Taxpayers as Terrorists – Draconian New Powers for Tax Inspectors

Taxpayers as Terrorists – Draconian New Powers for Tax Inspectors
When my erstwhile employers, the Inland Revenue, merged with HM Customs and Excise in 2005 to create HM Revenue and Customs, the government gave assurances that the merger of the organisations would not mean that the Inland Revenue side would get the same powers as had been enjoyed by HM Customs for many years.


This was important, because the two organisations had totally different traditions and values. While the Inland Revenue’s “Surveyors” (as the early tax inspectors were called) were responsible for taxing landowners on the “annual value” of their property, the “Preventive Officers” (the early Customs Officers), spent their time shooting smugglers and sinking their ships.


As I suppose was to be expected, those assurances have lasted less than three years because the current Finance Bill combined with a statutory instrument in February which brought into effect certain provisions of the Serious Crime Act 2007, mean that HMRC now has a fearsome array of new powers.


Customs Officers, due to their responsibility to crack down on drug and gun smugglers, have long had the power to bug phones and intercept mail and email, but now this power has been extended to HMRC when investigating direct tax matters.


Given the appallingly incompetent way Customs have used their powers in the past, leading to the collapse of several prosecutions due to what Mr Justice Crane described in 2005 as “muddle, incompetence, and lack of frankness”, it seems strange that the solution chosen has been to extend rather than to limit those powers.


In addition to being given bugs to play with, HMRC now has the power to enter business premises in order to inspect business records – something that VAT inspectors have always had, but which tax inspectors could only do if they obtained a search warrant in the most serious cases of tax fraud.


This power means that if you run your business from home (as I used to do, and as many self-employed people do) HMRC could turn up on your doorstep and demand to come in to inspect your records. Thankfully, given that they can do this without a search warrant, they have no power to force entry (so, presumably, if they try, you can use “reasonable force” to resist them). If you do refuse to let them in, however, they can then impose penalties on you for refusing to allow your records to be inspected.


It has long been a legal requirement to keep business records, with penalties for not doing so, but in practice I have never known HMRC to try to enforce this, mainly, I suspect, because there was no definition of exactly what “business records” were. Under the new legislation in the Finance Bill, HMRC can define (by statutory instrument) what records must be kept, and then you can be fined if you do not keep them. Many tax inspectors display a wholly unrealistic view of what are appropriate records for a small business to keep, so it will be interesting to see how burdensome the record-keeping requirements will be when the statutory instrument defines what is required. I would not be surprised if within a few years computer based records were made compulsory, given how much easier it is for HMRC to use software to interrogate such records.


“Doublethink” is typical of all totalitarian regimes, as George Orwell pointed out, and the new rules on record inspections are a beautiful example of doublethink. The new legislation restricts the inspection powers to statutory records (the ones the law requires to be kept, such as the VAT account book, and not other records such as your appointments diary). This has been highlighted by apologists for the new rules, but there is also a power to compel the taxpayer (and anyone else) to provide supplementary information to establish the correct tax position.


In other words, HMRC have no power to inspect records other than statutory ones, unless they think they are relevant to the tax payable. Or to put it another way, they can’t inspect them unless they want to!


It is easy to get hot under the collar about these proposed invasions of our civil liberties on general principles (I have a Labrador called “Liberty”, which tells you where I stand on the matter) but I think there is another much more serious aspect to these powers, and one which may have far-reaching consequences for the way we do business with HMRC.


Until now, relations between tax advisers and HMRC have been reasonably cordial. We can sometimes be a bit abrasive with each other, but in general we cooperate with each other to get things done. The new powers of entry, arrest, and search will (I fervently hope) not be used in the typical local tax enquiry, but the fact that they exist and could be used may well bring about a change in the way we represent our clients.


Tax advisers will need to be familiar with the extent of these new powers in order to protect their clients from attempts by HMRC to abuse them – and attempts there will be, if the past record of HM Customs is anything to go by. We will be less like business negotiators, and more like criminal defence lawyers, alert to attempts to coerce our clients or to infringe their civil liberties. Meetings with tax inspectors will become more formal, and this will do no favours to either side.


I was talking recently to a tax inspector who said that all the good staff have either left HMRC or are in the process of looking for other jobs, as he would have been were he not so close to retirement. He said he felt “ashamed” of the quality of work his colleagues were producing, and that they seemed to have no concept of applying the law in an even-handed way, but instead simply demanded tax wherever possible, leaving the tax advisers (for those taxpayers who could afford them) to argue that the tax was not due.


If you have lost your best staff, is it really a good idea to solve the problem by giving those who remain new powers that are so easy to abuse?


James Bailey