FAQ: New Compliance Checks

Introduction

Question and answer

General
Exercise of powers
Authorisations
Information powers
Inspection powers
Time limits
Record keeping

Introduction

Background

New inspection, information and record-keeping powers and obligations were introduced on 1 April 2009, for some taxes, and extended to others on 1 April 2010.

New time limits for assessments and claims were introduced on 1 April 2009 and 1 April 2010. Many time limits have been shortened but where they are longer than before arrangements were made to ensure that no assessment or claim could be made for a tax period that was previously out of date for assessment or claim.

The table below shows which tax regimes are affected:

1 April 2009 1 April 2010
Capital Gains Tax Aggregates Levy
The Construction Industry Scheme Climate Change Levy
Corporation Tax Inheritance Tax
Income Tax Insurance Premium Tax
PAYE and NIC Landfill Tax
VAT Petroleum Revenue Tax
  Stamp Duty Land Tax
  Stamp Duty Reserve Tax

This FAQ provides you with answers to some common questions about these changes.

General

1. Why were these changes made?

The powers inherited by HM Revenue & Customs (HMRC) were unaligned and ready to be modernised. Each tax regime had its own approach to checking compliance. For example, VAT used inspection visits, employer compliance reviewed records, and Income Tax and Corporation Tax used written notices to get the information needed.

Safeguards to protect customers were varied and patchy.

HMRC undertook a wide-ranging review of powers, deterrents and safeguards, before introducing the new legislation. The review consulted staff, customers, representative bodies and accountants.

Both HMRC and taxpayers wanted a more flexible approach which allowed the checking action to respond to the taxpayers' circumstances and the nature of the risk.

The legislation, introduced in two phases on 1 April 2009 and 1 April 2010:

  • makes compliance and enforcement work more consistent because of the new legislation applies to all the taxes in the table above
  • introduced consistent safeguards for HMRC customers

2. Do the powers follow the former Inland Revenue or VAT models?

Most of the powers already existed for one or other of the taxes but no single model was followed. These powers represent a sensible common approach across most taxes. In many places they enhance safeguards for taxpayers and they allow HMRC to work more effectively and reduce the burden on compliant taxpayers. The legislation is to ensure HMRC has the right powers for the job, not simply levelled-up or levelled-down powers. It extends some powers but restricts others, such as the VAT power to visit unannounced.

3. The term 'compliance check' is new to me - what does it mean?

It is any activity where HMRC checks whether someone has met their tax obligations. It could be to check that proper records are kept, or that returns are filed, or that the filed returns or other documents that HMRC rely on are accurate.

Other terms such as enquiries, investigations, employer compliance reviews and assurance visits have different meanings for different taxes. HMRC think compliance checks is the best phrase to describe the range of different ways they check whether a person’s tax position is correct.

4. What does the guidance cover?

Technical and operational process guidance on these new powers is available in the Compliance Handbook. The operational guidance in the Compliance Handbook -‘How to do a compliance check‘ - does not cover every aspect of doing compliance checks.

There is guidance for doing checks of specific taxes or duties which has not changed and links with the guidance in the Compliance Handbook. For example, for guidance on methods of doing Income Tax enquiries you should refer to the Enquiry manual.

5. What do the factsheets cover?

HMRC have published a series of factsheets to help customers understand the compliance checks, information powers, and penalties. They are issued at different stages during the check and help to explain in plain English how HMRC conducts compliance checks, what powers can be used and what safeguards are in place. They don’t replace the guidance but they do give essential information so customers can make informed decisions. Customers can see the full list of factsheets on the HMRC website and can download or request a printed copy of one at any time.

6. Will the guidance be updated?

Yes. HMRC review it on a regular basis and change it as the need arises.

7. What training have HMRC staff received on these new powers?

Staff must complete a High Level Awareness training module before going on to three Self Learning Modules (SLM) which cover inspection powers, information powers and penalties under Schedule 36 FA08. HMRC staff will not use these powers unless they have completed these to a satisfactory standard and managers are satisfied that they can use the powers properly. The modules are available on the HMRC website.

