HMRC’s power to publish the names of deliberate tax defaulters for up to one year is effective from 1 April 2010. It applies to deliberate acts of failure and evasion uncovered by the taxman. Although this measure may sound harsh, HMRC see it as a move towards consistency of treatment for deliberate evaders: the so-called “naming and shaming” extends to the civil code the powers already available to the tax authorities for criminally convicted fraudsters. HMRC also believe, according to their factsheet, http://www.hmrc.gov.uk/compliance/cc-fs13.pdf that public humiliation will encourage voluntary disclosure and deter evasion. This may seem perverse, but perhaps more understandable with the knowledge that HMRC would not be able to publish where a disclosure is unprompted. In addition, there will be no publication for where the potential lost revenue is less than £25,000.

Publication will be quarterly on HMRC’s website (accessible to customers, the media and family) and includes the name and address of the taxpayer or company; details of the business; the amounts of tax evaded; the penalty charged and the period over which the offence occurred. There are strict criteria and HMRC are now working on the introduction of a workable process for each case to allow them to publish, including the opportunity for the taxpayer to demonstrate they should not be publicly named.

It is important to put the new law in context: it applies to tax return periods beginning after 31 March 2010; thus, for example, it will apply to the 2010/11 personal tax return, which will not be due until 31 January 2012. As such, and allowing time for HMRC investigation, appeals and the process of publication, together with the seemingly decreasing number of investigators in HMRC, the first names are unlikely to be seen before 2013. Given this, it is worrying that we have already heard of an instance where a bullish inspector has already verbally threatened publication as a means of obtaining co-operation.

Perhaps in the dens of tax iniquity, publication will become a new badge of honour and street credibility. More positively, the timescale does give anyone seriously considering evasion or disclosure pause for thought!

The Government intended to abolish the current favourable tax regime for furnished holiday lettings with effect from 5 April 2010 but these plans have been shelved, at least in the short term. The withdrawal of the rules was first announced in the 2009 Budget and legislation had been included in the draft Finance Bill 2010. However, owing to the shortened timetable for passing this year’s Bill through Parliament due to the election, the proposed changes have been abandoned.

The tax benefits associated with furnished holiday lettings include:

• Income tax losses can be set against general income, which is not the case with other rental properties.

• Profits can be treated income for pension purposes.

• Favourable treatment under capital gains tax including entrepreneurs’ and roll over relief.

• Furnished holiday lettings may also qualify for relief from Inheritance Tax.

For your holiday home to be considered a Furnished Holiday Letting for UK tax purposes it must meet the following criteria:

• Available for holiday letting to the public for at least 140 days of the year.

• Furnished so that guests can live in it without the need for extra furnishings.

• Occupied by paying guests for at least 70 days in the year.

• Individual lets should not exceed 31 days and your holiday home must not be let to the same person for more than 31 days in the year.

This is good news, at least in the short term, and tax planning should now be considered to ensure that maximum relief is obtained before any future change is introduced.

The Word magazine does. This month’s edition’s “Best and Worst” is kid’s cartoons. They acknowledge he wasn’t really for kids “but he certainly treated you like one”. Given the Revenue’s budget they could have made “Who framed Roger Rabbit, not a sub-Jak doodle”.

The best is judged to be Spongebob Squarepants. More my kids’ era and with honorable mentions are Mr Benn, Top Cat, Willo the Wisp and Ivor the Engine.

Those were the days.

www.wordmagazine.co.uk

Now is the time to be thinking about some key issues related to the filing of the 2009/10 Employer’s end of year PAYE returns. What about any ‘off payroll’ transactions that might need to be included in the PAYE returns? This might include casual labour, paid through the purchasing, petty cash or employee expense claims systems. Is there a need to include any of these payments on the payroll, or do we need to complete a P38A Employer Supplementary Return for 2009/10?

Casual labour is a different and more dangerous issue in the Construction Industry. Any payments to workers that are included on the CIS300 monthly returns (there are no annual CIS returns) need to pass several tests. Firstly, we have to confirm that the worker is not an employee; we have to verify the worker to determine whether the individual is to be paid gross or taxed at 20% and if the worker is not registered or his details are not matched on the HMRC system, we have to deduct 30%. We also have to decide if the work is within the scheme (construction operations) or excluded from the scheme e.g. the professional consultancy work of a Quantity Surveyor, or an Architect. If the latter, is the worker self-employed, or employed under a contract of service?

