Don't Get Noticed!

MALCOLM GUNN FTII, TEP discusses self-assessment enquiries and notices to produce background paperwork.

ONE OF THE startling features of humanity which one comes across in tax compliance work is that a surprising number of people seem to know exceedingly little about their own financial affairs. Information has to be wrenched out of them shred by shred. It must be easier being a dentist pulling their teeth; once in his chair with evil sounding machinery all about, they cannot say that they will go away, have a good look but they are not sure where they put the tooth and it might take some time – will something similar (i.e. completely irrelevant) do?

I guess it must feel very similar in the tax office with self assessment enquiries. Surely all the relevant information must be to hand, otherwise how is it possible to complete the return? And why is there a fuss about private bank statements? Of course the Revenue is not the slightest bit interested in the number of cheques to the local Chinese, nor how much has been spent at Sainsbury's; the object is to check for income which has strayed from the business account. Why then should anybody be so reticent to co-operate?

In the beginning

Unfortunately life is not so simple. For a start, self assessment enquiries get off on the wrong foot because the Revenue refuses to offer reasons why a particular case has been selected. Furthermore, in some of the cases I have seen there is a strong suspicion that the enquiry has been opened because a particular taxpayer has ruffled a few feathers at the tax office. I have seen one case which has gone repeatedly under enquiry year after year, even though nothing out of order was discovered in the first year. Other cases have gone under full enquiry because there has been a claim for loss relief in respect of a trade against other income, and no doubt the system has flagged up the repayment as an abnormality. My own tax return, a mind-numbingly boring document if ever there was one, went under full enquiry and I have suspicions about the bona fides of this. The full enquiry recorded in the case of An Accountant (SpC 258) notes that the taxpayer in that case raised a query with the Revenue early in 1998 and details the query and then reports that the next return went under full enquiry. In Mother (SpC 211) the report notes that the taxpayer's agent had lodged complaints on more than one occasion about the conduct of the Revenue and one is left suspecting that this had something to do with the opening of that enquiry.

As if all this were not enough, self assessment has seen the onset of a new disturbing feature: this is the case which goes into perpetual enquiry mode – something which was virtually known before 1997. I have alluded to one such case above, and the appeal of Paul Wall (SpC 303) centres on another such case. The exasperated taxpayer in Paul Wall gave up trying to handle his tax affairs himself after a third successive year's accounts went into full enquiry.

The article by Will Heard in this week's issue of Taxation demonstrates that the cost to yield ratio from self assessment enquiries is diminishing, which fuels more suspicions that cases are being selected because the taxpayer was foolish enough to allow the top of his head to appear over the parapet. Keep out of sight and you will be out of mind and left alone. If it is indeed becoming a practice within the Revenue to open enquiries for unconventional reasons and not out of any perceived risk element, then I would suggest that the whole business needs to be re-thought starting with a clean sheet.

A second reason why co-operation from taxpayers with the Revenue does not struggle up as high as it does with the dentist results from the vast quantity of paperwork and information which is demanded: it will commonly be all business accounting records for income and expenditure, invoices issued, receipts for all items of expenditure, vouchers, bank statements, passbooks, paying in books, cheque book counterfoils, not the kitchen sink yet but we might need it later. The taxpayer will have the impression, misguided though it may be, that Inspectors have little to do, having transferred all responsibility and administrative work to the taxpayer, as a result of which the taxpayer's return was apparently selected for no reason and the Inspector is now requesting a mountain of information and paperwork, half of which appears to be of little significance, but it costs the Inspector nothing to ask for it, even though it will take hours or even days to ferret around and produce it.

Piling on the agony

One might think that all this is more than adequate friction in the system, but that is not quite the end of it. The Revenue has an information power in section 19A, Taxes Management Act 1970 by which it can call for documents or information within a time limit, and on pain of a penalty for failure to comply. Probably this information power was designed to be used very sparingly. The reality is proving to be very much different.

True enough, in all cases the Revenue will have announced the opening of an enquiry and at the same time asked informally for the production of this mountain of paperwork. Experiences will of course vary, but it often seems to be the case that if the Inspector is kept waiting longer than about a month, he will then fire off a notice under section 19A. What is more, the notice itself must go to the taxpayer, although a copy will normally be sent to the agent. The result will often be an agitated and aggrieved client. I would have thought that a formal information power is not something to be tossed about like leaflets offering double glazing at a discount. The power should be a last resort and a month in which to produce a vast quantity of paperwork is a tight schedule.