8. Is there any point making checks before the return is made?

Yes. It might be appropriate to:

  • ask questions of people who pay tax or make claims but don't receive a return and where requiring a return to be completed would be onerous
  • tackle the informal economy and fraud without having to issue and await the completion of returns which may never be made
  • consider complex transactions that may involve possible avoidance
  • make sure the right records are being kept to complete an accurate tax return
  • cover cross tax risks where appropriate in a single check

9. What happens if someone refuses to supply information

There will be a new deterrent - a penalty related to the likely amount of the improper tax advantage gained by not providing the required information. This type of penalty can only be imposed by the upper Tribunal, which is equivalent to the High Court.

10. Why is the enquiry window not being changed?

In consultation, people told us that the enquiry time limit in taxes like Income Tax provide a reassuring safeguard and give taxpayers earlier certainty. HMRC have, therefore, retained these structures.

11. Why was the enquiry window not extended to VAT?

The Income Tax and Capital Gains Tax and the Corporation Tax enquiry structures are based on annual returns, and most VAT payers make monthly or quarterly returns.

An umbrella enquiry window covering all tax returns would mean that HMRC checks would always have to consider all issues across all taxes or risk losing the one chance, apart from the discovery provisions, to check a tax position. For most taxpayers this would not be appropriate.

Alternatively, separate enquiries would have to be opened into separate taxes. That goes against the aim of the formation of HMRC to allow cross-tax working where appropriate. Also, VAT payers can use the error correction process. An enquiry window for VAT would not fit well with that process.

Exercise of powers

12. Are these simply revenue raising powers?

Only to the extent that HMRC want people to pay the right tax at the right time. These powers will allow HMRC to work more effectively and reduce the burden on compliant taxpayers whilst tackling those who try not to pay.

13 What procedures are in place to make sure staff are using these powers correctly and consistently?

The law sets out the new compliance checks framework clearly, which will also help HMRC apply it consistently.

HMRC trains its staff in the use of the new powers. All HMRC officers involved in compliance checks receive full guidance and training before they can use the new powers. All frontline compliance staff and their managers receive the same guidance and training. The learning is also on the internet to help customers understand the new compliance checks framework, as is the detailed guidance available in the Compliance Handbook.

HMRC provide its compliance staff with help cards, containing a summary of the new system, to back up the training and guidance.

An officer will have to obtain authorisation before they can use some of the more intrusive powers such as unannounced visits. The authorised officer will consider if the officer is applying the legislation properly and consistently, in each case. For some visits HMRC can obtain permission from the First-tier Tax Tribunal. This may lead to a penalty if such previously approved visits are deliberately obstructed.

The ‘Implementation of Powers Oversight Forum’ monitors the use of these new powers across HMRC. It is a broad based implementation governance group with external representation.

If a person is unhappy with the actions of any officer they may use the complaints procedure. The recipient of an information notice can also appeal in certain circumstances.

14. Can HMRC check across taxes?

Yes, the new powers allow HMRC to check any of the tax positions shown in the table above that a person has.

15. How do I know what records to keep?

You must keep what is needed to complete an accurate return. For VAT and PAYE specific records are required and these are set out in regulations. Record-keeping guidance is available on the HMRC website. The guidance sets out what types of records need to be kept including which must be maintained in their original form. There is also a businesslink website tool, which helps users quickly work out exactly what records they need to keep.

Authorisations

16. Why do some actions need to be approved by an authorised officer?

This is to ensure that some of the more intrusive powers are only used after approval by senior, experienced and specially trained officers who may, using their experience, skills and knowledge, suggest alternative, less intrusive courses of action if they are available.

17. Who is an authorised officer and how does this work?

Each business unit decides who its authorised officers are but this is underpinned by a common set of key principles as follows:

  • no self authorisation
  • independence from the case worker
  • authorised officers must have the relevant training and experience to do the job
  • authorised officers will be accountable for their decisions
  • no one below Senior Officer grade can be an authorised officer

18. Can an authorised officer use his or her own powers without further authorisation?

Assurances were given to Ministers that there would not be any self-authorisation for Sch 36 powers. In those situations where only an authorised officer has the legal power to do something that officer must get authorisation from another authorised officer before using the power. This additional safeguard continues.

