The magazine When Saturday Comes reports that in 2010 HMRC intensified its battle against tax avoiders in football with at least 28 winding up petitions issued to clubs.  HMRC refused to provide exact details despite a Freedom of Information request  but a spokesman said:

“As a sector football clubs have a long history of not paying their tax debts on time.  There is little HMRC can do for a business whose viability is dependent on not paying UK taxes to which they’re liable”.

Interesting article but it’s not exactly tax avoidance.  HMRC classify defaulters as won’t pay or can’t pay.  Most debts will be PAYE and NI which was never the club’s money and they will be put in the won’t pay box and hammered.

Discovery assessments may only be made in very specific circumstances.  The recent case of Ho v HMRC (UKFTT387) has hopefully taught HMRC a few lessons.

Mr Ho was a London cabbie operating out of Heathrow.  HMRC’s enquired into his 2003/4 return and:

• undertook a cash flow test
• assumed a pattern of working and
• estimated private expenses

to discredit the accounts and rebuild turnover for the year.  Based on this the officer had made discovery assessments for an additional six years.

The FTT found for Mr Ho  who was seen as “an honest, straightforward and truthful witness”.  They found the errors HMRC had used to discredit the records were acidental and insufficient to amount to negligence.  They rejected HMRC’s methods and accepted that there was no 2003/4 under-assessment.  As a result discovery assessments could not stand.

The credibility of the taxpayer was contrasted with HMRC’s behaviour.  Costs were sought by Mr Ho and the Tribunal gave a strong indication that costs would be awarded.  So straightforward mistakes can be other than negligent/careless but HMRC’s blinkers were only taken off after the expense of much time and energy.  If considering litigation a key point is the taxpayer’s credibility as a witness.  Not only what they have to say but how they say it.

The recent cases of Hankinson v HMRC (UKUT361(TCC)) and Ho v HMRC (UKFTT387) add to the understanding of discovery assessments. Section 29 TMA 1970 sets out the circumstances where HMRC can make assessments when they no longer have the option to enquire into a tax return

This posting looks at Hankinson. The taxpayer appealed to the Upper Tribunal (UT) questioning the right in law of HMRC to make a discovery assessment. The First Tier Tribunal had determined matters of fact relating to Hankinson’s residence in the UK and these had not been appealed. The aggregate income tax and capital gains tax at stake was in excess of £30 million.

The appellant contended that before a discovery assessment is made the HMRC officer’s decision making process is twofold: has a discovery has been made and, if so would s29 prevent an assessment.

S29, described in the court’s decision as serving to “protect the taxpayer who has made an honest, complete and timely return”, imposes two conditions, either of which can protect the taxpayer from a discovery assessment: was the taxpayer either fraudulent or negligent or could the HMRC officer have been reasonably expected to be aware, based on the information provided, that further tax was due.

The UT decision was that HMRC do not have to consider whether these conditions apply: it is sufficient for an assessment to be made that the officer has discovered an insufficiency of tax. The conditions enable the taxpayer to challenge the assessment on appeal and it is then up to the Tribunal to consider them.

It will be interesting in the coming months to see how HMRC’s Schedule 36 powers will affect the discovery issue. These powers are now being using widely to look at errors in years closed against the normal enquiry route.

HMRC’s forms and certificates are littered with warnings that “False statements may result in prosecution” or similar. The reality is that HMRC prosecutions are very rare – just 157 convictions for tax evasion last year. I regularly ask accountants when was the last time they saw any publicity on a tax prosecution and the usual answer is Ken Dodd or Lester Piggott. These were both in the late 1980’s and reflect the low profile of tax prosecutions over many years. Perhaps not for much longer with HMRC investing £900 million to tackle non-compliance including:

“a five-fold increase in criminal prosecutions to act as a deterrent to others”

HMRC’s prosecution policy has been unchanged for several years and it would be a mistake to assume that the cases that have been prosecuted will be the most serious. Certainly for several years after the introduction of the Fraudulent Evasion of Income Tax Act in 2002 many prosecutions were distinctly low level. More recently there has been a focus on organised criminal attacks on the tax system (for example MTIC and tax credit frauds) and professional advisors.

