Tax compliance: powers to inspect businesses

HMRC have powers to inspect business premises.

Key points for business owners:

• Most visits are pre-announced.
• Ensure the details of any telephone conversation made with HMRC regarding the business, books and record-keeping etc. are recorded. The information given may form part of a notice of inspection and HMRC will expect it to be accurate.
• Penalties apply for obstruction.
• HMRC cannot conduct a search, only an inspection.
• An inspection may include interrogation of computers.
• It will include the statutory books and records, which include the accounting records and any other record that HMRC decides is a statutory record.
• Private records will be subject to inspection if they form part of the business records for example where cash takings are banked in a personal account, or when the business records are proved unreliable and HMRC needs to verify earnings.
• An unannounced visit must be authorised by a senior officer, although it is unclear who this might be, or the Tax Tribunal. When an unannounced visit is made, HMRC’s officer will hand a notice to whoever it thinks is in charge, verifying authorization.
• There have been reports of individuals impersonating HMRC. If a notice does not appear to be valid, you should ask for ID and telephone the tax office on the notice to confirm the details. If no notice is given, then you should evict the impersonator and call the police.
• HMRC will not visit domestic premises unless they are used by the business, or stock or assets are stored there.
• HMRC also has the right to visit third parties.
• An appeal can be lodged against an inspection notice.
• There is no right of appeal where a notice has been agreed by the Tax Tribunal.

HMRC may inspect a person’s:

Business premises, together with business assets and business documents.

• Business premises: any premises that an officer of HMRC has reason to believe is used in connection with running a business.
• Business assets include stock.
• Business documents: statutory records or documents which relate to the carrying on of a business.

Why?

If the inspection is reasonably required:

• To check a person’s tax position.
• To check a valuation of the premises (including measuring it).

What about private dwellings?

• HMRC has no power to enter or inspect any part of the premises that is used solely as a dwelling.
• A private dwelling can be inspected if an officer of HMRC has reason to believe is used in connection with running a business.

Third-party premises

HMRC may inspect the premises of a category of persons called 'involved third parties' for Income Tax purposes. These are listed in Paragraph 61A of the 2008 Finance Act and include:

• A body approved by HMRC for the purpose of paying charitable donations.
• An investment plan manager.
• A child trust fund account provider.
• A registered Lloyds managing agent.

Inspection timings

Announced visits

• A time agreed with the occupier, or
• At any reasonable time, providing the occupier has been given seven days notice by HMRC (in writing or otherwise).

Unannounced visits

Why?

On grounds that it would prejudice tax collection to warn the taxpayer of a visit.

When?

• At any reasonable time if the inspection is carried out by, or with the agreement of an authorised officer of HMRC.

In these circumstances, HMRC must provide a notice which states:

• The possible consequences of obstructing an officer.
• If the inspection has been approved by the First Tier Tribunal, it will state this too.

The notice must be presented to:

• The occupier, if present, if not.
• To the person who appears (to HMRC’s officer) to be in charge, in any other case.
• The notice must be left in a prominent place on the premises.

Note that an unannounced visit does not require the Tribunal’s approval.

Inspection conditions: valuations

Two alternatives:

1. HMRC must give notice, in writing, to the occupier, or if they cannot be identified or if the property is vacant, to the person who controls it.
2. The inspection has been agreed by the First Tier Tribunal and the relevant person has been given at least seven days notice, in writing of the inspection.

The notice must state:

• The possible consequences of obstructing an officer.
• If the inspection has been approved by the First Tier Tribunal.

Approval by the First Tier Tribunal

• HMRC does not have to inform the taxpayer that it is seeking the approval of the Tribunal.
• Application must be made by an authorised officer and the Tribunal must be satisfied that that inspection is justified.

Further powers

HMRC has powers:

• To copy documents or remove them for a reasonable period.
• To mark assets to show that they have been inspected.
• To interrogate computers, or be given assistance in doing so.

Restrictions

• A document can only be requested if it is in that person's possession or power.
• Certain information is exempted including:
  • Records that are more than six years old.
  • Legally privileged material (this does not normally apply to accountants’ working papers).
  • Auditors’ papers.
  • Tax papers relating to ongoing appeals and tax adviser's papers giving tax advice.
  • Journalistic material.

Note: if your practice is subject to an announced visit you will need to be extremely careful about the information that you provide because of taxpayer confidentiality. Obtain legal advice before handing over any documents.

Taxpayer notices

When a taxpayer has made a tax return, a notice cannot be issued for the purpose of checking that person’s tax position in relation to the chargeable period, except if any of the following conditions apply:

1. A notice of enquiry has been given in respect of:

• The return.
• A claim or election, affecting that period.

And the enquiry is still open.

2. An officer of HMRC has reason to suspect that as regards that person:

• An amount that ought to have been assessed to tax has not been made.
• An assessment may be or become insufficient.
• A relief may be or become insufficient.

