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20 December 2000
Tax Investigations of Yore
Have investigation strategies really changed much in the last ninety years? Chris Chadburn investigates.
'The past is a foreign country: they do things differently there.' L P Hartley, The Go Between
Have investigation strategies really changed much in the last ninety years? Chris Chadburn investigates.
'The past is a foreign country: they do things differently there.' L P Hartley, The Go Between
Tax Investigations of Yore
Have investigation strategies really changed much in the last ninety years? Chris Chadburn investigates.
'The past is a foreign country: they do things differently there.' L P Hartley, The Go Between
You know what it's like when you're moving office. There are dozens of dog eared books and stacks of dusty papers that you have not looked at since the last move. But this time it has got to be different because the powers that be have only ordered 20 crates and eventually I get to the moment I have been dreading – the dark and cob-webbed corner that is the tax investigations 'library'. I really cannot leave behind our antiquarian section consisting of General Instructions to Surveyors of Taxes of 1911 and Roper's Back Duty Manual of 1961, but what is the business case for taking them?
Back duty in the early 20th century
The 1911 General Instructions to Surveyors of Taxes is a very handsome leather bound tome consisting of 290 pages and covering everything a Surveyor had to know about his profession. Amendments and updates were made in copper plate manuscript or on printed scraps of paper glued on pages left blank for the purpose. There are three references to back duty in the index, as follows.
Records of all enquiries into tax returns had to be kept in the notebooks supplied for the purpose. I remember those from my Revenue days and, come to think of it, I am sure there were a few notebooks still open with unsettled cases going back to 1911 … or perhaps that was just districts where I was district Inspector.
Full reports which have to say 'whether the persons undercharged are prepared to make good the whole or any portion of the deficiency' have to be made to the Board. It does not say what the Board will do if the non-payers of tax are not inclined to make good. This could be a major loophole that has been relatively unexploited in the last 90 years.
On settlement, application for payment is made by the Board and …. Well, that is it, really. There is less than a page on back duty work and nothing in the index on prosecutions; information powers; selection of cases; penalties; business economics or any other aspects of our present stock in trade. It really was a foreign country.
Back duty in the 1950s and 1960s
The 1961 version of A J Roper's Back Duty Manual is an update of the 1953 first edition by an ex Inspector living in Melton Mowbray who had been in Enquiry Branch (the old Special Compliance Office, for younger readers). It cost 32s 6d, the same amount as an LP (long-playing record made of vinyl – explanation provided again for the benefit of younger readers) at that time.
It was written after the 1960 Finance Act when for the first time the Commissioners could decide whether there were proper grounds for raising assessments for past years and also determine penalty levels.
We are now in much more familiar territory than the 1911 instruction book but it is still definitely a foreign country.
Chapter IV is entitled 'The Beginnings of a Back Duty Case'. These arose from:
extensive enquiries into the accounts with the case drifting 'almost unknowingly into the back duty class'. (I have seen 100s of those in the last 30 years.);
specific enquiries leading in the direction of a back duty;
a request for the taxpayer to meet an Inspector from the Inland Revenue Enquiry Branch;
a 'summons' from the Inspector to the taxpayer to his office to 'invite him to make a disclosure of any tax irregularities'.
I do not remember this last approach as a newly recruited Inspector in Newport 1 tax district in the early 1970s. I think we were really far too busy on the first approach, getting to the bottom of private use of telephones and guard dogs, to worry about summoning people to make disclosures. This was probably really the responsibility of our kindly old District Inspector, Fred Davies, who I think was really more tuned in to the 1911 way of doing things. I do remember a printed form called a 'Mae West' asking the taxpayer to 'come up and see me sometime' although that might have been later when I was in Kings Cross district.
Meeting strategy
Let us return to the plot. It seems that advisers used to get letters just asking them to bring in their clients. If the letter was typed with a reference this probably meant 'the matter was of some moment'. Fred Davies would invite the accountant and the client in for a meeting. Roper advises the client to say as little as possible in the meeting – nothing changed there, then. Apparently Fred will not say much either as he is not supposed to let on what information he has. Certainly there is no change there either. The Inspector 'will talk with no great direction' (Fred was good at that) but the client will know he is a suspect and that if he reveals all, the Board will look kindly on him. Roper says that the taxpayer should 'listen with patience and intelligence' (which could be tricky) but make no admissions.
What you then did was grill your client to 'refresh his memory and obtain a disclosure'. Once you had the general confession, you got down to the specifics of how much and over what period, and most of the book centres on two detailed case studies centred on capital statements. A business economics approach and detailed book examinations were a rarity until the introduction of ERA in the late 1970s. The chapters on the private side review are just about as valid today as they were 50 years ago although the numbers will probably have to be revisited for the next edition. I do not think too many bungalows could be built now for £3,270 even though I am told builders do often give discounts for cash.