Nevertheless this is life as we are currently seeing it and I would therefore strongly recommend that as soon as notice of the opening of an enquiry is received, contact should be made with the Inspector to agree a realistic timetable for collecting all the data. Realistic in this context may be nothing like 30 days, particularly for a taxpayer with a 30 April year-end as, by the time an enquiry gets opened, some of the data can be three years vintage.

The notice

Where a section 19A notice is issued, there will often be two strands to it:

(i) The production of documents in the taxpayer's possession or power reasonably required to determine the accuracy of a return.

(ii) The furnishing of accounts or particulars reasonably required for the same purpose.

Note that documents do not need to be actually in the taxpayer's possession. If they are elsewhere, it must be within his power to obtain them and obviously it will be a rare case where the taxpayer is not able to obtain from third parties information relevant to his return. Perhaps one example might be capital gains in an offshore trust where the trustees might validly refuse to divulge the information.

One does not have to produce the documents at any particular place, least of all at Inland Revenue premises. They can be produced wherever the taxpayer specifies so that the aggrieved taxpayer resident in Land's End has a surprising weapon of annoyance if the Inspector is at a London Provincial tax district.

The second strand of the information power is the furnishing of accounts or particulars and in the appeal of An Accountant (SpC 258) the Special Commissioner found it significant that a different verb is used under the second strand compared to that in the first so that the two have entirely different natures.

Reasonably required

Both strands contain the limitation that what is requested must be 'reasonably required' to determine whether a return, or an amendment to a return, is incorrect or incomplete. If this sounds like a fruitful avenue of appeal, then even a cursory glance at the few Special Commissioners' cases concerning section 19A notices will quickly cause disillusionment to set in.

In the case of George Henry Guyer (SpC 274), a solicitor, one complaint was that the Inspector was requesting copies of the clients' accounts of the firm and these could not be reasonably required in relation to the solicitor's own tax return. The Special Commissioner accepted the Inspector's argument that they were reasonably required on the basis that the fee notes issued did not always agree with the amounts received from the clients in the office cashbook. Although the appellant was able to reconcile some of the differences which were pointed out, others were not fully reconciled and so the client accounts were held to be reasonably required in order to resolve the position.

A similar point arose in the appeal of An Accountant (SpC 258) where the Revenue was asking to see bank statements for the firm's general client account. In this case, the Revenue accepted that designated client accounts were not required, but the Inspector was not content with simply a certificate of interest paid from the bank in relation to other accounts. The contention was that the firm's money could be placed in the general client account and so full details relating to that account might be relevant to the appellant's tax return. The Special Commissioner accepted this contention.

Perhaps the biggest debate about documents 'reasonably required' concerns private bank accounts. Taxation has reported one successful appeal in this area, but in my view it was a fortunate one for the taxpayer. I sense that one has an uphill struggle in persuading the Special Commissioners to intervene in the mechanics of tax administration. I have told my Inspector that he can trawl through my private bank account to his heart's content, and as far as I am aware that is what he is doing, but others will fear that this will only lead to a vast increase in the information requested as all sorts of further queries pop out of the woodwork from unexplained entries on the bank account. Given the state of knowledge that many people have concerning their finances, as I explained at the outset, you may as well ask them what they were doing at 3.30 pm on 11 June 1986; you will get no better answer than you will to a question about a credit of £75 to a bank account a year ago.

However, nothing further needs to be said here about private bank statements as I understand that an important announcement on the subject is due to be made by the Revenue shortly.

It does not exist!

I have seen cases where section 19A notices ask for documents which do not exist. Is this not the best defence one could possibly have against the notice? The answer, extraordinary though it may be, is yes and no.

If the notice is asking for a report or other formal document which might have to be drawn up by an unconnected third party, then that does indeed mean that the notice need not be complied with to that extent.

If, however, the document asked for is something which the taxpayer or his agent ought to be able to draw up readily, the notice is likely to be upheld. Thus in the case of An Accountant, he claimed that the Revenue did not require balance sheets to be prepared for small businesses and so he had not bothered with one. The Special Commissioner decided that it should be easy enough for him, as an accountant, to draw up a balance sheet and so even though it did not currently exist, a section 19A notice could require one to be produced. This was partly founded upon the differing requirements of the two strands of section 19A already mentioned, these being 'producing' documents and 'furnishing' particulars. The former relates to papers already in existence whereas the latter enables the Inspector to ask for new accounts or particulars not previously available.

