Home | Legal updates | Guess who's coming to dinner: HMRC extends investigative powers in relation to compliance checks

Guess who's coming to dinner: HMRC extends investigative powers in relation to compliance checks

13 October 2008

Legislation has been introduced in Finance Act 2008 (Schedule 36) setting out compliance powers which HM Revenue and Customs (HMRC) considers necessary following the merger of Inland Revenue and HM Customs and Excise, in 2005.

There are three main elements to these enhanced compliance powers:

• aligned and modernised record keeping requirements
• new inspection and information powers
• new time limits for making assessments and claims

This article discusses the new and enhanced inspection and information powers in more detail. 

Information powers and penalties for failure to comply with these obligations will have effect on or after 1 April 2009. 

Time limits for making assessments and claims will require a transitional period and so it is expected that these provisions will not become fully operative until 1 April 2010.

The new package (in relation to inspection and information powers) introduces:

• a power to inspect records required under the new record keeping legislation – this introduces a new power of inspection for direct tax and restricts the existing VAT and PAYE inspections to statutory records
• a power to require supplementary information which is reasonably required ‘for the purposes of checking the taxpayer's position' – this could presumably cover a number of assessment years in contrast to the current position which requires a separate enquiry for each year
• a power to require third parties to provide information which is relevant ‘for the purposes of checking the taxpayer's position'. Notices can be sent by any officer if the taxpayer agrees.  If not the approval of the notice by a ‘First tier Tribunal' (ie the body that will be replacing the General and Special Commissioners from April 2009) is required
• an HMRC notice to a third party can now include documents that predate the previous six year limit on documents so that third parties may be asked to provide historical documents (where the whole of the document originates more than six years prior to the date of the notice) that would have previously been excluded from an HMRC request
• a power to visit business premises and to inspect records, assets and premises. The granting of this power to HMRC has led to concern from tax industry commentators. As they point out, the safeguards surrounding the use of this power are not clearly defined and allow little recourse for a business owner if they feel that they are being targeted unfairly. There are also concerns that repeated use of this power in relation to specific businesses could cause extensive disruption to the day to day operation of the companies concerned. While reasonable notice should be given, in certain cases (where HMRC suspect serious tax avoidance or evasion) HMRC has the discretion to waive such notice. In addition, this power extends to any premises which HMRC has reason to believe are used ‘in connection with' the carrying-on of the taxpayer's business.
• appeal rights against any penalty, and against information notices which have not been pre-authorised by an appeal tribunal
• penalties for failure to allow an inspection and failing to comply with an information notice, including a tax-geared penalty which can be imposed by the new upper tier tribunals
• an updated criminal offence of destroying or concealing records requested under a notice authorised by a tribunal

HMRC has arguably, under the guise of alignment (and modernisation), greater powers than those it enjoys under the current rules.

Much will depend on how HMRC applies these rules in practice. However, as the changes allow the use of wider powers by less experienced inspectors without the protection of external oversight, a heavy reliance will be placed on HMRC to act fairly and implement the new powers in a clearly understood way.

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Stuart Hale

Associate
T: 08700 86 8822
I: +44 (0)118 965 8822
E: stuart.hale@shoosmiths.co.uk