What about other payments made gross to individuals treated as self-employed? Has somebody checked this out and perhaps used HMRC’s Employment Status Indicator (ESI) tool to confirm self-employed status is correct? Is there a copy kept on file to show the HMRC employer compliance or status officer when they cals? Have any payments been made gross to a Non-executive director, which HMRC might challenge at a future date?

We are experiencing the worse recession since the 1930’s and a lot of people have lost their jobs. Are we satisfied that any tax-free termination payments made in 2009/10 were dealt with properly, or do we need to check this out? Genuine statutory redundancy payments will be exempt for tax purposes and will not be earnings for Class 1 NICs. Some employers pay more than the statutory amounts, such as one week’s basic pay for each year of service and any such non-statutory redundancy payments will be exempt from tax, subject to the £30,000 exemption limit. There is no limit for NICs and the payments will not be earnings and not liable to Class 1 NICs.

Genuine payments of compensation or damages will be exempt, subject to the £30,000 limit and not earnings for NICs, but should we check that the payments were compensation and not dressed up as such. Payments in lieu of notice and ex-gratia payments will come under scrutiny at any HMRC inspection and care needs to be taken before making such payments gross, without deducting income tax and NICs. Has professional advice been obtained or was clearance sought from HMRC?

Well that’s all for now folks, but thank you for reading my March 2010 Blog.

This month’s edition of The Oldie (my Grandfather gets it) asks what “a remittance man” was. Nothing to do with the current tax activities of our non-doms but according to the shorter OED “an emigrant who is supported or assisted by remittances from home”.

The Oldie picks up the story of Edward Blake a Victorian dropout whose clerical father also had seven daughters to find dowries for. Edward is shipped off to Australia and is told to appear at the offices of a solicitor every quarter to pick up a modest allowance from pa. “Remittance men could be found in all corners of Empire far enough away to make a return to the bosom of their no-longer loving family all but impossible”.

The 2010 non-dom remittance men are now in all corners of the UK ensuring the payments out of their global coffers are as low as possible. Apparently the Victorian practice disappeared with the youth of World War One. I’m sure nothing drastic is being planned in the 2010 budget for the non-doms in general or Lord Ashcroft in particular.

HMRC’s latest tax “amnesty”, the Tax Health Plan for medical professionals, is the third in less than a year. These are not strictly amnesties as the individual still has to make full restitution of tax due with interest and a penalty. The attraction is a penalty restricted to 10% and a “lite touch” disclosure framework.

The first amnesty, the Offshore Disclosure Facility, was announced in 2007 following receipt by HMRC of the names of foreign account holders from the High Street banks. The ODF was on similar terms as the THP and enabled the taxman to collect tax of £400m at a cost of £6m. HMRC then tackled over 300 other financial institutions and armed with further information launched the New Disclosure Opportunity in 2009. The NDO recently came to an end with the 12 March 2010 deadline for all filing and payment.

The number of NDO registrations, at 10,000, is disappointing for HMRC. One reason for this was the announcement of the Liechtenstein Disclosure Facility shortly after the NDO and giving the lie to the claim that the latter was the last beneficial opportunity to come clean. Taxpayers who can qualify will naturally choose LDF because of the relatively generous terms on offer: the LDF permits registration until March 2015 and will collect tax calculated at a composite rate, for only ten back years compared with the twenty of the NDO.

Having said that, those who are affected by the LDO are advised not to take too laid back an approach as there is always the possibility that HMRC will amend the terms to be less favourable. Although the clock starts ticking once registration is made - the taxpayer will have either seven or ten months to make a report of the irregularities, depending on the tax rates adopted - best advice is to register now to take advantage of the offer on the table. More information can be found at http://www.hmrc.gov.uk/disclosure/liechtenstein-disclosure.htm.

HMRC’s announcement that further amnesties will be forthcoming for other professional groups confirms their appeal for the taxing authority, regardless of uptake. The formulaic self-assessment approach with HMRC rubber-stamping the vast majority of disclosures is very attractive to an authority whose ongoing cuts in resources is at odds with its increasing need for revenue.

