New powers for HMRC

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15 May 2009

When the taxman comes knocking to investigate a business, many people’s first reaction is to act like an earnest schoolboy and bend over backwards to accommodate the investigator. It’s rather like cleaning a car before an MOT in the hope that the mechanic will overlook some borderline failures.

HMRC now has new powers to visit your premises without notice – a development which stems from the merger of the Inland Revenue and Customs departments. The combined HMRC now has the right to enter and inspect business premises, the right to obtain information and documents from a taxpayer, together with any relevant third party, and the right to copy, remove and hold these documents to support its findings.

Justification for such actions can range from the material being deemed “reasonably required for the purpose of checking the taxpayer’s tax position” to “a random check to test the quality of [its] risk analysis”. The taxpayer will not be told whether he or she has been selected at random or whether HMRC thinks it has other reasons for the investigation.

Yet despite these new powers, business leaders should not be overly spooked. They have the right to deny investigators entry and to control the access they have to the company’s records - it can be as simple as seating the investigators in a meeting room and giving them the relevant files.  If bosses change their minds and withdraw consent, even halfway through an inspection, HMRC has provided assurance that its investigators would then leave as requested.

If a taxpayer sends in an inaccurate return and the inaccuracy is either deliberate or careless, HMRC can charge a tax-geared penalty – up to 30 percent for carelessness or between 70 and 100 percent for deliberate inaccuracies. One of the reasons the taxman might visit premises is to check out why a taxpayer has sent in an inaccurate return.

In such a case the first port of call for tax matters is usually an accountant, but in this instance it would be wise to instruct a solicitor who specialises in contentious tax issues as, even if the taxman thinks that you are guilty of failure to comply with procedure as a result of carelessness, there is scope to argue that you are not culpable and therefore not liable for a penalty.

For lawyers, the problem lies in the slippery meaning of ‘carelessness’ and what constitutes ‘reasonable care’. As the new rights if HMRC were implemented on 1 April 2009, the understanding of this word has not yet been tested in court. It is also unclear what value ‘carelessness’ will have, as a lack of case law makes it difficult to argue to what extent the business leader should be penalised.

The argument goes further: as cases come to court, it will also be possible for businesses to argue that, whilst their return may have been ‘careless’, the company next door was ‘let off’ in similar circumstances and that it should therefore not be liable. 

Reassuringly, however, HMRC has said that it does not expect perfection and that mistakes will be made.  It will also expect that a big company with greater resources will take greater safeguards to get things right than a smaller business.

The law, as ever, is not black and white. Case law and further clarification will decide what the courts will consider constituting ‘reasonable care’. In the meantime, business leaders can look to question the taxman with the aid of an experienced solicitor and potentially avoid being found liable for substantial penalties.

This article first appeared in Director of Finance online.

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