The self-assessment system essentially relies on taxpayer honesty to ensure that all tax that is due is paid. However, as a back-up, HMRC carries out compliance checks on a proportion of returns to ensure that the correct amount of tax has been paid.
The rules governing compliance checks have been revised and standardised such that from 1 April 2010 a single system applies across many taxes.
A single system has applied for capital gains tax, corporation tax, income tax, PAYE, the construction industry scheme and VAT since 1 April 2009. The regime is extended from 1 April 2010 to encompass stamp duty land tax and stamp duty reserve tax, inheritance tax, petroleum revenue tax, insurance premium tax, landfill tax, aggregates levy and climate change levy.
This means that HMRC has the same powers across these taxes as regards their ability to visit business to inspect premises, assets and records and to request information from third parties and others.
Compliance Factsheets Available from HMRC
To help taxpayers understand the rules, HMRC has published a series of factsheets covering different aspects of compliance checks. The factsheets are available on the HMRC website (see www.hmrc.gov.uk/compliance/factsheets.htm).
It is HMRC’s policy to tell a taxpayer when a compliance check is being carried out on his or her affairs. If the taxpayer has appointed an adviser and notified HMRC of this on form 64-8, HMRC may also contact the adviser to notify of the check. A taxpayer can appoint an adviser to handle the compliance check and to deal with HMRC on his or her behalf.
HMRC will also tell the taxpayer what they are checking. This may be all of a document or return, or just part of it.
As part of the check HMRC will ask for information or documents. They may also need to visit the taxpayer’s business premises. However, they will only visit the taxpayer’s home if his or her business is run from home. They may also ask questions over the phone, however the taxpayer does not have to answer questions by phone and can request that HMRC write instead.
HMRC can only request that information which they reasonably require to carry out their checks but what is regarded as reasonable will depend on the nature of the checks.
What Rights Do Taxpayers Have?
The taxpayer also has a number of rights. These include:
- the right to be represented – the taxpayer can appoint someone to act on his or her behalf. This does not have to be a professional adviser (although this may be wise depending on nature of checks), and can be a friend or relative;
- the right to consult an adviser – HMRC will allow a reasonable time for this
- the right to confidentiality in dealings with HMRC; and
- the right to complain if the taxpayer has not been treated fairly by HMRC.
It is in the interests of the taxpayer to help HMRC and to provide information requested promptly as this may reduce any penalties ultimately payable. However, the taxpayer does not have to help HMRC and comply with requests (although this is not recommended).
If the taxpayer chooses not to comply, HMRC will explain his or her rights and what happens next.
What If I Need More Time?
The taxpayer can also ask for more time to comply with a request and can also tell HMRC if he believes that HMRC have asked for something that is either not reasonable to ask for or is irrelevant to the check. The taxpayer can also ask HMRC to stop the check (or ask a tribunal that HMRC stop the check if HMRC do not agree).
In the event that HMRC find something amiss, they will work with the taxpayer to put things right and to collect any tax and interest that may be due. A penalty may also be charged.
Compliance checks are a normal part of HMRC’s work and do not necessarily mean that something is wrong. The taxpayer is advised to work with HMRC and co-operate fully as this will pay dividends in the end.