Medical professionals wishing to make a disclosure under the THP should register before 31 March 2010. Following registration, all duties must be paid and forms submitted by 30 June 2010. Further details can be found at http://www.hmrc.gov.uk/tax-health-plan/index.htm. Those who feel “left out” as they have not yet qualified for an amnesty can beat HMRC to it – a voluntary disclosure will still offer the chance of significantly reduced penalties.

“The Beatles” was a US animated TV series which ran from 1965 to 1967 and was produced in Australia.  Each “witty” episode set up a visual illustration of a Beatles song played in its entirety.  American actor Paul Frees did the John and George voices with Lance Percival doing Paul and Ringo.  Frees was best known for his work for Walt Disney and Percival’s main claim to fame are several film appearances in “Carry Ons..” and “Up Pompei” plus spin offs.  As you will hear neither actor made any attempt at impersonation.  The song starts at 2.40.

According to his excellent book “Revolution in the Head”, Ian MacDonald says this track was recorded in April and May 1966 at the time George had “just realised how much of the group’s income was being siphoned off by the Treasury.”  For those of you who appreciate the technicalities MacDonald refers to McCartney’s playing of “some remarkable bass, taking advantage of the tone, range, and fluid action of his new Rickenbacker particularly in his agitated secondary riff during the song’s third verse.”   Personally I prefer “Tomorrow Never Knows”.

1. Do your best to avoid your client’s return being picked up for detailed enquiry. It will be almost certain that the enquiry has been launched following a detailed risk assessment and you should be at least broadly aware how that works. It’s not easy but you need to be systematic in trying to ensure you and your staff avoid mistakes in providing advice and producing returns etc. Similarly you need to pay particular attention to the aspects on the return that are likely to be of interest to HMRC. Are further explanations desirable or necessary?

2. Whatever your views on professional fees insurance you should make sure that your clients are aware that products are out there and can be of great assistance if their unlucky number comes up. Avoid the difficulties of the client finding out from a third party when he’s already paid substantial fees getting the problems sorted out. “Why didn’t you tell me about this insurance?”

3. The first stage of defence for most clients will be the maintenance and retention of a good set of books. Although the enquiry will have been carefully selected, in most cases the inspector will not have an open and shut case and will be looking to punch holes in the credibility of the records. This validates the taxman’s pursuit of detailed information on private finances and the operations of the business. The new laws on record keeping and the power to inspect business records (not just PAYE and VAT) will be a key factor in the future selection and working of cases. Your clients need to know about these radical changes.

4. Be clear what your client will want to know when the “I am writing to tell you that I intend to enquire into ..” letter drops on the doormat. FAQ’s are:

• Why us?
• What are they after?
• Do they have a right to all this information?
• What’s the process?
• How long is this likely to take?
• What do we do now?
• How much is this going to cost me?
• What are you going to charge?

The relevant Code of Practice will be a useful framework to address their concerns but you will need to put your own emphasis on the key points and agree a strategy as soon as is practical.

5. Be clear on what information the inspector can legitimately request. Opening letters tend to be lengthy and formulaic. In your view is the information being sought “reasonably required” to enable the return to be checked? A decent rule of thumb is that if there is anything being requested beyond the books and records you used to draw up the accounts and return then the inspector should be setting out why it is considered the information is needed. So if the private bank statements are requested then the taxman will probably say (if pushed) these are needed as means are an issue. If price lists, appointment books and the like are requested the reason will probably be because they don’t like the gross profit rate or similar ratios. Is the inspector’s line reasonable? What exactly are the issues? You should be looking to identify and focus on the perceived risks as far as HMRC are concerned.

6. Times may be changing in relation to understanding where the inspector is coming from and your response to requests for information and meetings. At the end of April 2008 HMRC ended a trial rather clumsily called “Openness and Early Dialogue”. The idea was to be open with the reasons for the enquiry and to discuss key issues in relation to records; their initial review and conclusions over a relatively short period of time. Six months after the end of the trial there has been no official feedback but if these ideas are implemented then your degree of active co-operation needs to be carefully considered. The draft Codes of Practice on the new records inspection regime indicate this is the road they are going down. Much will depend on your view of “working together” with HMRC both generally and in relation to specific officers.

