Coping with HMRC Enquiries - Mercia Group

Coping with HMRC Enquiries April 2015

Coping with HMRC Enquiries Contents 1

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Coping with HMRC enquiries

Publication date: April 2015 No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these notes can be accepted by the authors or company. For further information relating to the course or these notes contact:

Mercia Group Ltd, Best House, Grange Business Park, Enderby Road, Whetstone, Leicester, LE8 6EP Tel: 0116 258 1200 www.mercia-group.co.uk

 April 2015 Mercia Group Ltd

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Coping with HMRC Enquiries Reference

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Coping with HMRC enquiries

1.1

Discovery (s29) HMRC has 12 months from the date of submission to make an enquiry. If they do not do so, then they can only raise an additional charge for that year if they make a discovery. S29 historically allowed discovery assessments if tax had been lost due to: 

the fraudulent or negligent conduct of the taxpayer; or



where the officer could not have been reasonably have been expected, on the basis of the information provided to them, to have been aware of the under-assessments.

The time limits were five years from 31 January next following the year for incomplete disclosure and 20 years for fraudulent or negligent conduct. From 1 April 2010, HMRC are still able to raise assessments outside the new normal time limit (be six years from the end of the relevant period) in cases where there is careless or deliberate behaviour on the part of the taxpayer or someone acting on their behalf.

1.2



Where the behaviour is careless, the time limit is six years from the end of the relevant period.

s36(1) TMA 1970



Where the behaviour is deliberate, the time limit is 20 years from the end of the relevant period, as is failure to notify cases.

s36(1A) TMA 1970



Where there is incomplete disclosure, the time limit is four years from the end of the relevant period.



Where tax has been lost as a result of the careless or deliberate action of a taxpayer who has died, an assessment cannot be made for any year of assessment ending more than six years before the date of death. The assessment must be made within four years of the end of the year of assessment in which the taxpayer died.

s40 TMA 1970

What does disclosure mean? The meaning if disclosure has been interpreted extremely broadly by the Courts in recent years. The ground-breaking case was that of Veltema (see SP1/06). The case of Corbally-Stourton v R&C Commrs (SpC 692) involved a lady who entered into a loss buying scheme. In 1998/99 the taxpayer made substantial capital gains but on her tax return declared that she had made a capital loss. HMRC subsequently discovered that this alleged loss was attributable to a ‘scheme’ suggested by the taxpayer’s bank in which several hundred taxpayers had participated. The return included the following comments: ‘I am entitled to the loss of £1,003,994.08 by virtue of the provisions of TCGA 1992 s.71(2). The loss is part of a loss of £1,000,000,000 which accrued to the Trustees of Castle Trust on 8 April 1997 on the [disposal] of a European Average Rate Option (Trade No.82831) relating to the shares in Deutche Telecom. On 24 November 1998, I purchased for a fee of £77,625.00 (part of which is contingent) from the Trustees of Charter Trust 1.250% of their beneficial interest in the Trust Fund of the Castle Trust. That interest deter-mined on 25 November 1998, when I became absolutely entitled to receive from the Trustees of the Castle Trust the sum of £8.82.’

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The Commissioners commented: ‘It seems to me that an inspector equipped with a reasonable knowledge of tax law could reasonably be expected to conclude from the Appellant’s disclosure that something was going on, and that Mrs Corbally-Stourton had participated in a tax scheme. It would be reasonable to expect him to wish to question the workings of the scheme and the genesis and existence of the remarkable £1 billion loss. But he would also be aware that some tax schemes work and deliver the benefits claimed. There is nothing…in the disclosure to suggest that this scheme did not work. In my judgment an inspector could not reasonably be expected to conclude from the clear hints that there was a scheme that it was unlikely that it would work.’ Serious thought should therefore be given to exactly what information needs to be sent to HMRC to fulfil this requirement.

1.3

Computer records There has been some debate over recent years as to whether HMRC could insist on seeing computer records. HMRC have now attempted to put this matter beyond doubt. The legislation applies to any enactment that, in connection with an HMRC matter, requires a person to produce a document or requires a person to permit the Tribunal or an HMRC officer to inspect a document, or to make or take copies of or extracts from or remove a document. Relevant penalty legislation will also apply.

s114 FA 2008

The rules provide that references to documents and copies of documents were references to anything, including something electronic or computerised, in which information of any description were recorded. The same restrictions on access to paper documents will also apply to computer documents. An authorised person may, at any reasonable time, obtain access to, and inspect and check the operation of, any computer and any associated apparatus or material which is or has been used in connection with a relevant document. The authorised person may not necessarily be an officer of HMRC if HMRC did not have the necessary internal expertise to check the particular records. An authorised person may require the person by whom or on whose behalf the computer is or has been used, or any person having charge of, or otherwise concerned with the operation of, the computer, apparatus or material, to provide the authorised person with such reasonable assistance as may be required. Any person who obstructs the exercise of a power in this section, or fails to comply within a reasonable time with a requirement, is liable to a penalty of £300.

