Brave New World on April Fools’ Day – HMRC’s New Investigation Powers

Brave New World on April Fools’ Day – HMRC’s New Investigation Powers
The 2008 Finance Act contained sweeping new powers of investigation for HM Revenue and Customs, and these will come into force (perhaps appropriately) on 1 April this year, so they will apply to your 2008/09 Self Assessment return, for example.


Until now...

Essentially, HMRC’s compliance role has consisted in checking if a tax return is correct or not, and so by definition, they have had to wait until the return has been submitted. There have been a few exceptions to this, typically where the taxpayer is working as an unpaid agent of HMRC, deducting PAYE tax for example, or accounting for VAT. There have also of course been powers to force recalcitrant taxpayers to submit returns.


From 1 April 2009
It is difficult to overstate how fundamental are the changes we are about to experience. Instead of a system broadly based on the taxpayer submitting a return and HMRC deciding whether to accept it or to check its accuracy, we are to be subjected to continuous surveillance of our tax affairs (or “tax position” as the 2008 legislation describes it).


In particular, we are to be vulnerable to powers of entry and inspection that have up to now been restricted to cases of serious tax fraud, and we are to be at the mercy of HMRC “guidelines” on record keeping that will have almost the force of law.


It is vitally important that everyone is aware of what is in store for them, so pull you hats down over your eyes, turn up the collars of your trench coats, and follow me into the dangerous world of the new regime of “Compliance Checks”...


Statutory Records
It has long been the case that taxpayers are required by law to keep adequate records of both their business and personal affairs to enable them to complete their tax returns accurately, but this has been more of a pious hope than a real obligation.


I must make it clear that I strongly approve of keeping proper records (for one thing, it makes my job much easier when it comes to preparing clients’ accounts and tax returns),  but the point here is that HMRC will now have the power to inspect those records, whether or not they are enquiring into a specific tax return. They will also have a statutory power to issue “guidelines” as to the appropriate records to be kept.


I have ranted about this on previous occasions in other contexts. The problem is simply that if we are to be at risk of suffering penalties for failing to comply with the rules, then those rules should be imposed by our democratically elected Parliament, not by “guidelines” written by civil servants (who are not noted for either their practicality or experience of the real world of business).


Information Powers
HMRC are to have the right to demand information to check a taxpayers “tax position” from that taxpayer, and from third parties such as banks, employees, or other taxpayers. They will do this by issuing an “information notice”, which may ask for the statutory records (remember those “guidelines”) and there will be no right of appeal against such a notice. An “information notice” can also ask for “supplementary information”,  such as “appointment diaries, notes of Board Meetings, correspondence, commercial employment contracts, explanations and schedules” – that is a quote from HMRC’s own guidelines on the subject. There will be a right of appeal against such a notice, but only if it has been issued on the inspector’s own authority without approval from a Tribunal. If the Tribunal have approved the notice in advance, there can be no appeal.


Inspection Powers
HMRC will have the right to enter business premises and inspect “the premises, business assets, and statutory records”. HMRC claim that such visits will “normally” be arranged in advance, but where they are not pre-arranged, HMRC also claim you have a right to refuse entry.


This is an outrageous example of “doublespeak”, to use George Orwell’s term for the false language used by those who would destroy liberty. You can refuse entry, but you will then be penalised for that refusal “if the inspection has been approved by the First-Tier Tribunal”.


In other words, you can either agree in advance to an inspection visit, or you can refuse and the inspector will then get approval from the Tribunal and turn up unannounced. He cannot kick the door down, but if you do not let him in, you will suffer a financial penalty.


Oh, and guess what – there is no right of appeal against such an inspection notice.


With power comes responsibility?
What is conspicuously absent from this package of new measures is any form of redress for taxpayers who are unfairly victimised by inspectors who use them wrongly, either out of vindictiveness or stupidity.


Vindictiveness among tax inspectors is fortunately extremely rare – I can count the examples I have come across on the fingers of one hand – but regrettably, stupidity is not.


I am currently dealing with a case where one of my clients, a limited company, sold its business, including goodwill, to a third party. Since 2002, goodwill in a limited company has been treated as a “corporate intangible asset”, and is subject to its own special regime for tax. It is not, unlike goodwill owned by an individual or a partnership, an asset for the purposes of capital gains tax. The corporation tax computation, therefore, correctly dealt with the sale of goodwill as a corporate intangible.


Unfortunately, the inspector who looked at the accounts has apparently not yet caught up with his technical reading since before 2002, because he wrote opening an enquiry with the patronising and sarcastic question “what was the strategic reason for omitting to declare the capital gain on the sale of the goodwill?”, and followed this up with a demand for “each and every” bit of documentation relating to the sale. Such a request might have been justified in a case where a major disposal had in fact been omitted from the tax computation, but this arose from the inspector’s sheer ignorance of the relevant legislation.


I have tried writing to him gently pointing out his mistake, but he has simply repeated his demands for a huge amount of information, backed up with a threat to use statutory powers to obtain it if we do not cooperate.


My point is not to moan about this particular individual, however. Bear in mind that this is an Enquiry under the old rules. Under the new rules, I would have thought that the omission (as the inspector wrongly perceived it to be) of a major disposal from a set of tax computations is precisely the sort of thing that might trigger an unannounced visit as described above.


There seems to be nothing in the legislation that provides for any form of redress in such a case, and given that the inspector concerned is by no means unique in his shaky technical grasp and lack of any sense of proportion, I fear we are all about to experience what the old Chinese curse calls “interesting times”!


James Bailey