Since the merger of the Inland Revenue and HM Customs and Excise we have been interested to see how their combined powers have been used on businesses subjected to VAT audits

Background

We are acting for a number of clients who own retail outlets and with whom HMRC have taken a particularly aggressive approach. Following a VAT Tribunal ruling that found in favour of HMRC regarding the liability of certain products. HMRC then began to conduct unannounced invigilation visits to the premises of the businesses concerned.

During the visits they interviewed members of staff, demanded the production of till receipts, oversaw the ringing up of products and monitored the tax settings in the till which determined the liability of goods as they were sold.

Invigilation is a methodology usually adopted by VAT officers when they are suspicious that takings are being suppressed but HMRC admitted there was no such allegation in this case. It was our concern that they were merely on a ‘fishing trip’ to see what information the unannounced visits and interviews with staff produced.

Wide ranging powers

Most advisers are aware that VAT officers have wide ranging powers in relation to entry into business premises and the inspection of business records. But there are limits placed on officers under the legislation and it was these limits that were brought to a head in this case.

At first reading the legislation relied upon by HMRC appears quite draconian. The VAT Act 1994, Schedule 11 deals with administration and enforcement and section 7 (2) relates to the furnishing of information and production of documents.

‘(2) Every person who is concerned (in whatever capacity) in the supply of goods or services in the course or furtherance of a business or to whom such a supply is made, every person who is concerned (in whatever capacity) in the acquisition of goods from another member State and every person who is concerned (in whatever capacity) in the importation of goods from a place outside the member States in the course or furtherance of a business shall -

a) furnish to the Commissioners, within such time and in such form as they may reasonably require, such information relating to the goods or services or to the supply, acquisition or importation as the Commissioners may reasonably specify; and

b) upon demand made by an authorised person, produce or cause to be produced for inspection by that person –

i. at the principal place of business of the person upon whom the demand is made or at such other place as the authorised person may reasonably require, and

ii. at such time as the authorised person may reasonably require, any documents relating to the goods or services or to the supply, acquisition or importation.’

As can be seen from this extract an officer can demand the production of ‘any documents’ by ‘any person’ who is involved in the supply of goods and services but these demands must be ‘reasonable’.

Agreement reached with HMRC

In our client’s case when the officers visited their outlets unannounced, the officers demanded the
immediate production of documents from the staff. What the officers had not done was advise our client that their obligation was to produce documents that were reasonably required and within a reasonable time – not necessarily on demand. Another concern was there were no independent witness present when the staff were being interviewed. In our opinion the officers were not acting reasonably.

HMRC officers explained that their internal guidance states that to make such demands during the trading hours of a business is ‘reasonable’. However, we took a different view and suggested it was not reasonable in this type of case, to interview staff and demand the production of records from them particularly without the ‘officers’ of the business being present. The staff have no responsibility in the business for such matters and may not understand the relevance or importance of the questions being asked.

Providing the information required

We therefore required HMRC to stop making unannounced visits and agreed to provide them with the data they required within a reasonable timeframe. Staff were also instructed not to provide any documents nor answer any questions in relation to the business if further unannounced visits took place.

Of course HMRC were not happy with our intervention but we reminded them of something we are sure they already knew, the failure to comply with Schedule 11 section 7 (2) has no immediate consequences. Unlike most legislation where there is a penalty for failing to comply, for example a fine, in the case of section 7 (2) there are no such consequences. Only when a written notice to produce is ignored can HMRC impose a fine for failure to comply.

Criminal matters

HMRC do have the powers of arrest under the Customs and Excise Management Act for obstruction of an officer but this is most unlikely to be enforced in relation to a civil matter. If HMRC really had cause to exercise their powers to demand immediate entry and production of documents they could of course have obtained search warrants, but that is a whole new area of discussion, and not relevant to the issue being discussed.

One final comment, the VAT Act gives officers the right to inspect, which is very different to search. Inspect means ‘look not touch’ so if the officers are not handed a document they cannot search for it by opening drawers or cupboards so be wary as they may try to get you to open drawer or cupboard for them.