1.4

What is a computer record? ‘The terms ‘electronic document’ and ‘electronic record’ are interchangeable for these purposes.

CH23360

An electronic document may be a physical object used to store the information. It might be:

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

the actual computer or server, including an internal hard drive system, or



an external storage device holding backed up information or scans of previously printed documents such as:

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     

magnetic tape optical disk external hard drive CD or DVD floppy disk, or memory stick.

It may be sufficient for the person to produce a printed copy of an electronic document. Where it is not, for example with large spreadsheets, you can, if you have reasonable grounds to do so, issue an information notice to the person to produce the original electronic document or an electronic copy.’

1.5

Information powers Significant changes have been made to the regime allow HMRC officers to obtain information and documents. These provisions give much greater power directly to the officers without requiring the same level of external control from Tribunal that exists in the current regime.

s113 & Sch 36

Schedule 36 took effect from 1 April 2009.

SI 404/2009

The old powers to obtain information contained in ss19A and 20 TMA 1970 were repealed (subject to a transitional regime preserving the appeal and penalty rules relating to notices issued before 1 April 2009). The new powers can be used to obtain information and documents from the taxpayer and third parties for the purpose of checking the tax position of the taxpayer. This term is defined in the legislation as meaning:

para 64 and SI 404/2009

‘past, present and future liability to pay any tax’. This, significantly, gives HMRC the power to request information ahead of the submission of any return. This is explained away by the Financial Secretary in the following terms: ‘The powers can be used without a tax return being issued and completed first. This is new for income tax, capital gains tax and corporation tax and it is true to say that it has not been universally supported in consultations. None the less, I am persuaded and HMRC certainly believes that it is essential to enable it to be flexible in the different circumstances that it encounters. HMRC should be able to ask simple questions of taxpayers who do not normally file tax returns, without putting them to the trouble of completing a tax return that might ultimately prove unnecessary. It should also be able to check those persons who do not submit returns because they trade in the hidden economy.’

1.6

Powers to obtain information from a taxpayer A power is available for an officer of HMRC to require in writing a taxpayer to provide information or produce a document that is in their possession or power if it is reasonably required by the officer for the purpose of checking the taxpayer’s tax position. This requirement does not preclude oral requests but such requests are not enforceable until formalised in a written notice. Alternatively, Tribunal approval may be sought (see 5.21). If a return has been submitted for a chargeable period, a taxpayer notice can only be issued if one of the following conditions is satisfied: 

a notice of enquiry has been given and the enquiry is still open;



an officer has reason to believe tax should be assessed for the enquiry period;



any information is needed to check the tax position other than CGT, IT or CT;



any information is needed to check the PAYE position.

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A taxpayer has the right of appeal against a notice or any requirement in a notice but this right does not extend to any requirement to produce ‘statutory records’. If documents are destroyed or concealed after a notice has been approved by the First Tier Tribunal or after informal notice has been given, that can give rise to a criminal offence which can lead to a fine or imprisonment.

1.7

Power to inspect business premises The basic power is to enter business premises and inspect:   

the premises; any business assets on the premises; or any business documents on the premises

if the inspection is reasonably required to check the tax position of a person. ‘We cannot search premises, nor can we search for assets or documents.

CH20250

Whilst an officer of HMRC has inspection powers enabling them to enter business premises to check a person’s tax position, the person or occupier also has the right to refuse entry to those premises or to terminate the visit at any time.

CH255520

You must not use force or subterfuge to gain entry. You can examine statutory records and inspect the premises and assets by looking at them.

CH255525

You cannot search, rummage or wander around unaccompanied without the person’s consent. You can only look at information beyond the statutory records if the person agrees or once they have been issued with an information notice.’

1.8

Saying no ‘The person whose tax position you are checking or occupier of the premises you wish to inspect has the right to refuse you entry. It cannot be overridden, so a person retains the right to refuse entry to their property even when an officer has a right to enter and inspect with tribunal approval. You should try to establish why you are being refused entry and if possible agree a date and time for a return visit. If this is not possible, you should withdraw and try to arrange another visit at a later time.