Information powers

The new information powers mean HMRC can issue an information notice which requires a person to provide information and/or to produce documents within a reasonable length of time.

The information or documents HMRC ask for must be reasonably required to check a person’s tax position and there are certain types of information HMRC cannot require a person to give, full details are in the Compliance Handbook starting at CH22000 and CH220000.

HMRC may also ask other people for information to help with a Compliance Check. In most cases, HMRC will ask for permission before they do this, either from the person being checked or from an independent tribunal. The person being checked can make representations to the tribunal but in exceptional circumstances, HMRC may need to get the information without telling the person.

If a person fails to comply with an information notice, conceals or destroys requested documents, or provides inaccurate information, HMRC may charge a monetary penalty.

There are appeal rights and oversight by an independent tribunal to ensure that HMRC act reasonably, that any action HMRC take is appropriate to the circumstances and does not infringe a person’s rights under Article 8 of the Human Rights Act. Factsheet 2 (PDF 59K) explains more about requests for information and the customer’s rights.

19. What about the other existing information powers?

HMRC will continue to review other powers and will reform them as appropriate, after full consultation in accordance with Cabinet Office guidelines (minimum 12 week public consultation).

20. Have the existing VAT powers been restricted?

The previous VAT obligations that required any person concerned in the supply of goods or services to supply relevant information have been repealed. There is now a requirement to say who is being investigated to give notices in writing and third parties can be required to provide information. VAT officers can visit homes if they are used for business.

21. Does this mean that HMRC no longer asks for things first?

Cooperation and sharing of information is still the preferred first way of working.

22. Does discovery still apply?

An information power can be used to check a person’s Income Tax, Capital Gains Tax or Corporation Tax position after the enquiry window is closed where an officer has reason to suspect that tax has not been assessed. The discovery assessing provisions have not changed but the time limits for making assessments have.

23. Is there a right of appeal against an information notice?

There is a right of appeal against most information notices but not against any requirement to produce statutory records. Normally officers will warn a taxpayer that they intend to seek the approval of the tribunal in the issue of an information notice. In these circumstances the taxpayer may make any representations they wish to the officer who will pass them on to the tribunal. The tribunal can approve the issuing of an information notice even if the taxpayer has not been given prior warning. They only do this where they are satisfied that such a warning might prejudice the assessment or collection of tax. There is no right of appeal after the independent tax Tribunal has approved the issue of a notice.

24. Why is there no right of appeal on statutory records?

There is a statutory obligation to keep tax records. So HMRC must be able to see them.

25. Has anything changed on legal professional privilege?

No, HMRC cannot require a person to provide information or documents that are protected by legal professional privilege. There is guidance in the Compliance Handbook. Legal professional privilege applies to certain communications between a lawyer and client and does not apply to communications between a client and any other type of professional person.

26. What if I disagree with a tribunal authorised information notice?

Where HMRC gets pre-authorisation from a tribunal to issue a Taxpayer or Third Party notice there will be no right to appeal. But before HMRC goes to a tribunal they will issue an ‘opportunity letter’ to the customer. It will tell the customer that HMRC is seeking tribunal authorisation, what information is being sought, and give the customer an opportunity to make representations that can be presented to the tribunal.

27. Have the penalty levels for failing to provide information changed?

Yes. The old penalty levels had not changed for many years, and some were ineffective as a deterrent against a failure to provide information. The initial penalty is now £300 and the maximum penalty for continuing failure is £60 per day.

28. What is the new tax-related penalty?

In some cases, the maximum daily penalties may be ineffective because the benefit of withholding information or documents is greater than the cost of the penalty, for example, when a large amount of unpaid tax is at stake.

In these circumstances there is a new penalty that takes into account the likely amount of the improper tax advantage gained by not providing the required information. This type of penalty can only be imposed by the Upper Tribunal, which is equivalent to the High Court.

Inspection powers

29. Is it true that VAT officers can no longer visit homes?

No. Homes which have no business use could never be entered without permission from the customer. Where a home is used for business such as a VAT registered address an officer may enter and inspect any part that is used for business purposes.

