HM Revenue & Customs (HMRC) is consulting on new powers to support its approach to tax compliance. As has been seen in many of HMRC’s initiatives since it was formed in 2004, the concept of compliance extends beyond mere compliance with the law, to analysing taxpayer behaviours and in particular the taxpayer’s approach to tax planning and the transparency of the taxpayer’s relationship with the tax authorities.
HMRC is tackling planning at the end of the spectrum which HMRC considers to be unacceptable by, in particular, making it unattractive to plan. Taxpayers engaged in planning can expect to face an aggressive enquiry or full-blown investigation, with the aggressive use of information powers, and it is clear from HMRC’s published Litigation and Settlement Strategy, July 2007, that HMRC will not entertain ‘soft’ settlements, instead taking a ‘no compromise’ position, when defending many forms of planning. While the consultation document contains proposals for consolidation and alignment of tax administration procedures across all taxes in areas such as record keeping, assessment time limits and due dates, an overhaul of HMRC’s information gathering powers is also put forward. The proposed powers clearly have in mind that they will help reinforce its approach to tackling more aggressive forms of planning.
Under this proposal, HMRC officers will have the power to access business premises to inspect business records in situ, as currently already exists for inspection by VAT and PAYE compliance officers in order “to carry out checks quickly but effectively, at low cost to both parties”. Such access will normally be by appointment. However, a power to make unannounced visits to business premises is proposed where serious non-compliance is suspected. Although not expressly mentioned, it is likely this would extend to the promotion of mass-marketed planning schemes.
There is no right of appeal proposed in respect of a request for access, since HMRC considers that any appeal process could be used to frustrate the legitimate use of the power. Instead, a penalty would apply where a reasonable request for access is refused, such penalty itself being appealable. The powers would extend to consensual access for inspection purposes only — and should be distinguished from ‘raid’ powers, which allow for forcible entry to search for and seize documents.
A power to access private residences is also proposed, but only to inspect business assets or stock believed to be on the premises, and books and records which could not be inspected elsewhere. There must be business use associated with the residence — but this includes ‘record-keeping’ and ‘entertaining’. It is not clear how far this will extend in practice — could a director’s home, used occasionally for entertaining and storage of the odd record, be caught?
In an effort to harmonise all information and document discovery powers the following powers are proposed:
- First party information powers: powers used directly against the taxpayer should be harmonised across all taxes in line with the current powers used in direct tax enquiries (section 19A, Taxes Management Act (TMA) 1970 and para 27, schedule 18, Finance Act 1998). This means that, for the first time, a right of appeal to a tax tribunal will exist in respect of a VAT notice, and pre-authorisation by the tax tribunal would no longer be required in direct tax cases outside an enquiry (for example a PAYE enquiry or where HMRC is out of time to open an enquiry but suspects an omission from a return). However, retention of the pre-authorisation procedure is suggested for cases of serious non-compliance (to reduce the risk of destruction or alteration of documents).
- Third party information powers: currently, for direct tax, HMRC needs to gain pre-authorisation by the tax tribunal before requiring third parties to provide documents (section 20(3) TMA 1970). For VAT, no pre-authorisation is required and there is also no right of appeal. HMRC is proposing to replace all current powers with a power that does not require pre-authorisation but which is subject to a right of appeal. Pre-authorisation would be retained however for cases where serious non-compliance or collusion by a third party is suspected. ‘Class’ notices under section 20(8A) TMA 1970 (see below) are not within the paper’s scope.
Dispensing with pre-authorisation outside serious cases is to be welcomed, since a taxpayer has no right of attendance at the hearing, being allowed only to submit written arguments. Introducing a formal external control in VAT cases is also to be welcomed. In all cases, however, protection for the taxpayer against unduly onerous enquiries should be retained, including limiting requests to information which is relevant and reasonably required. HMRC should not be permitted to go on ‘fishing trips’.
Compulsory inspections are more contentious. While there is often clear value to both sides in on-site inspections of records, safeguards will need to be built in to ensure this power is not used over-zealously. A taxpayer facing any site inspection should ensure it is carried out to its convenience, not that of HMRC — insist on an appointment and ask HMRC to provide a broad outline or list of questions in advance of the inspection.
These powers will help supplement the current increased and better targeted use of information powers to tackle planning. In its Litigation and Settlement Strategy, HMRC vows to fight questionable planning and inspectors are told to look for implementation failures and impose a sizeable penalty if a scheme fails because it has not been implemented correctly. Regular review of planning to check for implementation failures or a legal analysis that can no longer be supported under current case law is essential for the taxpayer — and becoming more so.
A notable use of HMRC’s powers over the last two years has been the issuing of ‘Class’ notice against the five major high street banks to obtain details of overseas accounts held by UK residents. Armed with a treasure trove of information, HMRC launched the Offshore Disclosure Facility (ODF) in April this year, under which taxpayers with undisclosed tax liabilties in respect of offshore structures were offered the opportunity to disclose for a reduced penalty, fixed at 10%. Phase two is now underway. One hundred and seventy financial institutions have been invited by HMRC to co-operate in turning over client records. Dave Hartnett, director-general, HMRC, also discussed the possibility of a second ODF in a televised interview given to Accountancy Age on 16 November, 2007.
Most offshore structures identified by this information trawl are linked to fraud, typically an extractive kind where profits or income are channelled offshore. However, some cases include aggressive planning, believed to work at the outset, but which has failed through defective implementation or increasingly untenable positions being taken by the taxpayer as the scheme runs its course. Taxpayers with offshore structures should review their affairs to ensure no taxation issues exist and disclose any issues. Voluntary disclosure will always lead to a reduced penalty, whether under a second ODF or otherwise.
HMRC proposes to influence behaviours so that taxpayers are discouraged from engaging in tax planning. The Litigation and Settlement Strategy makes clear that aggressive or marketed planning is likely to be the subject of extensive investigation over the years to come. The proposed powers will reinforce such interventions. While tax planning remains alive, taxpayers engaged in planning must expect to come up against a tax authority prepared to use extensive and intrusive powers of investigation and its full resources to challenge planning through the courts. Planning under this new regime is not for the faint-hearted.
Jason Collins is head of the tax litigation team at McGrigors.