HMRC'S NEW POWERS

Radical changes have taken place in HMRC's Enquiry and Compliance methods, Application of Penalties and the procedures surrounding Appeal Hearings from 1 April 2009.

Compliance Checks
These were known previously as investigations, enquiries and compliance visits. The new legislation gives HMRC one set of powers covering PAYE, VAT, Income Tax, Capital Gains Tax, Corporation Tax and the Construction Industry Scheme to:

• Carry out visits to business premises to inspect the premises, assets and records - unannounced if they deem it necessary.
• Request information and documents, even by telephone.
• Conduct "cross tax" checks, in other words a routine VAT inspection may evolve into a full blown books and records enquiry.
• Inspect records before submission of a return to the Revenue.

The Revenue now effectively have the right to walk into business premises, unannounced, and ask to see the current years books and records, then take them away with them for further inspection. The previous comfort of knowing that HMRC were required to open an enquiry before reviewing your books and records has now gone.

The Revenue can also "check your tax position" by simply lifting the telephone and asking a few questions - the answered supplied could then be used in a later Compliance Check. If an unsolicited call is made by HMRC to carry out a check, it would be wise to ask them to put any queries in writing - they are obliged to do this if requested.

S19A and S20 TMA1970 which gave taxpayer protection have been repealed and replaced with Schedule 36 FA 2008 widening HMRC's powers at the expense of the taxpayer. However some safeguards are in place, for example:

• Inspectors will not be allowed to enter any part of a private dwelling which is not used for business purposes.
• The approval for an unannounced visit must be made by a Senior Officer.
• The Revenue must give at least seven days notice if they intend to make a visit.

The New Penalty Regime
The old rules HMRC used when applying a penalty meant 100% of the culpable tax could in theory be charged, minus a percentage of mitigating factors i.e. Disclosure 40%, Co-operation 40% & Size and Gravity 30% (although, bizarrely this equals 110%). Penalties are now applied the same over all taxes.

The usual penalty on an enquiry settlement ranged from 10% - 30%. Very rarely, if ever, was 100% charged.

The new regime is much more complex and ranges from a penalty of 0% to 100% taking into account factors such as:

• Prompted or Unprompted Disclosure
• A mistake being made despite taking reasonable care
• Failure to take reasonable care
• Deliberate understatement
• Deliberate understatement with concealment

The mitigating factors are now:

• Telling - up to 30% reduction,
• Helping - up to 40%
• Reduction and Access - up to 30% reduction

This looks straightforward enough, but the percentage reductions apply to percentages HMRC have already applied, therefore calculating and negotiating penalties will now become a minefield.

Penalties may even be suspended for two years to see if the taxpayer improves their behaviour. If they do the penalty can be quashed.

New Tribunals
From 31 March 2009, the General Commissioners, Special Commissioners and VAT tribunals have all been abolished and replaced with Tax Tribunals.

The main changes taking place are:

• When an appealable decision is made by HMRC, the taxpayer notifies the Revenue of the intention to appeal.
• HMRC must then offer an "Internal Review"
• This Internal Review must be carried out by a Revenue officer not previously involved in the case.
• The taxpayer now notifies the appeal to the tribunal if he is still not satisfied with the internal review.
• HMRC no longer list appeals for hearing.
• There will be two tribunals, the First Tier and the Upper Tribunal.

How independent will the Internal Review actually be? If an offer of a review is taken up, HMRC must respond within 45 days. Realistically, in a long running enquiry case, how thorough and impartial will the reviewing officer be?

The First Tier will hear the vast majority of the cases and the Upper Tier will hear cases on points of law and which are deemed "complex".

What Now?
We have already heard of two "cross checks" taking place and it is safe to assume these new powers will be widely used. HMRC have been training staff with a direct tax background on indirect tax and vice versa.

They have also invested heavily in training their staff on using the new information and inspection powers. Although the Revenue have shed a number of staff, they are encouraging taxpayers and companies to take up more online services, thus freeing up remaining staff for compliance work.

We can all expect to see more compliance checks taking place and it is prudent to familiarise yourself with the new Compliance Regime.

Who to Contact
Please contact Bruce Wilson or Aileen Scott on 0141 887 4141 for further information or advice.