30. How will HMRC decide what is business?

In most cases it will be clear whether premises are business or private. Some examples are provided in the guidance.

31. Have unannounced inspection visits been stopped?

No. Where the circumstances merit an unannounced visit this can still be done. The visit must be authorised by an authorised officer and may be approved by the tribunal.

32. Is there a right of appeal against the power to inspect?

No. One rule says that an officer may enter and inspect a person’s business premises where the inspection is reasonably required to check the person’s tax position. If the occupier feels that HMRC would breach this rule, they could refuse to allow the inspection to take place and possibly make a complaint if they feel the officers behaviour deserved it. A penalty for deliberately obstructing an inspection can be charged where the tribunal has approved the inspection. HMRC must convince the tribunal the inspection is reasonable before approval is given.

33. Is the power to inspect new?

Not for VAT and employer compliance. It is new for Income Tax, Capital Gains Tax Corporation Tax and some of the taxes added at 1 April 2010. It should help speed up checks by avoiding protracted correspondence and the risk of documents or explanations going missing in transit. Seeing the business provides an officer with a better commercial perspective and a more complete picture of records, assets and business activities.

34. Can inspection visits be made without being arranged in advance?

Yes, but these need to be approved by an authorised officer or the first-tier Tribunal.

35. How much notice of an inspection visit will be given?

At least seven days but in most cases a period of three or four weeks is more likely so that a mutually convenient time can be found. Visits can still take place earlier than seven days with the customer's agreement such as visits where repayment claims have been queried by HMRC before payment is made.

36. What is an officer entitled to do at an inspection visit?

An officer can enter business premises and examine statutory records, inspect the premises and business assets. They may take away, copy or make extracts from documents produced to them. A document is anything that contains information. They cannot search, rummage or wander around unaccompanied without the taxpayer's consent. They can only look at documents beyond the statutory records if the occupier agrees or which are produced in response to an information notice.

Time limits

How have time limits changed?

The time limits for making assessments, determinations and claims have been changed in some cases. This might reduce compliance costs for customers and make compliance checks easier.

The time limit for some assessments and determinations will be four years from the end of the relevant tax period. There are some variations from this and the tables at CH56000 give a full summary.

For certain taxes HMRC can make assessments for up to six years after the end of the period where tax has been under-assessed or over-repaid because of careless behaviour by the person, or another person acting on their behalf. An assessment or determination can be made up to 20 years after the end of the period where tax has been under-assessed or over-repaid because of deliberate behaviour or certain failures.

The time limits for claims changes from six years to four but if a person has not been given the opportunity to make a claim, for instance, by receiving a Self Assessment return, then transitional arrangements will ensure that the person does not lose out. Please see Please get your tax claim in on time.

37. What are the new time limits?

The assessing time limits are:

Tax Ordinary time limit Tax lost due to careless behaviour, by the taxpayer or a person acting on his/her/its behalf. Tax lost due to deliberate behaviour, by the taxpayer or a person acting on his/her/its behalf, and certain failures.
Aggregates Levy, Climate Change Levy, Insurance Premium Tax, Landfill Tax, VAT 4 4 20
Capital Gains Tax, Corporation Tax, Income Tax, Inheritance Tax, Petroleum Revenue Tax, Stamp Duties 4 6 20

38. What are the transitional arrangements for Income Tax, Capital Gains Tax and Corporation Tax?

So that people outside Self

Assessment can make claims for earlier years the revised time limits will not be brought in until 1 April 2012. For more briefing see Please get your tax claim in on time

39 What transitional arrangements are there for the new taxes from 1 April 2010?

Under transitional arrangements the four year time limit will not apply in full till 1 April 2011 for Insurance Premium Tax, Aggregates Levy, Climate Change and Landfill Tax.

40. Can taxpayers still make late claims?

Taxpayers can make claims outside the normal time limits in certain circumstances. They will continue to be able to make late or out of time claims in those circumstances. See for instance SACM10035 and SACM9005.

41. Have the enquiry time limits changed?

No.