Legal privilege
By Chapter X we are ready for the Revenue. Some topicality here with Roper considering legal privilege. He takes the view that as an accountant may plead an appeal before the Commissioners, it is reasonably certain that legal privilege extends to a qualified accountant.
Roper then considers the switch in role of the adviser at the point he is happy that he has got to the bottom of the problem. He must now 'defend his client from any attack by the Inspector'. The strategy is to submit the figures but not to give any information to the Revenue on how the fraud was perpetrated. The rationale is that nothing should be divulged which would help the Revenue take penalty or criminal proceedings.
It is difficult at this point to see how the Inspector can reasonably be satisfied that the revised figures are correct if there is effectively no disclosure of information other than relating to the private side. Roper reminds us that Inspectors in those days 'seldom leave their desks and are content to draw inferences from information given to them by accountants … Inspectors are loath to spend more than the minimum of time examining books …'. In the introduction, however, are comments that explain the background to the strategy. It seems that as now, the Revenue took very few prosecutions but it was common practice in large or small cases for Inspectors to make 'forceful mention of such proceedings'. The atmosphere was clearly felt to be very threatening. Although the Hansard approach had been formalised in 1944, there was apparently very little comfort taken from the fact that a case was being worked at a local office and not Enquiry Branch who would take all prosecutions.
Settlement
Moving on to the settlement, we have three factors being looked at when determining penalty levels, but they are not disclosure, co-operation and size/gravity. Forty years ago the Inspector was looking at culpability, time and ability to pay. Time relates to the old, complex assessment rules which I was delighted to have forgotten about. The point is made when looking at ability to pay that with high income tax rates, surtax, profits tax and excess profits tax the duty lost may well exceed the profits understated. There may well be no 'free' money and the lack of means is a very strong rationale for asking for a light settlement. Inspectors these days are not quite so relaxed where there are assets but no 'free' money. No clear guidelines are given on the size of penalties your client could expect in practice and it seems this part of the process was more akin to buying and selling an Austin 7.
Some things never change
Max Beerbohm may have thought there was 'always something rather absurd about the past', but my lasting impression from peering into these dusty covers is one of surprise as to how much has survived absolutely intact from the 1950s and 1960s. It is really quite spooky to find the wording of a certificate of disclosure or the formal questions and format of the Hansard meeting has not changed one jot.
Chris Chadburn is a partner in Baker Tilly's Tax Investigation Group in the Guildford office.
Have investigation strategies really changed much in the last ninety years? Chris Chadburn investigates.
'The past is a foreign country: they do things differently there.' L P Hartley, The Go Between
You know what it's like when you're moving office. There are dozens of dog eared books and stacks of dusty papers that you have not looked at since the last move. But this time it has got to be different because the powers that be have only ordered 20 crates and eventually I get to the moment I have been dreading – the dark and cob-webbed corner that is the tax investigations 'library'. I really cannot leave behind our antiquarian section consisting of General Instructions to Surveyors of Taxes of 1911 and Roper's Back Duty Manual of 1961, but what is the business case for taking them?
Back duty in the early 20th century
The 1911 General Instructions to Surveyors of Taxes is a very handsome leather bound tome consisting of 290 pages and covering everything a Surveyor had to know about his profession. Amendments and updates were made in copper plate manuscript or on printed scraps of paper glued on pages left blank for the purpose. There are three references to back duty in the index, as follows.
Records of all enquiries into tax returns had to be kept in the notebooks supplied for the purpose. I remember those from my Revenue days and, come to think of it, I am sure there were a few notebooks still open with unsettled cases going back to 1911 … or perhaps that was just districts where I was district Inspector.
Full reports which have to say 'whether the persons undercharged are prepared to make good the whole or any portion of the deficiency' have to be made to the Board. It does not say what the Board will do if the non-payers of tax are not inclined to make good. This could be a major loophole that has been relatively unexploited in the last 90 years.
On settlement, application for payment is made by the Board and …. Well, that is it, really. There is less than a page on back duty work and nothing in the index on prosecutions; information powers; selection of cases; penalties; business economics or any other aspects of our present stock in trade. It really was a foreign country.
Back duty in the 1950s and 1960s
The 1961 version of A J Roper's Back Duty Manual is an update of the 1953 first edition by an ex Inspector living in Melton Mowbray who had been in Enquiry Branch (the old Special Compliance Office, for younger readers). It cost 32s 6d, the same amount as an LP (long-playing record made of vinyl – explanation provided again for the benefit of younger readers) at that time.
