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KEY POINTS
- HMRC segment taxpayers and have different approaches for each segment.
- Business records checks are still causing concern for the profession.
- More innovative approaches are needed to bring people into the tax system when they are operating outside it.
- Informal enquiries may be quicker, but do not provide certainty for taxpayers.
Last month, the LexisNexis offices in Sutton (home to Taxation) played host to a local Working Together meeting, looking at the way investigations were now being carried out.
Rather than concentrating on the legislation, or on each separate type of investigation, the idea was to get an overall picture of how the landscape now looked, both from an adviser’s and a Revenue perspective (although inevitably the conversation strayed into other areas).
Attendees from the professional side were mostly from smaller practices in the local area, HMRC officers came from a range of different backgrounds.
The discussion proceeded under the Chatham House rule, so the only identification given below is whether the comments came from the HMRC or professional side and, even then, nothing said should be seen as authoritative HMRC guidance.
On the professional side, Mike Down, a partner in Baker Tilly, was happy to be named as a speaker.
View from HMRC
The session started with an outline from HMRC of how the current process of investigations fits in with their objectives, starting from the over-riding principle that one of the purposes of HMRC was to bring in the money that funded the UK’s public services.
The strategy for achieving this breaks down customers in to seven segments, who would be helped in different ways:
- High-value large or complex customers are being helped to be compliant by allocating staff to ensure good relationship management.
- The willing and able get more help through online processes, forms and guidance.
- Those needing help around life events would also have simple compliance issues resolved at Compliance Centres.
- Taxpayers who always need help will be supported indirectly by HMRC working more with agents and intermediaries such as the Citizens’ Advice Bureaux.
- Potential rule breakers will be deterred by: business records checks, to encourage better record keeping; the work of taskforces which will be publicised as a deterrent; compliance centres which will quickly resolve and, if necessary, penalise errors; and speeding up compliance work through the single compliance process.
- Rule breakers will additionally be targeted by taskforces and campaigns, and serious deliberate defaulters will be scrutinised for up to five years to improve their compliance.
- More staff will work on the issue of organised criminals, and there will be prosecutions in more cases.
View from the profession
Mike Down commented on HMRC’s approach to changing behaviours. As the breakdown from HMRC had indicated, this went across all taxpayers, aimed at getting them to pay the right amount of tax at the right time.
The relationship with tax agents was crucial to this, and needed to be at the heart of HMRC’s strategy.
There had recently been an overwhelming number of HMRC campaigns and initiatives, starting with the offshore disclosure opportunities and now looking at individual trades and professions. There was a danger that people would simply wait until the ‘right’ opportunity to disclose came along, and there was an argument for a more long-lasting and general opportunity to come forward and disclose any irregularity.
Business records checks were beginning to cause concern, not least because of the way in which they had been introduced. The ‘test and learn’ pilot was reporting 44% of records not fully complete and 12% significantly incomplete.
With penalties of up to £3,000 and a planned 20,000 checks annually from 2013, this had the potential for conflict with taxpayers and their agents. The staffing figures suggested that each officer would have to carry out 166 checks a year, more than three every week.
We were then also in a new regime for penalties, where the discretion of HMRC was restricted, and penalties for late payment and late returns were stricter than had previously been the case.
Coming in addition to the evolving ‘compliance check landscape’ which now featured interventions, compliance checks and informal enquiries in addition to the traditional investigations, a lot had changed both for agents and HMRC.
Feedback
The attendees, sitting on mixed HMRC and professional tables, were then given time to discuss and feed back on what they had heard.
Facilitators on each table were given a list of questions that could be used, though they did not have to follow them if the discussion developed differently.
The different approaches for different types of taxpayer raised the greatest number of questions and suggestions, with an emphasis on the need for better communications:
- Better advice needed to be made available by phone.
- Taxpayers would be helped by better signposting on the website – for example, a clear link to a summary of the new HMRC powers, so that unrepresented taxpayers could find them.
- Agents could better help their clients if there were dedicated agents’ lines for all taxes, not just self-assessment. The agent account managers could no longer be telephoned directly, agents had to register and email, then wait for a response.
- However, when the right person can be located in HMRC, they can be very helpful indeed.
Agents in particular felt that there were a lot of people simply not within the tax system at all who needed to be the focus of attention, particularly since they undermine the businesses of bona fide traders.
Suggestions ranged from having a way to report suspicions of tax evasion online, to a genuine amnesty with no immediate penalties in order to bring people into the tax system for the future.
On penalties, the new PAYE late payment penalties were singled out for criticism, as they penalised clients who did not know what they had to do rather than those deliberately avoiding their responsibilities.
However, in some areas, HMRC seemed to be too slow in using their powers. For example, in making determinations for self assessment when fines were not having any impact.
Sometimes, HMRC would wait for the full six years of outstanding returns before determinations were made.
The loss of local offices was again criticised. There was no longer an easy way of bringing in someone ‘out of the cold’, collecting together a number of years’ returns and agreeing the liability.
That depended in the past on personal contacts at local offices, who would also have been the route to pass on information in confidence that agents thought HMRC ought to know.
Finally, although agents were concerned that HMRC expectations of the average client might be too high in business records checks, there was support for publicity in cases where people were evading tax.
One wry comment suggested that benefit fraud leads at best to a fine and at worst to a prison sentence, whereas tax fraud leads at worst to a fine – and at best to a knighthood!
Case study
The session then continued with a case study. Briefly, the case study concerned a UK resident but non-domiciled client dealt with by the High Net Worth Unit.
Keen to adopt the ‘light touch’ way of working compliance checks, the HMRC officer dealing with a review of the 2009/10 return rang the agent in October 2011.
The inspector asked a range of questions including the procedures for identifying taxable remittances, the reason why a farming business that has been loss-making for five years has made a profit, and more routine queries on dividends, interest received and a P11D benefit.
The agent gave replies to some of the questions, but said he would need to write in with clarification of others.
The main question the groups were asked to consider was whether the agent should have insisted that a formal enquiry was opened. Opinions were divided, with some seeing the benefit of handling matters quickly, while others were concerned about certainty for the taxpayer.
Those who felt the informal approach was helpful pointed out that dealing with it between agent and HMRC meant the client did not have the stress of knowing that an enquiry was being opened. If it could be dealt with quickly, it would be over before the client even knew it had started.
An informal enquiry put pressure on HMRC to come to a swift conclusion, because they only had (in this case) from October to January to settle the case informally.
Those who disagreed cited the problems of answering questions without preparation, and what would happen if the officer later raised more questions. There would also be no certainty for the client that the outcome was final. Some fee insurers also would not pay out in respect of informal investigation work.
Some insight was given into how the single compliance process might affect a case such as this. The emphasis was on open and early dialogue, so the risks would be clearly identified to the taxpayer and agent in advance.
For example, the opening letter might say that drawings would appear to be inadequate for the lifestyle which the taxpayer enjoyed, and once that risk could be discounted following the answers received, the enquiry would be wound up.
The process would often involve an on-site visit to address the risks, but the intention was that this should be more like a VAT compliance or PAYE audit visit. While the risks addressed may go across all taxes, this would not necessarily mean that they would all be addressed by one person. If officers specialising in different taxes were needed, they would attend.
The meeting closed with comments that the discussion had been useful, and had helped each side to understand the other’s approach and concerns. More meetings might be arranged to look at specific elements of the new compliance landscape.