3. The notice is given for the purpose of checking the VAT position.

4. The notice is given for the purposes of checking PAYE.

5. The notice refers to information or documents that relate to a herd-basis election (see below).

6. It appears to an officer of HMRC that a counteraction provision may apply:

• Section 703 ICTA 1988 for Corporation Tax advantage.
• Section 684 ITA 2007 for Income Tax advantage.

Similar provisions exist for land transaction returns.

Right of appeal

A taxpayer has limited rights of appeal against a notice or requirement in a notice. No appeal is possible if:

• The notice is in relation to any information or document that forms part of the taxpayer’s statutory records.
• The notice was approved by the First Tier Tribunal.

Where a third party is given a notice, it may appeal it on the grounds that it would be unduly onerous to comply with the notice or requirement, unless the notice was approved by the First Tier Tribunal.

How to appeal

In writing, to the HMRC officer within 30 days of being given the notice.

• Appeal is to the Tribunal, who may:
  • Confirm, vary or set aside the notice.

Special cases: third parties

Neither taxpayer agreement nor Tribunal approval is needed in the case of a third-party notice that relates to:

• Information or documents that form part of a person’s statutory records and relate to:
  • The supply of goods or services.
  • The acquisition of goods from other states in the course of carrying on a business.
• Similar provisions apply to notices given to involved third parties.

Partnerships

The same restrictions as apply to taxpayer returns apply to returns or claims or elections made by individual partners.

When a third-party notice is given in respect of checking the tax of more than one partner it need only specify the name of the partnership and its purpose. The rules covering notification to individual partners of a third-party notice do not apply.

The herd basis

HMRC has the power to check a herd basis election, irrespective of whether or not the taxpayer has submitted a tax return.

Information from persons liable to the counteraction of a tax advantage

The restrictions which apply when a taxpayer has made a tax return are disregarded if:

It appears to an officer of HMRC that a counteraction provision may apply to the person by reason of one or more transactions, and the notice refers only to information or documents relating to any of the transactions.

'Counteraction provision' means:

• Section 703 ICTA for Corporation Tax advantage.
• Section 684 ITA 2007 for Income Tax advantage.

Tax penalties

Penalties apply for:

• Failure to comply or obstruction. This includes the destruction or concealment of records and documents. The penalty is £300, followed by daily penalties of £60.
• Inaccurate information and documents. Penalties are applied as for Errors in documents, to a maximum level of £3,000.

Unannounced visits

Unannounced visits to premises are only likely to occur in serious cases where tax fraud is suspected. However, there have already been reports of visits occurring in what the advisers who are acting at the time, say they think are low-risk cases.

HMRC does not share its risk assessment methodology but cash businesses are obvious targets, especially when they are fast food outlets. 
Useful links: Risk assessment review for sole traders/partners

Announced visits

HMRC will contact a taxpayer in order to plan an announced visit. It is essential to advise your clients to make sure that they keep a written record of the conversation (HMRC will certainly do so). It is open to them to record it if that is more practical, but only if HMRC's officer consents to this.

Why take notes of phone conversations?

This is discussed in the article, If HMRC calls you, take notes.

• If a taxpayer tells HMRC that their home is used for work, they could taint the home as a business premises. Whether HMRC will visit their home depends on the assessment it makes of what it has been told (on the phone/or by earlier enquiries).
• If a taxpayer discusses their books and records in a conversation with HMRC the books and records named may be taken to constitute the statutory books and records of the business. The taxpayer will consequently have no right of appeal if HMRC requests (by notice) access to those records.

Tip for advisers: brief your clients on the procedure to follow if HMRC calls, and ensure that they or their staff know what to do. 

If HMRC asks a substantive question, a note should be taken of it and HMRC should be asked to agree to a considered, written response. If HMRC insist on an immediate response in the context of a Tribunal approved inspection an immediate response should be given.

Can HMRC request to inspect private records?

HMRC does not want to conduct fishing expeditions, so it will consider:

• The costs of its time in making an inspection v. the benefits.
• The taxpayer's rights of privacy (Article 8 of the Human Rights Act).

before it demands private records; this does also depend on what the taxpayer has confirmed in its initial enquiries.

Details of private bank accounts: will be requested when:

• Capital introduced is not independently verified.
• It is reasonable to assume that undeclared income or gains have been credited to the account.
• Means testing does not add up.
• It is reasonable to suppose that the return was based wholly or partly on private bank accounts (this could be a result of the taxpayer admitting this).
• HMRC “breaks” the records.
• Taxable receipts or expenditure are unvouched or estimated.

Announced visits: 64-8 problems for advisers

HMRC will not inform a tax agent that it is visiting your client unless it has a 64-8 in place covering all the taxes which are going to be reviewed in that visit.
 

Useful guides on this topic

Tax compliance: penalties for errors in returns and documents

Schedule 36 information notices

Schedule 36 third-party notices

HMRC's inspection powers are found in Schedule 36 of the 2008 Finance Act.

Section 114 FA 2008 provides specific and wide powers to examine and interrogate computers that have been used in connection with any document that HMRC wants to examine.