7. Think about penalties from the outset. The present system has been around forever and was heavily criticised by the National Audit Office for not doing enough to encourage miscreants to disclose and proactively co-operate. In decent cases penalty levels were generally 20% to 30% of the tax lost. The new system is going to substantially increase the general levels where the disclosure is prompted with minimum levels of 15%, 35% and 50% where the inaccuracy is (respectively) careless, deliberate or deliberate and concealed. These levels will only be achieved if there is the highest level of co-operation and disclosure. The new regime operates for return periods starting after 31 March 2008 and it appears it will not be retrospective. Again your clients need to know about these changes.

8. Flag up any significant financial problems of the client at an early stage. Whatever the strength of the inspector’s case it is a waste of everyone’s time arguing about correctness of the return if it is clear that the client is in a poor financial position and there is no way he could fund any settlement. This is not just about liquidity but if the reality is that income is low and net assets minimal then at the very least the pressure should be on to cut to the quick and get the issues sorted out without fuss. The same goes for serious illness of the taxpayer or close family.

9. The inspector will undertake a review of the information provided and often their response will be to say they need more details and look for a meeting with you and your client. You need to seriously consider whether a meeting is the best way forward for your client. The taxman should be setting out the concerns both specific and general at this stage although experience shows that inspectors have an increasing tendency to keep their cards close to their chest. These will relate to any or sometimes all of the following:

• general standard of the records and specific points arising from the review of them
• business results either in comparison with other years or similar trades etc
• private finances in terms of the apparent incomings compared to the apparent lifestyle and wealth
• specific information held

There is no obligation to attend a meeting and the less open the inspector is about the perceived “risks” then the more inclined you should be to insist on the matter being dealt with by correspondence. It may be a pain to deal with the 8 page letter but at least you can consider with your client the specific queries and the general thrust in your own time; with proper research and in a calm atmosphere.

10. Ensure your preparation is thorough if you are going to have a meeting. The key to this getting a proper agenda from the taxman and focusing on what you perceive as the key issues. If they say they want to know more about the business then what do they want to know? You will invariably find if you push for detail then you will find that a large element of what they want to talk about can be more effectively provided in a concise note. This enables everyone at a meeting to focus on the matters that can be best dealt with at a meeting. The real reason HMRC is keen to meet is that they can then get your client’s answers on the record before they and you are clear on the significance of some key questions. For example, the inspector will be very interested in cash. Who handles it; what’s spent; what’s banked; what’s drawn and what’s kept. Is there a safe? What’s in it? What’s the most cash on hand you’ve had? What’s the most cash you’ve ever spent at any one tiime? What do you generally use cash for? Etc etc.

11. Negotiate. There will be plenty of black and white areas in terms of what the inspector wants but most of them will be grey. Working together makes sense but it takes two to tango. Be assertive form the start, not to prove a point but to show the inspector you’re well aware of his powers and more particularly the limits of those. The meeting is a good example. The inspector will often suggest a time and date and location. This is your call and the place you meet as well as the time and date are ultimately your call. Similarly with requests for information. Unless the inspector has a very strong hand do not willingly agree to providing, for example. private bank statements.

12. One way or another the inspector is likely get more information and at some point will have set out the case against your client. This may be a simple explanation with the threat of assessments and determinations. You need to consider in detail your respective strengths and weaknesses to determine how you move the case forward. This is really just a part of the negotiating process. If you accept that the inspector has a good case you should discuss with the client whether a disclosure needs to be made or whether you should take a proactive approach. “We understand where you are coming from and intend producing a report on the matters you have outlined.” The next step should be agreeing with the taxman exactly what needs reviewing and how this can most cost effectively done. The advantages (assuming you do a good job) are many:

• you will score well on any penalty abatements
• you work to an agreed time scale and framework
• you are not just continually knocking the ball back over the net, you are dealing with the risks as agreed with the inspector
• you can do the appropriate research and be well placed to present yor client’s case in the best light

13. On the other hand in many cases you and your client will be totally unconvinced by the inspector’s arguments and conclusions. It is no good these days simply making assertions, the inspector is interested in hard evidence. Remember that if you cannot agree it is the Commissioners not the inspector who has the final say. The Commissioners or Tribunal will make their decision on the balance of probabilities having heard all the evidence and inspectors need reminding of this. If you haven’t got a contemporary bit of paper the taxman’s knee jerk response is to say “..there is no evidence, I’m disallowing the expense..” or whatever. At the very least you potentially have evidence from your client (or others) in the witness box and invariably simple witness statements can be supplied by staff, suppliers or whatever. What has the inspector got beyond assertion?

