July brought new tax enquiry procedure

Following HMRC’s consultation on “Modernising Powers, Deterrents and Safeguards”, the department has announced that it is now trialling a new type of tax enquiry procedure called “Alternative Interventions to Support Compliance”.

The trial is designed to provide a light-touch regime and to provide a possible alternative to s9A enquiries in the future.

HMRC promises to ensure that tax advisers are copied in on any correspondence sent to their clients. This has not always happened in the past. Agents may wish to write to their clients to tell them about the new procedure in case they receive a letter.

The new procedure will include:

• Telephone calls from HMRC, preceded by letter, explaining any errors that taxpayers are considered to have made on their tax returns. HMRC will suggest how the errors can be resolved and how any underpayments of tax can be settled. Where agreement is reached with HMRC, the department will confirm the settlement in writing, together with a demand for payment.
• Correcting submitted tax returns, in accordance with information held by HMRC. The department will then write to the taxpayer for an explanation, and settlement of any unpaid tax if not appealed.
• The issue of questionnaires to taxpayers within certain risk parameters, to assess whether significant risks exist. This sounds a little like a fishing expedition and we will need to see how it works in practice.
• Getting taxpayers to audit their own returns and to consider risks around return entries. HMRC may even coach taxpayers on how to do this.
• Compliance visits to check on business record-keeping procedures.
• ‘Health checks’ to advise certain taxpayers about the risks of non-compliance.

There is no statutory requirement for taxpayers to cooperate with compliance visits and health checks, so any cooperation will be on a voluntary basis. However, a taxpayer risks facing a more formal investigation where he refuses to cooperate.

Although this less formal approach may save time and money, it is not clear how existing safeguards will work, though the existing appeal procedures will apply.

The promised light-touch regime may in practice turn out to be somewhat heavy-handed, and this may become apparent during the trials.

Commenting on the new regime, the Professional Contractors Group said: “One of the six proposed approaches would allow tax inspectors to change people’s tax returns without having to justify their action, leaving the taxpayer to prove that they do not owe the extra tax involved. We consider this unacceptable, especially given our extensive experience of dealing with the inequitable IR35 legislation. We believe that this approach and some of the others could be applied very unfairly.”

The Chartered Institute of Taxation has published its views on the new regime. Published 13 July 2006