Multiple requests

One of the rare successes at the Special Commissioners by a taxpayer contesting a section 19A notice was in Self Assessed (SpC 207). The Inspector called for documents to be produced within 30 days of the notice and the eagle-eyed taxpayer spotted that this did not conform with section 19A. It took two days in the post for the notice to arrive and so she actually had only 28 days to comply and this was not in accordance with the 30-day requirement in the section. So she succeeded. Unfortunately it does not need the deductive powers of Sherlock Holmes to work out what happened next. There is nothing at all to prevent an Inspector issuing a whole succession of section 19A notices in any one particular enquiry and so it was a racing certainty that all Self Assessed achieved was a nice new section 19A notice issued soon after her successful appeal. Sure enough, we heard all about it in Self Assessed (No 2) (SpC 224).

Other lines of attack

The appeal of George Guyer reported at SpC 274 records that he threw just about everything he could at section 19A in a vain attempt to knock it off its perch. It was all to no avail. Did not legal professional privilege prevent him from disclosing to the Revenue information which related to clients? What about Article 8 of the Human Rights Act 1998 which prohibits interference by a public authority in the right to privacy? Also, is there not a Data Protection Act 1998 which prohibits the disclosure of the information requested? None of these arguments got anywhere for the simple reason that section 19A is the necessary authority given to the Revenue and its position is adequately safeguarded in the other Acts cited.

Exceptional cases

The Revenue's Enquiry Handbook makes it clear, at paragraph 330, that section 19A notices should not normally be issued unless there is evidence of refusal to co-operate or a time limit previously set for producing paperwork has expired without compliance. As I have said, many Inspectors interpret this as 'wait a month and then wade in with all guns blazing'!

There is in fact nothing to prevent the Inspector from issuing a section 19A notice at the same time as issuing a notice of enquiry (although if the section 19A notice precedes the notice of enquiry, it will be invalid). However, the Enquiry Handbook demonstrates that it would have to be an exceptional case where this course of action is taken and so loud alarm bells should be ringing in the tax practitioner's office if the two notices arrive together.

Improper use of section 19A

The Inspector's information power under section 19A is undoubtedly of very wide scope. It can be used to obtain not only the standard paperwork for business accounts but also for researching the merits of a claim to the benefit of an extra-statutory concession which might have been taken under a self-assessment return or, more significantly, whether a bona fide commercial motive test, such as that in section 741, Taxes Act 1988 is satisfied; or indeed it could be used to obtain information to determine whether the Ramsay approach might apply to transactions undertaken by the taxpayer. Even so, there are some limitations on its wide scope.

First and foremost, it cannot be used by an Inspector to obtain documents, accounts or particulars which relate to a pending appeal. The Revenue's Enquiry Handbook interprets this as meaning documents, accounts or particulars 'which have been brought into existence as part of the preparation for the presentation of an appeal'.

The notice cannot request or require a meeting to be held with the taxpayer. This can only be the subject of an informal request by the Inspector.

Section 19A does not empower the Inspector to obtain information from third parties. It can only be given to the taxpayer himself and must relate to papers which are in his own possession or which it is in his power to obtain.

The notice must be specific. It must state exactly what is required and cannot be in general terms like 'all papers relevant to your self-assessment return'.

The interaction between section 19A and section 16 is not all that clear. Section 16, Taxes Management Act 1970 enables the Inspector to ask for details of payments made by a trader or businessman to third parties for services of those not actually employees of the business. In practice, I would not think that there is much to be achieved by making an issue out of this. If the Inspector asked for details of these third party payments in a section 19A notice, any objection will no doubt only lead to a section 16 notice being issued and I am not sure that the client will really be any happier if he receives two statutory notices instead of just one.

Still talking

Right from the planning stage, the main professional bodies gave considerable input to the design of the system in discussions with the Revenue and I know that these still continue from time to time. It will be very interesting to see the outcome of the latest discussions, details of which are to be released shortly. There is no doubt that Somerset House is keen to listen and consider representations, but I still believe that the circumstantial evidence of the operation of enquiries at district level is raising many question marks. Furthermore, Inspectors who splash out section 19A notices with great gusto and undue haste risk souring proceedings at an early stage in an enquiry. The best initial approach for both sides is not confrontation but co-operation and once all goodwill has been blown away, it will never be reinstated.

Generally the prospects for appealing against information notices are not all that good and few should be encouraged to waste the time and money involved. The Special Commissioners seem to have a particular dislike for attacks on the machinery of the tax system and in general the prospects of success there are minimal. The best advice to a taxpayer who wants to make an issue out of excessive Revenue demands is therefore to appeal to the General Commissioners whose High Street form of justice is much better suited to curbing over-zealous Inspectors.

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