As a result of the merger between the Inland Revenue and Customs & Excise, since April 2009 HMRC officers have enjoyed a significant widening of their powers to obtain information from taxpayers and inspect business premises. Self-assessment gave HMRC the inherent right to enquire into tax returns but the pursuit of tax evasion and avoidance had been slowed by a framework of powers that had not changed much in decades. I have set out below the tax department’s new powers and how they can be potentially brought to bear in an investigation into an individual or a business’s tax affairs.
At the beginning of any enquiry the taxman will invariably make a request for documents and other information. Failure to provide these within an acceptable timescale is likely to provoke a legally binding formal notice from the officer requiring the information from the taxpayer.
This information must be reasonably required for the purpose of checking the taxpayer’s tax position and can relate to any UK tax and most foreign taxes. In general there are no time limits directly associated with this power and current, past and future liabilities are covered.
Unfortunately, there is no appeal against a request for information that forms part of the records a taxpayer is required to keep for tax purposes; also very similar powers exists for obtaining information from third parties, but only where the taxpayer agrees or where the officer has obtained approval from the tax tribunal.
The taxman has the power to enter a person’s business premises and inspect both the premises and any business assets and business documents on the premises.
There is the limited safeguard that the inspection must be reasonably required for the purpose of checking that person’s tax position; and the inspection must be carried out at an agreed time or on seven days notice or with the approval of an authorised officer, such as a tribunal official.
Any failure to comply with a formal notice requiring information or the deliberate obstruction of an officer on your premises can result in a fixed penalty of £300 and up to £60 for each day the offence continues.
Other points to bear in mind
Enquiries and inspections are not normally routine; with so-called random compliance checks being undertaken only after a risk analysis has been done. In other words if the investigating official is asking searching questions, it is almost certain that HMRC considers tax to be at risk.
You are entitled to ask if the information requested is reasonably required for the check. There is a growing trend for officials to be more open about their concerns at an early stage and this should make it easier to ascertain whether requests are justified. If you consider they are not, then ensure the official is fully aware of your views.
It is quite common for officials to make information requests that are of dubious validity, in other words they are on a “fishing expedition”. They do this because they usually find people don’t know the law and willingly supply what is asked for. For example if questions are asked about matters arising in a period where on the on the face of it the tax position cannot be changed because time limits have expired. The official should only be reviewing such matters if HMRC has a good and genuine reason to believe that time limits may be extended, such as careless or deliberate understatements on a tax return. In this example, it is not unreasonable for him to believe that they probably also occurred in earlier years.
HMRC’s factsheet on pre-arranged inspections states: “You do not have to be present at the visit… It will be helpful if you are available at the visit, particularly at the beginning and the end”. It will usually be sensible to have someone around to help the officer understand the record system, such as your accountant, but the officer has no powers to ask questions of or interview directors or staff.
Unannounced inspections normally arise because appointments have been broken or HMRC has been unable to contact the taxpayer. However of more concern are the minority of cases where to quote HMRC’s factsheet:
“We have identified concerns that can only be dealt with by an unannounced visit”
When the new powers were granted the impression given was that such concerns would typically relate to significant tax risks. So if the knock on the door is the first sign that you may be in trouble the taxman is likely to believe the inspection will reveal a major underpayment of tax or possibly out and out fraud.
You do have the safeguard that if an unannounced visit happens to you have the legal right to refuse entry or if you’ve let them in, you can ask them to leave partway through the inspection. The downside of politely asking the taxman to go away to enable you to get your financial ducks in a row may simply be a loss of some goodwill, however if the visit has been approved by a tax tribunal then penalties may arise.
You must remember
HMRC officials have wide-ranging powers to obtain information and inspect documents and they never ask questions without a good reason. In my experience officials will usually act reasonably but there can be areas of genuine difficulty, with the classic example being requests for personal bank statements, especially if it’s a joint account with your partner.
Occasionally officials may be unreasonable or aggressive in their requests and approach but if you have a clear knowledge of the limits of their powers and take a firm stance they will invariably back off.Share Tweet