14. You need to be able to counter the taxman’s business economics arguments. A common approach in smaller cases now seems to be to undertake a half-baked audit; discredit the records then re-compute the profits in line with similar trades on the basis of the records and “the information provided by your client at our meeting.” The first point to address is whether the records really are weak. The requirement is for records to be kept that enable a correct return to be made. The records may not be perfect but are they fit for purpose? A critical analysis of the business model involves resolving the following queries:

• is the sample period is realistic
• are estimates and assumptions reasonable (put the inspector to proof on comments about average gross profit rates etc)
• what assumptions are based on the records
• are the calculations arithmetically correct
• are there factors not taken into account in the figures

HMRC’s Enquiry Manual acknowledges this is all broad brush stuff and conclusions should be checked against the likelihood of this business generating this level of income and the proprietors spending or investing this sort of money. Such checks are often conspicuous by their absence.

15. As with business economics you need to know how to establish that your client’s private finances stack up. In larger and more serious cases this is the area that is usually the main focus as despite the problems in establishing a private expenditure level there is a high level of factual content to the approach. That is to say bank or credit card statements; completion statements; invoices for car purchases or sales etc. If they do anything on the private side inspectors draw up a simplistic means test that is OK for very straightforward cases but totally useless in all the others. The more detailed approach looking at the paperwork in detail is time consuming put can pay big dividends by ensuring that the following are identified:

• the more significant bank etc credits
• the financing of major investments, repayments and expenses
• the elements of private expenses paid through the bank and credit cards

That leaves the cash position which is really done by elimination and a judgement as to whether the cash apparently available can reasonably be expected to cover the expenses likely to have been paid in cash. Avoid the client completing HMRC private expenditure questionnaires at all cost.

16. Be aware of the consequences of HMRC treating operators in the Construction Industry as very high risk. Any recent and significant compliance failure of the business or the proprietors may prove very expensive. This is not only in terms of tax, NIC, interest and penalties but also the loss of Gross Payment Status where over 100,000 subcontractors do not suffer the 20% deduction. This is now subject to a rolling review and recent figures shoe that of the 62,000 taxpayers reviewed almost 30% lost their right to receive gross payments. Relevant clients need to be aware of their responsibilities and to be dealing with them on time and accurately.

17. Remember that PAYE audits and the like are risk assessed like other “interventions”. Prime target areas are:

• establishing the correct status of workers
• the taxation of casual labour
• tax free termination payments
• fuel scale charges
• P11D values of company cars

Employers are often persuaded to pay the tax due from the director or employee in relation to expenses and benefits and penalties are waived in these circumstances. The flip side is that the income tax will be grossed up to pay tax on the tax and NIC that is being paid on the employee’s behalf.

18. Are you happy that you are not out of your depth in a particular investigation? Advising in these situations can be very high risk for the advisor with substantial amounts involved and the possibility (no matter how slim) of prosecution. Particular points to be aware of:

• the actual or likely involvement of specialist HMRC teams
• ensuring the best defence is available on technical matters
• being clear on the rights of HMRC and your client
• the likelihood of the issues being litigated
• a spotlight being shone on what you and your firm have done
• have a game plan for if a client’s premises (or yours) are raided by the taxman - it does happen

19. The cost of litigation can be high but where your client has a defensible case HMRC should be clear that if agreement cannot be reached you will take the issue to the Commissioners or Tribunal. The taxman is likely to be bullish on the merits of their arguments and your role is to stand up to this pressure. The bottom line for both sides is that the likely costs are weighed against the risks of winning and losing. Usually both sides will be able to settle on something they can both live with but brinkmanship is the name of the game. Be aware of HMRC’s Litigation and Settlements Strategy which can limit the scope for negotiation in all or nothing situations.

20. Recognise and focus on the key factors to minimise your client’s settlement. This is where your negotiation skills are fully put to the test in relation to agreeing:

• the understatement for the enquiry period
• the other years where understatements arose
• the level of understatements for those years (don’t just accept RPI adjustments)
• all the tax adjustments including VAT and tax credits
• a reasonable penalty level
• payment arrangements.