It was written after the 1960 Finance Act when for the first time the Commissioners could decide whether there were proper grounds for raising assessments for past years and also determine penalty levels.
We are now in much more familiar territory than the 1911 instruction book but it is still definitely a foreign country.
Chapter IV is entitled 'The Beginnings of a Back Duty Case'. These arose from:
extensive enquiries into the accounts with the case drifting 'almost unknowingly into the back duty class'. (I have seen 100s of those in the last 30 years.);
specific enquiries leading in the direction of a back duty;
a request for the taxpayer to meet an Inspector from the Inland Revenue Enquiry Branch;
a 'summons' from the Inspector to the taxpayer to his office to 'invite him to make a disclosure of any tax irregularities'.
I do not remember this last approach as a newly recruited Inspector in Newport 1 tax district in the early 1970s. I think we were really far too busy on the first approach, getting to the bottom of private use of telephones and guard dogs, to worry about summoning people to make disclosures. This was probably really the responsibility of our kindly old District Inspector, Fred Davies, who I think was really more tuned in to the 1911 way of doing things. I do remember a printed form called a 'Mae West' asking the taxpayer to 'come up and see me sometime' although that might have been later when I was in Kings Cross district.
Meeting strategy
Let us return to the plot. It seems that advisers used to get letters just asking them to bring in their clients. If the letter was typed with a reference this probably meant 'the matter was of some moment'. Fred Davies would invite the accountant and the client in for a meeting. Roper advises the client to say as little as possible in the meeting – nothing changed there, then. Apparently Fred will not say much either as he is not supposed to let on what information he has. Certainly there is no change there either. The Inspector 'will talk with no great direction' (Fred was good at that) but the client will know he is a suspect and that if he reveals all, the Board will look kindly on him. Roper says that the taxpayer should 'listen with patience and intelligence' (which could be tricky) but make no admissions.
What you then did was grill your client to 'refresh his memory and obtain a disclosure'. Once you had the general confession, you got down to the specifics of how much and over what period, and most of the book centres on two detailed case studies centred on capital statements. A business economics approach and detailed book examinations were a rarity until the introduction of ERA in the late 1970s. The chapters on the private side review are just about as valid today as they were 50 years ago although the numbers will probably have to be revisited for the next edition. I do not think too many bungalows could be built now for £3,270 even though I am told builders do often give discounts for cash.
Legal privilege
By Chapter X we are ready for the Revenue. Some topicality here with Roper considering legal privilege. He takes the view that as an accountant may plead an appeal before the Commissioners, it is reasonably certain that legal privilege extends to a qualified accountant.
Roper then considers the switch in role of the adviser at the point he is happy that he has got to the bottom of the problem. He must now 'defend his client from any attack by the Inspector'. The strategy is to submit the figures but not to give any information to the Revenue on how the fraud was perpetrated. The rationale is that nothing should be divulged which would help the Revenue take penalty or criminal proceedings.
It is difficult at this point to see how the Inspector can reasonably be satisfied that the revised figures are correct if there is effectively no disclosure of information other than relating to the private side. Roper reminds us that Inspectors in those days 'seldom leave their desks and are content to draw inferences from information given to them by accountants … Inspectors are loath to spend more than the minimum of time examining books …'. In the introduction, however, are comments that explain the background to the strategy. It seems that as now, the Revenue took very few prosecutions but it was common practice in large or small cases for Inspectors to make 'forceful mention of such proceedings'. The atmosphere was clearly felt to be very threatening. Although the Hansard approach had been formalised in 1944, there was apparently very little comfort taken from the fact that a case was being worked at a local office and not Enquiry Branch who would take all prosecutions.
Settlement
Moving on to the settlement, we have three factors being looked at when determining penalty levels, but they are not disclosure, co-operation and size/gravity. Forty years ago the Inspector was looking at culpability, time and ability to pay. Time relates to the old, complex assessment rules which I was delighted to have forgotten about. The point is made when looking at ability to pay that with high income tax rates, surtax, profits tax and excess profits tax the duty lost may well exceed the profits understated. There may well be no 'free' money and the lack of means is a very strong rationale for asking for a light settlement. Inspectors these days are not quite so relaxed where there are assets but no 'free' money. No clear guidelines are given on the size of penalties your client could expect in practice and it seems this part of the process was more akin to buying and selling an Austin 7.
Some things never change
Max Beerbohm may have thought there was 'always something rather absurd about the past', but my lasting impression from peering into these dusty covers is one of surprise as to how much has survived absolutely intact from the 1950s and 1960s. It is really quite spooky to find the wording of a certificate of disclosure or the formal questions and format of the Hansard meeting has not changed one jot.
Chris Chadburn is a partner in Baker Tilly's Tax Investigation Group in the Guildford office.