The vast majority of serious fraud cases have been and will continue to be dealt with as civil matters by HMRC under Code of Practice 9. The advantages to the taxman being:
• limited resources needed
• relatively quick turnover of cases
• early and substantial payments on account of tax due.

HMRC are evidently going to need to switch substantial resource to prosecution work to get anywhere near their five-fold increase. This could be achieved by increasing the prosecutions of minor cases but this is unlikely to prove any sort of deterrent to the COP9 type miscreant involving yields of hundreds of thousands.

Confiscation orders have been a feature of tax prosecutions for several years and a more aggressive use of the 2002 Proceeds of Crime Act could be the kind of highly cost effective approach that HMRC are looking at. In cases where there is very good evidence of tax evasion at the outset then prosecution and consequent confiscation orders will bring much more into the Treasury coffers than the typical civil settlement. In less obvious cases proceedings in the High Court for recovery orders will have the same financial effect.

A big problem with these approaches is that the guilty and their dependents are often wiped out financially. Silly me. I was forgetting the aim is “to act a deterrent to others”.

So George Osborne confirmed HMRC’s latest strategy to reduce the tax gap In last week’s 2010 Spending Review speech. A £900 million investment to “tackle tax evasion, evasion, fraud and debt” will bring in an additional £7 billion a year revenue by 2014/15. In other words another “Spend to Save” initiative to add to several others dating back to the 1990’s.

In fairness HMRC’s performance in tackling evasion and avoidance has been pretty impressive over the last few years given their staff reductions – 30% since 2004. Another 10,000 (from the current 70,000) are likely to go over the next 4 years.

Putting the additional £7 billion a year into some context HMRC’s total yield in 2008/9 from the efforts to tackle non-compliance was £12 billion. Even taking into account some of the £7 billion will relate to improved debt collection the targets are stretching - to put it mildly.

The Spending Review paper is short on detail on the way forward referring simply to:
• a five-fold increase in criminal prosecutions
• a new dedicated team of investigators to crack down on offshore evasion
• more resources to prevent tobacco and alcohol fraud; an increase in registration checks and a cyber team* to address repayment fraud
• dedicated tax experts to extend coverage of large business tackling high risk areas
• improvements in house debt collection and placing up to £1billion a year of tax debt to private sector agencies.

Offshore evasion is an obvious target given the amount and quality of information now available to HMRC and if big numbers are sought then Large Business avoidance will be in the front line. There is nothing radical here. Given HMRC’s inability over the last few years to predict with any degree of accuracy the take from various amnesties it is no surprise that observers are presently very sceptical on the taxman’s ability to delver.

Particularly intriguing is how the planned five-fold increase in prosecutions can be achieved. We will cover this in the next posting.

*Per Wikipedia
“E-, cyber-, and virtual are often used in names coined for “electronic” or computer-related counterparts of a pre-existing product or service”.

“McFedries observes that a backlash against the use of e- and cyber- can be traced to the late 1990s, quoting Hale and Scanlon requesting writers in 1999 to “resist the urge to use this vowel-as-cliché” when it comes to e- and calling cyber- “terminally overused”.

A more stringent regime introduced as part of HMRC’s avowed intent to let the punishment fit the crime can impose a penalty of at least 35% of the tax loss (and up to 100% in extremely serious cases) where HMRC find that deliberate errors have been made.

To make matters worse since April this year anyone who deliberately evades tax is at risk of the whole affair being made public via HMRC’s power to publish on their website details of “deliberate defaulters”. To qualify for this electronic equivalent of the medieval stocks, the deliberately evaded tax must be at least £25,000 and the offender must have compounded the situation by being less than co-operative in assisting HMRC with the enquiry. HMRC say they will publish the minimum amount of information for the defaulter to be identified, including business details and the amounts of tax and penalties.

Evidently HMRC wants to make people think twice before evading tax and to inculcate in the taxpaying public’s mind a common view that deliberate tax evasion is socially unacceptable. Now HMRC officers have a means of intimidating and or winding up taxpayers. Factsheet CC/FS13.

This publication is designed to help taxpayers understand the process of naming and shaming but is being issued at the start of enquiries usually before even an innocent mistake has been demonstrated by HMRC, let alone deliberate wrongdoing. So right at the start of an enquiry the threat of exposure is suspended like the sword of Damocles above the taxpayer’s head.

