HMRC Compliance Checks Decoded

VERSION ONE • JULY 2013

Tax-Hell.co.uk

Acknowledgements Thanks to the many tax professionals who have helped with the technical aspects of this publication. Particularly Chris Chadburn director at venntax.

Nick Morgan

Disclaimer: care has been taken to ensure the accuracy of the contents of this document but we can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any statement in it.

This ebook created in July 2013 i

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Introduction

The “General information about compliance checks” factsheet is issued when HMRC open what they call a “check”.

The four page document is confusing and frightening.

We explain why that is, what it is really saying and what you need to know to move forward.

You can download the HMRC factsheet here http://www.hmrc.gov.uk/compliance/cc-fs1a.pdf

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But.. but..but WTF!? Why me, what will happen next and what’s this so called “factsheet” all about?

Can you give me an example?

Well there’s the meeting.

Take a few deep breaths.

What meeting!?!

OK.

Exactly, it’s not mentioned in this document but it’s about to become extremely important.

First things first: you want to know what this is all about? I can tell you now, this is an investigation.

Now HMRC won’t say that they’ll say it’s a “compliance check” or they’ll say it’s an “enquiry” and they’ll say that they don’t necessarily think that you’ve done anything wrong.

And that could be true, this could be a random check and you are just really unlucky to be picked, but the likely scenario is this: something has happened to push up a red flag with your name on it. HMRC are now investigating.

What do I need to know about the meeting?

At an early stage in the check the likelihood is that HMRC have their suspicions about you and they are looking for evidence to substantiate those suspicions, a meeting with be their chance to fish for evidence.

That doesn't sound good, what should I know?

1. You are not legally obliged to attend a meeting and it may be better for you to decline at this stage.

You’re joking aren’t you?

I’m not, I’m very serious.

OK, tell me about this factsheet then.

The document provides information on the process that has just kicked off together with your basic rights BUT there are significant issues that are glossed over or ignored altogether.

2. HMRC may well put pressure on you to attend the meeting, they will suggest that a meeting will speed up the ‘check’ (it’s unlikely to at this stage) and they will use phrases like, “I need you to attend a meeting”. They may well say that if you don’t attend it may have an impact on penalties - if they become applicable. This is not true, the meeting is not a legal requirement (see point 1) and as long as you answer HMRC’s questions in a written form within the time limits (normally 30 days) there should be no impact on penalties if they become applicable. iv

3. You have a right to ask for an agenda / list of questions that will be asked in the meeting. You need to be 100 percent prepared for what might come.

4. You have the right to be represented in the meeting.

5. If you go to the meeting you have a right to call an end to the meeting at any time.

OK what else should I know?

This factsheet contains a lot of stuff about complaining but it skims the most important information, which is about the new internal review.

Eeeewwwww, does this involve rubber gloves?

No, as unpleasant as this may sound it’s a very good thing.

6. You have the right to record the meeting - HMRC will ask for a written transcript of the recording.

Tell me more of this internal review...

7. If you are given a list of questions to be asked at a meeting (see point 3) you can simply give written replies and say that unless they have more questions the meeting is now pointless.

Well, like I keep saying this is just the introduction. I promise we’ll come to it. But my point is there are information holes here that you could drive a truck through. The purpose of what you are now reading is to show you where the holes are and what you need to know about them.

8. You may feel the urge to put your cards on the table, the best general advice is to wait until HMRC shows their cards first. If they want you to go to a meeting and they are not even telling you why they have opened the check you certainly shouldn't go.

OK, let’s go to work!

Not just yet, there’s something else I need to tell you.

Shoot.

It’s the jargon. HMRC are full of it. The people you will be dealing with are investigators, but that’s the last thing they’ll call themselves. They’ll be Inspectors, Compliance Officers or from Personal Return Complacence.

More jargon: compliance check (it’s an investigation) our service (again that’s the investigation) the customer (that’s you) v

penalties (fines) extending the scope of our check (expanding the investigation) quality of disclosure (you spilling the beans).

Jesus!

I know and what you are just about to embark on is an investigation. However - and this pains me - for the sake of factual accuracy I’m going to have to use the term single compliance process (SCP) to describe the investigation from here on in.

The Openness and Early Dialogue trials ended in March 2013 and now we’re waiting to see what HMRC decide to do, will they stick to the old system where they give out little or no information at the start of the investigation or will they be more upfront about why their suspicions have been peaked.

Anything else I should know before we start?

Yes, everything is in a state of change particularly with regard to the early part of the investigation. It’s all about how much information HMRC will give you about why they are checking you out.

What? So they are going to investigate me but not say why or what they are investigating?

Yes, that’s right. Since Self Assessment was introduced in 1997 HMRC has been under no obligation to justify the opening of an investigation, and typically they didn’t.

In late 2007 HMRC announced trials of a new approach called Openness and Early Dialogue which - in a 180 degree spin said they would tell you why you were being investigated and then you would try to agree on the process and timescale for the investigation.

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Analysis of

Page 1

• What is a compliance check? • What happens during a compliance check?

HMRC say this is a compliance check, but they don’t explain what a compliance check is. So what exactly is it?

A compliance check can be anything from a five-minute phone call (to sort out an obvious arithmetical mistake) to a major investigation into a sizeable company’s fraudulent activities and everything in-between. So it is an investigation into your tax return.

The factsheet says, “We carry out checks into returns to make sure our customers are paying the right amount of tax.” but what they don’t say is why I’ve been picked.

