HMRC compliance checks
Some may remember the ill-fated Her Majesty’s Revenue and Customs (HMRC) ‘interventions’ pilot. This was an attempt to contact taxpayers more informally about potential errors on their tax returns. It failed because it was introduced with inadequate consultation and communication. The project was shelved. HMRC went back to the drawing board and it has now developed the concept of ‘compliance checks’.
These are a new form of checking environment for income tax, capital gains tax, corporation tax, NICs, PAYE and VAT. (Note it does not at this stage cover inheritance tax or other taxes). The ideas were put out for consultation last May. More information was released about them in a paper from HMRC on 10 January 2008 called ‘A new approach to compliance checks: responses to consultation and proposals” which can be viewed on the HMRC website. This is part of a consultation that closes on 6 March 2008.
Compliance checks, if fully implemented, will be an important development in the way HMRC interacts with tax advisers and taxpayers.
The new approach
The January paper is very long (104 pages) but clearly states HMRC’s proposed approach. It defines ‘compliance check’ as a descriptive term for all that HMRC does to ensure that taxpayers declare the ‘right amount of tax’, whether they are individuals, partnerships, companies, trusts, employers or any other entity. The activity ranges from assistance and education through to full-scale civil tax investigations. Current compliance checks include self assessment enquiries, employer compliance reviews, VAT assurance visits and informal checks.
The paper emphasises that HMRC is intending to proceed on a risk-based approach to compliance checking. There would be a common approach across all the taxes named above to enquiries etc.
According to the consultation paper key features of this new approach would be a more flexible approach involving a wide range of checks that is ‘more geared to different taxpayer behaviours’.
Behaviours is the key term here. That is the underlying driver behind the new penalty regime for incorrect returns introduced by the Finance Act 2007 so it is no surprise to seeing it being fundamental to checking as well.
The idea is to have a ‘lighter touch checks for the majority of taxpayers who want to comply’. What this means is a more informal way of contacting taxpayer eg more use of telephone calls etc to resolve quickly simple mistakes made on returns or easy queries. There will be some safeguards to protect taxpayers from any overzealous use of these rules.
HMRC is suggesting some new powers to use against ‘the minority who deliberately understate their tax to be properly investigated’. We will come back to these new powers later.
When will a compliance check take place
It is envisaged that an officer of HMRC might begin a compliance check in respect of any of the relevant taxes for one or more of a number of purposes. These include checking that:
- a tax return, amendment to a return or claim is correct;
- statutory record keeping requirements are being met;
- tax has not been underpaid or over-claimed; or
- any issues concerning possible tax avoidance are considered.
Additionally, the taxpayer may occasionally have been selected at random for a check intended to validate risk assessment processes.
What has been listened to?
When the original consultation on compliance checks came out there were plenty of representations objecting to aspects of the proposals. Therefore the January paper does take on board some aspects of these responses. For example, many were concerned about HMRC asking for a new power to check corporation tax quarterly instalment payments. HMRC has now dropped this idea.
There is also confirmation that HMRC does not intend to drop the enquiry window for direct taxes (although arguably since Langham v Veltema this has been less important).
Additional safeguards are being proposed, such as an optional referral to an HMRC review panel, in cases of dispute, as a form of accessible appeal.
Some of the proposals will result in new powers or new methodologies. for example, the proposals include new provisions surrounding record keeping including regulations to:
- shorten the period for retention of records;
- specify records that need to be kept;
- set conditions for preserving information instead of records; and
- specify where original records need to be kept.
This is an interesting new development. Currently there are few records that are required to be kept and flexibility in what one can use. The above proposals suggests a more prescriptive approach.
For example, the consultation considers the introduction of a new power in respect of direct tax for HMRC to specify by regulation the records that must be kept and enable HMRC to address some of these matters by tertiary legislation, such as in a public notice.
There is an intention to make more visits to a trader’s premises to gain first-hand information on how the business operates and to check the record-keeping systems. This is likely to happen by prior-appointment although there is likely to be a power to visit unannounced in appropriate circumstances. This will apply to business premises only ie HMRC has dropped its idea of having a right to visit private residences. The programme would target those suspected of inadequate records and include some people picked at random. The taxpayer will have some protection by means of a Code of Conduct.
First major campaign
As can be seen there is a lot going on in relation to reviewing compliance checks and at the time of writing HMRC had reportedly launched its first compliance check campaign in relation to property income. The Financial Times reported on 22 February that 500 letters had gone out to predominantly buy-to-let investors.
It is likely that HMRC will be targeting those who may not have included property income on their self assessment tax returns or who HMRC have information on indicating they have let property but who do not appear to have disclosed this to the tax authority. Remember taxpayers must disclose property income even if they make a loss.