This approach is clearly inappropriate but I urge those getting this factsheet (or details of it) at the start of an enquiry to keep calm and carry on. For those who have made no mistakes, or whose errors are minor or non-deliberate, there is absolutely no question of being named in this way. Instead, consider responding in a polite way to any reasonable requests by HMRC, as being the surest way to close the enquiry quickly. On the other hand, if Factsheet CC/FS13 touches a nerve, maybe it is time to consult an investigations expert.

A recent Taxation article from a partner of Reynolds Porter Chamberlain highlighted the case of R (on the application of Glenn & Co (Essex)Ltd) v HMRC [2010] EWHC 1469 (Admin). This validated HMRC’s actions in removing from the business premises 19 desktop computers and the server for a couple of days during an unannounced visit in February 2009. Accountingweb picked up on the story and their thread included a number of responses on giving up information on clients.

There are two critical points here. Firstly this was not a question of HMRC obtaining search warrants with a view to a criminal prosecution for tax fraud. It was simply a visit to carry out a compliance check using the powers set out in Schedule 36 FA 2008. Secondly these powers only apply where “reasonably required for the purposes of checking that person’s tax position”. There is no third party inspection power in Schedule 36 so there should be no question of a visit to an advisor to inspect a client’s documents.

Compliance checks can be carried out with notice or less commonly unannounced. HMRC can remove a “document” during a compliance check and the judge in Glenn ruled that computers were included in the extended definition of “document”. He also acknowledged that the inconvenience of having vital business equipment removed for a period of time was an inevitable consequence of the law.

Clients need to know their rights in relation to inspection visits in general and unannounced visits in particular. In relation to Glenn type problems there are two more critical points.

Whilst HMRC are allowed to make compliance checks the client is entitled to refuse entry. See CH25600. If a tribunal has approved the visit in advance then there may be a penalty to pay for refusing entry, but this is small in comparison to the benefits of having the time to take professional advice before the visit is rearranged.

If the check is underway then if the client decides not to continue with the visit:
“then you should withdraw immediately. You should offer another time to complete your work or remove the records presented for inspection and continue inspection on HMRC premises”. CH25600.

Unannounced visits will be relatively uncommon and will typically involve situations where HMRC have had problems arranging a visit or where they have reason to believe there has been tax lost. In these circumstances clients should either be on notice that:

• obstruction is likely to result in a surprise visit or

• the surprise visit is because HMRC think there is a significant problem.

Vince Cable’s recent blast at the “spivs and gamblers” in the City reminded me of the tale of the UK’s favorite entrepreneur. The first chapter in Tom Bower’s 2000 biography is The Crime.

I was a student in Cardiff in 1970 and was a very happy bunny when for the first time I could buy discounted LPs from the fledgling Virgin Records mail order operation. I did wonder how they managed to make any money with such keen prices and clearly Customs & Excise had similar thoughts. The scam arose from a complete accident. The 20 year old Branson drove a van to Dover bound for Calais and Customs had stamped a form PT999 confirming the records were for export and exempt from purchase tax. The sailing was then cancelled and on the drive back to London our favorite entrepreneur realized the records could be sold in the UK without purchase tax and without declaring the extra profits to the taxman.

The Transit van was soon regularly making its way to Dover and back to London with the records and the documentation for “export” to people like me sitting in a Cardiff bedsit. The sheer scale of the operation soon alerted Customs and a three week surveillance operation was mounted culminating in a raid; Branson’s arrest and a night in jail for him. Father was a barrister and a stipendiary magistrate. Customs did not prosecute but accepted a monetary settlement of a modern equivalent of some £500,000. Rather unusual for the time. Bower finishes the chapter with one of his subject’s principal credos:

“I have always enjoyed breaking the rules”.

Clients should not overlook next month’s quarterly payment deadlines of the 19 and 22 October 2010. I find that my clients handle the normal monthly payments without much trouble (other than when they have cash flow difficulties) but they can overlook the quarterly payments. I am always concerned about clients who are Contractors in the Construction Industry where they have no PAYE and little or no CIS deductions collected from payments to subcontractors. It is fairly easy to notify HMRC of any nil payments through the online system and it is a lot less hassle than having to deal with the reminders from the Accounts Office, when inevitably their computers register that no payment has been made and that no notification has been received.

