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RICHARD CURTIS looks at a section 16 enquiry; is something fishy going on?
RICHARD CURTIS looks at a section 16 enquiry; is something fishy going on?
NEW FISHING GROUNDS was the probable reason that, in 1496, John Cabot found funding for a voyage of discovery from the merchants of Bristol, who were keen to find new business opportunities. So, perhaps it is not inappropriate that the Bristol tax office named after him should feel that there is potential scope for additional tax gathering in the marine industry. It is understood, though not confirmed, that the office's 'risk, intelligence and analysis team' (colloquially known as a 'RIAT'), has recently issued a letter to many businesses involved in this industry.
The letter is entitled 'Section 16, Taxes Management Act 1970 - payments made in the course of your business'. It goes on to explain that under this section an Inspector 'may issue a notice requiring any person to furnish information relating to payments made in the course of their trade or business, providing that the information is or may be relevant to any tax liability'.
However, having referred to the Act, the Revenue says that it 'commonly seeks to obtain information informally even where it is entitled to the information under the law … because we wish to avoid being seen as overly bureaucratic. However, we also understand that sometimes people prefer us to use the formal statutory route. In this case we could consider using section 16, Taxes Management Act 1970 to obtain the information from you if you do not wish to provide the information informally'.
As an explanation, the letter then says that the information 'is critical to the Revenue in its compliance strategy' and 'I think it is fair to say that we have found the information an invaluable investigation tool and it ensures that the Revenue is able to carry out its function of identifying and investigating tax evasion effectively'.
Casting the net
Section 16, 'Fees, commissions, etc.', provides that, if required, a trade or business should 'make and deliver to the Inspector a return of all payments of any kind specified in the notice made during a period so specified, being:
(a) payments … for services rendered by persons not employed in the trade or business; or
(b) payments for services rendered in connection with the formation, acquisition, development or disposal of the trade or business, or any part of it, by persons not employed in the trade or business; or
(c) periodical or lump sum payments made in respect of any copyright, public lending right, right in a registered design or design right'.
In itself, this is nothing new and is probably well known to many practitioners. What is rather different here is that the letter from Bristol, having referred to section 16, says that 'payments which you must (my italics) include [are those] made in the course of carrying on your business, and:
- which you make or give to a person who is not an employee
- where the gross annual amount paid is equal to or greater than £1,000.'
The Revenue then helpfully provides an example of the information and the format in which it could be presented. This includes not only items such as 'wharf repair and maintenance' and 'IT consultancy', which would seem to clearly fall within the ambit of section 16, but also items such as 'outboard engine', 'navigation instruments' and 'sails and fittings', which would not.
The Revenue line
In response to an enquiry regarding the thinking behind these letters, the Revenue provided the following statement.
'The request for information by the Bristol Cabot offices is part of the normal information gathering undertaken by the Inland Revenue during the course of its work. These types of letters could be issued by any Inland Revenue office in the country.
'The request for information in this particular letter is requested on an informal basis. There is no change in how the Inland Revenue perceives section 16, Taxes Management Act 1970.
'The Inland Revenue does not have figures giving breakdowns of the commercial results of these reviews.'
Reeling in some thoughts
Several thoughts occur to me.
First, if these letters really 'could be issued by any Inland Revenue office', practitioners need to be aware of this as it appears that their clients may be asked for information on the basis of dubious legality. Rather like 'the one that got away', the Revenue seems to be implying that section 16 is rather 'bigger' than it really is.
Secondly, what then adds to my concern is the statement that 'there is no change in how the Inland Revenue perceives section 16'. Does this mean that the Revenue's legal advice is that section 16 does cover the supply of goods as well as services? This would seem an unlikely and vigorous leap of the imagination - a strange reflection of section 16 perhaps. Or does it mean that the Revenue hopes to take an imaginative advantage of the old 'ignorance is no excuse of the law' scenario but in reverse? Not many businessmen or women will be aware of the intricacies of the Taxes Management Act 1970; perhaps this additional information will fall, hook, line and sinker, into its net as an added bonus. The suggestion that the information is 'requested on an informal basis' seems a little disingenuous. If that were the case, why refer to section 16 at all?
Thirdly, Inspectors must be able to 'protect the Revenue's interests', but is this the right way of going about it? From a practical point of view, if the Revenue does not have figures giving the breakdowns of the commercial results of these reviews, how does it know whether the effort and manpower being put into them is yielding results?
Fourthly, is this the right way for the Revenue to treat 'customers'? Code of Practice 11: Enquiries into tax returns by local offices 'promises you fair treatment under the law …'. With regard to large businesses, the first line of the Executive Summary of the Revenue's recent Review of Links with Business (at www.inlandrevenue.gov.uk/pbr2001/businesslinks.pdf) states that 'almost without exception large corporates want a relationship of mutual trust with the Revenue'. I do not want to go overboard here, but if I were the recipient of one of these letters, I am not convinced that I would feel that I was in a trusted relationship. I wonder if this is how a fish feels when it sees a nice juicy worm, not knowing that it conceals a barbed hook?
Finally, a question: what would be the position if a business that had received one of these letters was subsequently to receive notification of an aspect enquiry under section 9A, Taxes Management Act 1970, in respect of the same year? If the request for information relating to goods does not fall within section 16, could a business argue that, as it had already received a request for additional information relating to its return, it had thus already been the subject of an enquiry for that year and so request that this enquiry notice be withdrawn? The Revenue's Enquiry Handbook at paragraph EH149 states that: 'there is no statutory definition of an enquiry, so it carries its normal dictionary meaning of "seeking information, asking, questioning"'.
Gone fishing
So, are there new fishing grounds? Five hundred years on, let us hope that the same reason is not being used for the issue of these letters. The Revenue has run into some choppy waters recently regarding enquiries into business. It seems that the level of enquiry work under self assessment may have fallen short of targets in the past few years. One would therefore assume that enquiries of this nature should be focussed on areas that are likely to produce results, perhaps using the cost/tax yield ratios of similar past enquiries as a guide. Whether the Revenue does this or not, it seems a little strange that it does not keep a record of 'the commercial results of these reviews'. And I am not quite sure how this sits alongside the statement in the letter that 'We have found the information an invaluable investigation tool'. Having only been fishing once or twice in my life, I would have to describe myself as a complete amateur and given a rod and line I would guess that any stretch of water would give me the chance of a catch. But living near the sea and not too far from some of the best trout rivers in the country, my understanding from speaking to anglers is that if you know the best spots (say, where the river curves or by an overhanging tree), you will increase your chances of success. And if you fish in the Solent, an electronic 'fish finder' will mean that you do not waste so much time trawling up and down an otherwise featureless stretch of water. By the way, if you are now thinking of going fishing, I understand that out near the Nab Tower, off the Isle of Wight, is a good spot.
