THE Taxman’s powers are about to change to the point that it may drive you to the bottle. Now like the rest of us, HM Revenue & Customs staff enjoy a drink, and in terms of the way the powers of HMRC are evolving, Martini may well become the organisation’s tipple of choice.
No doubt you will be trying to work out whether this means taxpayers will be shaken or stirred. But the Martini reference links back to the advert which those of a certain age will recall contained the words “anytime, any place, anywhere”. That was the selling point for the drink; it’s also something of a selling point for the new powers regime HMRC will have from April 2009 and the rules are changing significantly.
The basis of powers
The taxman in any country needs powers with which to run the tax system. If taxpaying was just a voluntary activity, most of us would “volunteer out”. It is often noted that taxes are the price we all pay for living in a civilised society; having powers available to the taxman means that mechanisms are there to ensure that those enjoying the benefits of civilisation pay appropriately, according to the rules.
In simple terms, this means that laws have to be laid down to prescribe how the various taxes are to be calculated, when they are to be paid and what happens if those due to pay their taxes don’t meet their obligations. The most obvious consequence is some form of financial penalty for a taxpayer’s failure and, indeed, the penalties available to HMRC are changing significantly from April 2009.
But as well as financial penalties, the taxman needs powers to check what taxpayers are doing and to confirm that they have actually paid the right amount of tax based on their actual activities. The taxman’s powers have always included the ability to ask questions. That will very much still exist. But beyond the gentle enquiry comes the understandable need to have powers to look at the taxpayer’s records, visit them and to do so on a timely basis. It is these aspects that are being refined, extended and modernised.
The catalyst
The changes to HMRC’s powers came about through a major review of the whole area of powers, deterrents and safeguards surrounding the tax system. This review was sparked by the merger of HM Customs & Excise with the Inland Revenue in 2005. Now back to a (slightly refined) Martini.
Anything?
The taxman already has wide powers to see and seek information and to inspect records and documents. This is nothing new, but whereas the tendency in the past was for such powers to be used as an enquiry went along, under the new rules there doesn’t have to be that starting point of a formal enquiry.
It’s going to be quite possible for the taxman to ask for things entirely separate from any investigation of a specific tax return. And if there is an enquiry, that may well be via a phone call or even by e-mail.
It’s also worth noting that there will be a power to get information from third parties, that is someone other than the taxpayer. There are immediate safeguards here in that the approach to the third party must be with the taxpayer’s agreement or must be formally sanctioned by higher authorities within HMRC. If a third party is approached for information/documents, then the taxpayer must be told about what is going on.
Apart from documents protected by legal professional privilege, the taxman can get at any document. That is not to say that an approach from HMRC asking for documents should elicit the response of simply handing over everything: the initial response must always be to clarify what is wanted, why HMRC is seeking it and to ensure that it is being reasonable in both the request and the timescale for complying with it. These powers is have to be used “reasonably”.
Any place?
In connection with its work on somebody’s tax affairs, HMRC has to be able to visit business premises. The taxman needs to be able to check on the tax liabilities that involve things such as valuing stock that might be on hand or calculating duties by reference to production. Whilst HMRC has always had visiting rights, particularly for indirect taxes, its powers are being “levelled up”: visits will be easier for the taxman to arrange.
If the taxman does want to visit, then it’s perfectly in order to ask why and to see if there is an alternative way of meeting his needs. It may in fact be quite sensible and efficient for him to come and visit; but equally it may cause disruption and opting instead for a meeting at a mutually convenient time may well suit everyone.
One key safeguard that was added to the legislation during its passage through Parliament is that premises that are used wholly as dwellings cannot be visited. However, thousands of people who are self-employed or run a small business operate out of their own home.
In principle, that does seem to render some part of their home liable to a visit but HMRC has stressed throughout that it wants to use the powers sensibly and appropriately so would want to visit in such circumstances by agreement.
It is understandable that HMRC must have powers to insist on visits – it is, after all, trying to catch the fraudster as well as check the generally compliant. However, it has the same powers available to manage both ends of this taxpayer spectrum and much will come down to its using the powers “reasonably”, as the system requires.
Anytime?
One thing to appreciate under the new rules is that HMRC will no longer have to wait for a tax return to be submitted before asking questions about issues that it covers. That form of power is already available in the context of VAT, it will now start to apply for income tax and corporation tax. This means that HMRC will be able to ask to see the books of the business during the year rather than wait until after the year end.
Its guidance emphasises that it will not be expecting everything to be written up perfectly – it accepts that such things are not always possible in the real world. What it would want to be assured of is that the records that the taxpayer is keeping are sufficient to enable him to draw up his tax returns properly in due course. HMRC does actually have powers to comment on the taxpayer’s records generally and will shortly be putting out guidance on what it sees as adequate records.
The timing of visits to taxpayers’ premises is clearly sensitive. In normal circumstances, HMRC is required to give seven day’s notice. Naturally, though, it will not want to give such notice to a suspected fraudster, so it will also have the power to do unannounced visits. What is also changing is that those unannounced visits can be sanctioned internally by HMRC itself, rather than requiring the external sanction of the Tax Tribunal, though in some cases HMRC will seek the Tribunal’s approval to make the visit more formal.
Timing will also be a factor in how quickly enquiries are progressed. Both sides will no doubt want to get the matter concluded as quickly as possible, and that is all to the good. But taxpayers will still need to think before responding – to make sure they aren’t giving an explanation that is only half the story, or which could be misunderstood, in an effort to speed matters up. It would be all too easy to respond to a telephone enquiry from HMRC about a document with comments based on imperfect or distracted memory.
Penalties: just a hangover?
The various powers bring with them various penalties. For example, whilst it is possible to refuse entry to a visiting officer of HMRC, that will lead to penalties for obstruction if that visit has already been sanctioned by the Tax Tribunal. Even if it has not, an unreasonable refusal will lead to penalties.
At the same time, there are safeguards built into the powers, mainly in terms of what is becoming a wellworn word: “reasonable”. If the taxpayer feels that HMRC is not being reasonable, then he or she has the ability to appeal to the independent Tribunal.
April Fool?
These new powers commence in April and HMRC is busily producing guidance and training its staff. The powers do need to be taken seriously. It would be as well to think about how to handle the more serious information requests or visits that will undoubtedly start to flow from then onwards.