Some good news for the low paid, although perhaps not such good news for clients who are struggling to keep afloat. Increases that have been announced to the National Minimum Wage (NMW) rates. These take effect from Friday 1 October 2010. There are different levels of NMW, depending on the age of the worker and a significant change this year is that the main rate is being extended to adults over the age of 21, instead of 22. Please remember that NMW rates apply to most adult workers who are working legally in the UK and are not ‘genuinely’ self-employed. Workers of compulsory school age are not entitled to NMW.

There is a new minimum wage rate of £2.50 per hour for apprentices, which will apply to under and over 19’s but only in the first year of their apprenticeship.

Don’t forget the regulations introduced in October 2009 in relation to tips, gratuities, service and cover charges, which can no longer count toward the National Minimum Wage. It is irrelevant how the tips etc. are paid (cash, payroll or a Tronc System).

Clients need to be reminded that since 6 April 2009 employers may incur a penalty if HMRC compliance officers discover that the employer has failed to pay the national minimum wage. The workers will be entitled to have the arrears of wages repaid at the current rates.

I have been spending a lot of time on PSA’s over the last few weeks with the time rapidly approaching to submit computations to HMRC. I have mainly been reviewing nominal ledger accounts to extract taxable costs from staff entertaining, meals and travel and subsistence expenses, usually also taking a look at business entertaining expenses to satisfy myself that costs have been correctly posted and dealt with.

What is a PSA?

A PSA is a an annual agreement with HMRC whereby the employer agrees to accept the liability for certain taxable expenses payments and/or benefits in kind that would otherwise have to be:
• reported on an employees form P9D or P11D or
• included in the employees gross pay and put through the payroll.

Only certain taxable expense payments and benefits can be included in a PSA. The rules provide for the inclusion of minor items such as any taxable Long Service Awards given to employees working for the same employer. Next we have major items of expenses or benefits in kind that can be included in the PSA if they are made irregularly. For example taxable relocation costs where the allowable costs exceed the £8,000 exemption limit.

The most common type of expense payment or benefit in kind to be included will be something where it is impractical to apportion the costs between individual directors and employees. This could be the cost of a non-qualifying company party or other taxable event.

What do you need to do before submitting your client’s computations to HMRC?

This has to be done in time to meet the 19th October 2010 payment deadline.

We should start by looking at the actual P626 agreement. What has HMRC agreed can be included in the PSA? Many PSA’s include staff entertaining, staff functions, staff gifts and incentives. We then decide where the information has to come from, remembering not to overlook less obvious nominal ledger accounts, such as staff welfare. I never assume that everything posted to staff entertaining is taxable and that everything posted to meals, travel and subsistence, etc. is non-taxable.

I often find ‘staff entertaining’ meals that qualify as subsistence because they are taken away from the permanent place of work. Employees often misunderstand the rules and treat away subsistence meals as staff entertaining because one employee pays the bill for two or more employees. Another common error is treating minor and trivial costs, such as coffee and biscuits as taxable because someone pays for a group of people.

I have spotted the cost of eye tests that were to be included in the PSA but the costs are exempt and do not need to be included. Other costs that are exempt are birthday cakes or flowers for a birthday, christening, and an employee or family member in hospital. Flowers given as a reward are taxable benefit to be included in the PSA.

I always review the invoices for larger events and costs and check the number of attendees at a function to be included in the PSA. The exemption is based on the cost per attendee, not the number of employees and the exemption may apply without the client realizing that. However, I sometimes find errors where the numbers are overstated, being based on the number of employees on the payroll, not the number of attendees. I always check the number of ‘covers’ or meals booked and I check that all costs, including VAT, have been included in the calculation. We must assume that HMRC’s employer compliance officers would carry out similar checks when reviewing an employer’s procedures.

The VAT treatment of expenses payments and benefits in kind is important. The full cost must include VAT, irrespective of any VAT recovery, but our client systems usually report VAT exclusive costs. That means that we have to add VAT to the amount included in the PSA. I always use a reasonable estimate of the VAT to be added, knowing that a lot of the costs may have been incurred without VAT receipts being provided and where the VAT has not been reclaimed.