You’ve completed your tax returns, you think you can now breathe a sigh of relief, but can you? HMRC can inspect any taxpayer’s records under Schedule 36 by FA08, FA09 and FA10. They can check the tax records for:-
Pay as You Earn (PAYE)
Value Added Tax (VAT)
Income Tax (IT)
Capital Gains Tax (CGT)
Corporation Tax (CT)
Insurance Premium Tax (IPT)
Inheritance Tax (IHT)
Stamp Duty Land Tax (SDLT)
Stamp Duty Reserve Tax (SDRT)
Petroleum Revenue Tax (PRT)
Aggregates Levy (AGL)
Climate Change Levy (CCL)
Landfill Tax (LFT) and
Bank Payroll Tax (BPT)
The technical term for the inspection is a Compliance Check. They will check that the tax payer has:-
- Complied with their obligations
- Paid the correct amount of tax and at the right time
- Claimed the correct reliefs and allowances
This can be completed by anything from a short telephone call to confirm a single fact, to a detailed investigation of a person's entire financial affairs over a period of years.
HMRC may undertake checks by either asking for information or documents or by arranging a meeting or visit.
- Require taxpayers by notice in writing to provide information and produce documents (a “taxpayer notice”)
- Require third parties by notice in writing (for example a supplier or bank) to provide information and produce documents (a “third party notice”)
The caveat being that these requirements are reasonable for the purpose of checking a tax position. The generic term for these types of notice is information notice.
The recipient has the protection of a right of appeal to, or prior approval by, an independent tribunal. There is no right of appeal however where the notice only refers to information or documents that form part of a taxpayer's statutory records, or any person's records that relate to:
- The supply of goods and services
- The acquisition of goods from another member state, or
- The importation of goods from outside the European Union (EU) by a business
If the taxpayer is not forthcoming with the information, HMRC may invoke their statutory powers to obtain them.
They may also request assistance with aspects of a tax check from other government departments.
This could include a situation where there is reason to believe that a taxpayer:
- did not notify chargeability to tax
- did not register for VAT if required, or
- is operating in the informal economy
Restrictions on Information Powers
The taxman is not all-powerful; some safeguards have been installed, set out in the law and with guidance so that in carrying out compliance checks
- HMRC's powers are used reasonably and proportionately
- Taxpayers are clear about when a compliance check begins and ends
- Officers have no right to enter any parts of premises that are used solely as a dwelling, whether to carry out an inspection or to examine documents produced under an information notice. They can, however, enter if invited
- FA09 adds to Sch 36 FA08 a power to inspect all property for the purpose of valuation (for direct taxes purposes). This requires either the taxpayer's agreement or Tribunal approval
- Unannounced visits will only be made where agreement has been given by an authorised officer
Other safeguards include the fact that officers can’t require certain things to be provided:
- Information relating to the conduct of appeals against HMRC decisions
- Legally privileged information
- Auditors or tax advisers advice to a client about their tax affairs
- Information about a person's medical or spiritual welfare
- Journalistic material
- Information over six years old can only be included in a notice issued by or with the approval of an authorised officer
- HMRC cannot give a notice in respect of the tax position of a dead person more than four years after the person's death
The Power to Visit Business Premises and Check Assets and Records
Inspection powers allow an officer of HMRC to enter business premises and inspect the premises, business assets and statutory records.
If an information notice has been issued earlier, the documents required in that notice could be inspected at the same time.
FA09 incorporates into Schedule 36 inspection powers in respect of the:
- business premises of Involved third parties
- valuation of premises for Income Tax or Corporation Tax
- must only be undertaken where it is reasonably required to establish the tax position and
- will normally be by prior arrangement, the date and time being convenient to the taxpayer
The Power to Visit Business Premises and Check Assets and Records
Inspection powers also allow any officer to enter any premises when they believe the premises are to be used in connection with taxable supplies of goods or taxable acquisition of goods from Member States, and such goods or documents relating to such goods are on the premises.
There is no right of appeal against an inspection but the occupier can refuse entry and prevent the inspection from being completed.
The occupier can be penalised for such obstruction, where the inspection has been approved by a Tribunal.
There may be occasions when a pre-arranged visit will be inappropriate, for example where there is a strong risk that the taxpayer would move the business or remove stock or other assets. In such cases, an unannounced visit may be undertaken subject to prior agreement by an authorised officer.
If a formal statutory approach is needed, and it has not been possible to agree the time of inspection and give written confirmation, the inspection must be approved by a Tribunal and 7 days written notice of the time of the inspection given. The application for approval must be made by, or with the approval of, an authorised officer.
When a Penalty can be charged where a person:
- Fails to comply with an information notice
- Conceals, destroys or otherwise disposes of documents required by an information notice
- Conceals, destroys or otherwise disposes of documents that they have been notified are, or are likely to be, required by an information notice
- Deliberately obstructs an inspection that has been approved by the Tribunal.
- In complying with an information notice provides inaccurate information or produces a document that contains an inaccuracy,
- Fails to comply with a notice requiring contact details of a tax/duty debtor to HMRC.
These rights are covered in sections 38 FA 08 and 09
Types of Penalties
There are four types and amounts of penalty:
- An initial penalty of £300
- A daily penalty of up to £60 for every day that the failure or obstruction continues after the date the initial penalty is assessed
- A tax-related penalty
- A penalty not exceeding £3000 for providing inaccurate information or documents in response to an information notice
A tax-related penalty is in addition to the initial penalty and any daily penalties. The amount of the penalty is decided by the Upper Tribunal having regard to the amount of tax which either has not, or is unlikely to be, paid by that person.
A person is not liable to a penalty if they have a reasonable excuse for:
- Failing to comply with an information notice, or
- Providing inaccurate details or documents, or
- Deliberately obstructing a tribunal approved inspection
If they correct their failure as soon as the excuse ends, the excuse will then be treated as continuing until the correction is made.
Normally, daily penalties will not be assessed after the failure has been remedied.
Schedule 37 of FA08 amended existing record keeping legislation in respect of PAYE, VAT, IT, CGT and CT, whilst Schedule 50 to FA2009 extends this approach to IPT, SDLT, AGL, CCL, and LFT with BPT being included from 8 April 2010. Following consultation it was accepted that SDRT and PRT did not require separate statutory provisions, whilst IHT will be addressed through guidance.
These provisions are aimed at alignment and clarification.
This approach is designed to be flexible across a range of business and non-business taxpayers.
There are penalties for failure to keep adequate records.
The basic requirements in relation to record keeping have not changed but rules have been aligned on how long records are kept.