CH25650

Where the occupier of the premises asks you to leave during the course of an inspection, you must do so immediately. Make a note of the circumstances that have triggered the request, or any explanation the occupier may give. Receiving a phone call that their child has been hurt at school is very different from deciding, without further explanation, that they no longer want you to inspect the business. You should make arrangements to complete your inspection either before you leave or after you return to the office.’

1.9

Basic trigger for documents Three basic requirements will be needed before a penalty can be levied:

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

a person delivers to HMRC a document of a type listed…; and



the document contains an inaccuracy which amounts or leads to either: 

an understatement of the person’s liability to tax; or



a false or inflated statement of loss by that person; or

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 

a false or inflated claim to repayment of tax; and

the inaccuracy was careless or deliberate.

The basic definitions of the types of inaccuracy are given in the legislation as follows: 

‘careless’ if the inaccuracy is due to the taxpayer failing to take reasonable care;



‘deliberate but not concealed’ if the inaccuracy is deliberate but the taxpayer did not take steps to conceal it; and



‘deliberate but concealed’ if the inaccuracy is deliberate and the taxpayer made arrangements to conceal it; for example, by submitting false evidence in support of an inaccurate figure.

Where there is more than one inaccuracy, separate penalties can be levied for each one thus allowing HMRC to recognise different offences in respect of each inaccuracy. Where a person submits an inaccurate return or document but at the time of submission the inaccuracy was not careless or deliberate, it will become so if the person subsequently discovers the error and does not take reasonable steps to inform HMRC. Provisions already exist in s98 TMA 1970 to charge penalties in relation to specific returns. Those returns are excluded from the documents to which the new penalties apply.

1.10

The starting points The starting point for penalties for each type of behaviour is as follows: Careless action Deliberate but not concealed Deliberate and concealed Accepting under assessment

1.11

30% potential lost revenue 70% potential lost revenue 100% potential lost revenue 30% potential lost revenue

Disclosure The legislation defines a disclosure as the following: 

the taxpayer tells HMRC about the inaccuracy;



they give HMRC reasonable help in quantifying the inaccuracy; and



they allow HMRC access to records for the purpose of ensuring that the inaccuracy is fully corrected.

Disclosure is regarded as ‘unprompted’ if made at a time when the person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. Any other disclosure is ‘prompted’.

1.12

Discount for disclosure The legislation provides for maximum discounts which will reflect whether: 

there is any disclosure at all;



the disclosure is prompted or unprompted; and



the quality of the disclosure which reflects timing, nature and extent.

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The framework is then to identify the maximum penalty for the offence and allow HMRC to reduce it to an irreducible minimum which will reflect the quality of the disclosure. This can be summarised as follows: Max penalty

Type of disclosure

Irreducible minimum

unprompted prompted unprompted prompted unprompted prompted

0% 15% 20% 35% 30% 50%

30% 30% 70% 70% 100% 100%

A similar system (but with higher penalties) applies to offshore penalties from 6 April 2011.

1.13

Special reduction There is provision for HMRC to reduce a penalty if there are ‘special circumstances’. There is no definition of what ‘special circumstances’ might be considered other than to eliminate the inability to pay and the fact that the loss of tax may be balanced by another taxpayer’s overpayment. Apart from being able to reduce the amount of the penalty, HMRC will be able to stay a penalty or agree a compromise in relation to proceedings for a penalty.

1.14

‘You do not enter into discussions regarding the amount of any special reduction. If it is right to reduce a penalty because of special circumstances, TAA will calculate the level of the reduction...’

CH170500

Special circumstances are either:

CH170600



uncommon or exceptional, or



where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law.’

Suspension of penalties This is a new concept and will apply only to penalties arising because of a careless inaccuracy. HMRC must state in writing: 

what part of the penalty is being suspended;



the period of the suspension which must not exceed two years; and



the conditions which must be complied with by the taxpayer. These can include specific actions and a time limit.

Suspension of some or all of the penalty can be considered only if HMRC believe that compliance with the conditions would enable the taxpayer to avoid further penalties for careless inaccuracy. When the suspension period comes to an end HMRC have to consider whether the conditions have been complied with. If they have the penalty will be cancelled; if not the penalty becomes payable. If, during the suspension period, the taxpayer becomes liable to another penalty, then the suspended penalty immediately becomes payable.

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