The first 3 elements are critical. On penalty loadings you need to take a long hard look at the papers to form your own view on the disclosure, co-operation and seriousness. The taxman tends to take a broad view on this but you will often find for example that there are a mix of understatements many of which may involve low or no culpability. Remember inspectors have been trying to up the general levels of penalties in recent years

Background

I am afraid that here will be increasing numbers of redundancies and job losses in the foreseeable future and the subject of lump sum termination payments and the pitfalls of not deducting income tax and/or Class 1 NIC is a difficult one. I want to be absolutely clear that it is wrong to assume that someone is automatically entitled to a tax free payment when they leave or lose their job. This is a mistake made by many employers.

The exemption and the pitfalls

For income tax purposes, there is a limit of £30,000, but only for payments that fall to be taxed under Section 401 ITEPA 2003. To come within s401 the payment must not be otherwise chargeable to tax and this is where HMRC starts asking a lot of questions; officers seeking first to establish if the payment is taxable as earnings under S62 ITEPA 2003, or as a restrictive covenant payment under S225 ITEPA 2003.

HMRC guidance at EIM 12850 indicates that taxable amounts within Section 62 include a payment received under the terms and conditions of service. HMRC will want to see the contract of employment, staff handbook or any letter or other documentation that will indicate whether there is a contractual entitlement to the payment to bring it within Section 62. In my experience too many employers fall foul of the desire to say “thank you and goodbye” when perhaps “cheerio and good luck” is enough. Careless words cost money. Paperwork that might indicate to HMRC that the payment was a termination bonus or payment for past present or future service should be avoided like the plague.

Garden leave payments, made when the employee is sent home instead of the employment being terminated are earnings within Section 62. PAYE and Class 1 NIC deductions should continue to be deducted in the normal way. Restrictive covenant payments, usually provided for in the contract of employment or a compromise agreement, are liable to income tax and Class 1 NIC under s225.

Payments in lieu of notice cause most problems, HMRC seeking income tax by virtue of Section 62 if the terms and conditions of employment are the source of the payment or if there is a custom or practice of making such payments.

Genuine compensation payments for loss of office or employment will come within S401, but HMRC will scrutinize such payments and may need some convincing that they are compensation, not earnings within Section 62. We may need to establish that the payment is rooted in the termination of the employment, as opposed to coming from the employment.

Statutory redundancy payments are exempt but at £330 per week will not exceed the £30,000 exemption limit. Non-statutory redundancy payments should fall within Section 401 and be exempt within the £30,000 limit, but HMRC will check that the payments are what they are called.

Taxable amounts

Payments of salary, bonus, commission, arrears of pay and holiday pay should be taxed in the normal way and Class 1 NICs should also be deducted, as should contractual payments in lieu of notice or any contractual compensation. If income tax is due and the payment is made before the employee leaves it should be included in gross pay and PAYE operated in the normal way. When a taxable payment is made after the employee has left and been given form P45, tax should be deducted at the basic rate. The employer should write to HMRC to advise of the amount and date of the lump sum payment and the amount of tax deducted. The employee should be provided with a copy of the lette

NIC

There is no equivalent exemption limit in the NIC regulations, which means that a payment is either fully liable as earnings or the payment is not liable if it outside the definition of earnings. This is irrespective of the amount paid. A payment is within S401 and exempt (up to £30,000) will not be earnings for Class 1 NIC purposes. HMRC guidance for Class 1 purposes is limited, but note what is said on “ex-gratia” payments to employees/directors on leaving a company:

“Be careful if a payment to a director of a small company is described as ‘ex-gratia’. If the director receives such a payment while in office, it is unlikely that you can accept the payment as anything other than earnings.

Before reaching any conclusion you must find out:

• the reason behind the payment
• what happened to the normal remuneration (salary, fees, bonuses)
• if the company is paying normal remuneration and, if not, why not
• why the company regard the payment as ex-gratia
• if only selected directors get these payments, why the others are treated differently.”

I have recently seen HMRC arguing that an ex-gratia payment is liable to income tax and Class 1 NICs because it has had its source in the employment. Be warned and ensure that there is documentation to support the argument that the payment stems from the termination, not from the employment.

Remember, you cannot assume that a termination payment is exempt. Check the facts and the documentation. There is no formal clearance procedure, apart from redundancy payments, so again be warned!

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.