Only a tiny percentage of checks are random, the vast majority arise from an analysis of the risk of your tax being incorrect. At the start of the investigation it may not be clear why your tax affairs are being investigated and HMRC may not tell you. You should ask and be persistent. Why should you answer questions when you do not know the context?

What about the bit that says, “We carry out some checks over the phone. If we phone you, you can ask us to write to you instead.” Should I talk to them on the phone?

Its fine if the matter is straightforward and you are comfortable with dealing with the issue on the hoof. But be aware that these conversations may be recorded or detailed notes taken.

At a later point in the investigation these notes may be produced to support the case against you.

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If you do agree to talk with HMRC on the phone and you start to feel out of your depth remember you can end the call at any time. Just say, “I can’t talk to you anymore, you need to put this to me in writing.” If they try to make you say more just repeat the sentence over again. They will eventually get the message.

They can then either open up the earlier years for investigation or simply “scale back” which is a process where by HMRC estimate how incorrect your figures were in earlier years, then add penalties and interest then send you a bill.

What about this bit that says, “Some types of check can only be done within a certain time limit” that sounds like it might be interesting, is it?

HMRC have considerable powers but there are often rigid time limits to their activities.

For example enquiries into the tax return of an individual have to be started within 12 months of the filing date of the return (usually 31 January after the end of the relevant tax year).

Enquiries into the returns of small companies generally have to be made within 12 months of the date the return was received.

Then it says, “If we find something wrong we may extend our check... we may check earlier periods.” This doesn't sound like checking to me, it sounds like an investigation!

Don’t let this word “check” fool you, this is an investigation. If HMRC find something wrong in your return they are likely to make an assumption that you were also incorrect in earlier years.

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So they’ll tell me what they are checking and keep me informed about how the investigation is going, that sounds good - right?

The truth is that HMRC can’t quite decide whether it’s better for them to tell you why they are investigating you or not and in the last two decades they have swung from one extreme to another.

In 1996 they would tell you why an investigation was being launched, but in 1997 they reversed that policy.

A decade later they started to experiment with “Openness and Early Dialogue” so back to telling you why the investigation had been launched.

This sounds more straightforward is it?

Yes, unless you specifically request it, HMRC will deal directly with you.

You must authorise a third party (be it an accountant or tax advisor or a friend) to act on your behalf if that is your wish.

But - be warned - it’s you that has the responsibility if your representation messes up.

The form you fill out to allow a third party to represent you is very straightforward.

This experiment has just finished and today everybody in the industry is waiting to see how things are going to swing.

So HMRC might be informative and helpful or they might not.

You will just have to ask and find out, you might want to tell them that the investigation would be speeded up if you know exactly what they were investigating.

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tion. That may sound like a chunk of cash, but it may be a small price to pay for the chance to get your house in order.

This sounds like they have Gestapo-like powers!

• HMRC will “ask [for]... information or documents... [they] may need.” It’s up to you (and your representative) to know the limits of their power.

HMRC has formidable powers but there are limitations: • The information they seek must be reasonably required for the purpose of checking your tax position. For example they can’t make you hand over personal bank statements without good reason - for example they need to find some significant problems with your business records or have understandable suspicions about the financing of your personal assets.

• They have no right to meet with you or members of your staff. Pressure may be put on you to attend a meeting, but you are not legally required to go.

• HMRC have a right to enter your business premises and inspect your business records. You should only let them in when you are good and ready. You have a right to refuse them entry and this trumps their rights!

• If they come to your business premises armed with with written authorisation from the Tax Tribunal you can still refuse entry. The worst they can do is stick you with an initial penalty of £300 and a further £60 per day until you allow the inspec-

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What’s this all about?

If you read between the lines this paragraph tells you about the relationship between HMRC and tax advisors. Historically tax advisors and HMRC have often been just a little bit too matey, they do - after all - speak the same language and you’ll find that many tax advisers are former HMRC employees.

Then (in the mid to late naughties) HMRC started getting much tougher and many tax advisories found that this matey relationship was not working out so well for them (or their clients). The good ones became much more challenging.

HMRC then said, “Look if you are going to have the audacity to competently defend your clients, we are going to cut you out of the equation and go to the tax payer directly.”

HMRC are yet to make good on this threat, but if you have a tax advisor you must make sure that they are informed about what is happening. If you don’t tell them they can’t help you.

HMRC know that.

There is a lot of “asking” and “needing” here isn’t there?

Yes, now you are beginning to get it! What HMRC need and what they are entitled to see (or do) are often very different things.

If you believe taxman’s requests are unreasonable explain why. It is up to the HMRC to provide full details on why they need the information. Ultimately if HMRC ask for something other than your business records you can appeal to the Tax Tribunal on the grounds that it is not reasonably required for the investigation.

The threat of the Tax Tribunal may well stop HMRC asking, particularly if they know they are being ‘cheeky’.

At a meeting you may be asked a string of questions you consider to be intrusive and irrelevant. Do you smoke? Do you eat out much? What holidays have you been on in the last year? What car do you drive? Where do you shop? How much did you spend on petrol last year?

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You don’t have to answer any of these questions. Nothing outside the business unless there is good reason.

HMRC may say they don’t feel your declared income and outgoings match. They should explain this to you and at this point you should ask to see their figures to ascertain how strong they think their case is.

This is an area where you need to consider the assertion and your response in detail. In short do not commit yourself in the heat of a meeting.

HMRC may well give you something called a “lifestyle questionnaire” to complete. If HMRC’s assertion is reasonable then you need to consider your outgoings in some detail but the “lifestyle questionnaire” will be of little help. A detailed review of private bank statements and credit cards for a period and a sensible estimate of cash sources and cash spending usually is.

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