42. What does 'careless' and 'deliberate' mean?

The definitions of 'careless' and 'deliberate' are the same as those used for penalties for an inaccurate return etc, as legislated in Schedule 24 Finance Act 2007. Guidance on what is 'careless' and what is 'deliberate' has been developed and has been consulted on.

43. Why is the VAT assessing time limit for tax lost due to carelessness different from that for Income Tax/Capital Gains Tax/Corporation Tax?

In VAT the return is received sooner, and received quarterly. HMRC, therefore, does not, at present, see a need to extend VAT assessment time limits beyond four years, even where the taxpayer has failed to take reasonable care.

44. Why extend the assessing time limit for failure to disclose a notifiable avoidance scheme?

Where a taxpayer uses certain schemes, there is an obligation to disclose this to HMRC. If the taxpayer does not disclose the scheme, HMRC needs more time to find these hidden schemes, to investigate their use to see whether tax has been unlawfully underpaid, and quantify any tax due.

45. Why extend the assessing time limit where a taxpayer fails to notify/register?

Taxpayers have a long-standing obligation to notify HMRC that they are liable to tax. If a taxpayer does not notify HMRC, then HMRC may not find out about the taxpayer's existence for some time. HMRC therefore needs more time to find these hidden taxpayers, to investigate their affairs and quantify the tax due.

An extended assessing time limit removes a potential incentive for taxpayers not to notify liability, and hope they won't be found and evade paying tax.

46. Why four years and not three for the ordinary assessing time limit?

A number of different possible time limits were put forward in consultation to seek taxpayer representatives' views.
Four years strikes a balance between the certainty for taxpayers provided by shorter time limits, and the need for HMRC to have sufficient time from receipt of a return to check the tax position and quantify any additional tax due.

47. What about people who don't know they can claim?

HMRC will be targeting publicity at those likely to be able to make a claim. The time limits for people outside Self Assessment will not be reduced until 1 April 2012, to give time for publicity and new systems to take effect.

48. How will the new time limits help cross-tax working?

Previously, if an issue was raised during a Corporation Tax check, it was often not possible to also check any VAT implications because there were different time limits. Aligning assessing time limits at four years gives a greater 'overlap' period where these taxes can be checked.

49. Why is the closure process at the end of a Corporation Tax Self Assessment (CTSA) enquiry changing?

The previous process for making amendments at the end of an enquiry into a company tax return took a long time. This caused unnecessary costs for companies and for HMRC.

Now the closure notice at the end of an enquiry sets out the amendments which need to be made to a company's CTSA return, and makes these amendments. If the company disagrees it can appeal against the amendments. In short, CTSA has been more closely aligned with the change made to ITSA (Income Tax Self Assessment) some years ago.

Record keeping

50. What is the current requirement?

The law says that if you may have to fill in and send HMRC a tax return you must keep the records and documents that would enable you to make a complete and correct tax return. For people in business these will include records of receipts and expenditure, goods purchased and goods sold where relevant. VAT businesses need to keep both business and accounting records, plus any specified records such as import/export documentation, and sales and purchase invoices.

51. What are the time limits for keeping records?

In general you should preserve the records for at least six years, but this may vary depending on the tax involved and your circumstances. HMRC have produced a factsheet 'Keeping records for business – what you need to know' (PDF 32K)which provides details of further reading for specific taxes. You can preserve the information from the records rather than preserve the records themselves if you prefer.

52. What sort of conditions will be set for preserving information instead of records?

HMRC already specify some high level conditions. Taxpayers can preserve information instead of records but need to be able to show HMRC that a complete and correct tax return has been made. The information must also be able to be provided in a legible form on request.

Previously for VAT prior approval by HMRC was required before preserving information. The new legislation does away with the need for approval but to balance this HMRC are able to set conditions and make exceptions.

53. Does this mean changes to keeping information instead of paper records?

There were existing rules about keeping information instead of paper records but they differed across taxes. This legislation aligns the rules. In practice, taxpayers can keep their records in electronic format very much as they do now.

54. When will HMRC allow a shorter time limit for keeping records?

Where the records are bulky and the information they contain can be provided in another way. Guidance will explain where it will be appropriate.

55. Have penalties for failing to keep records changed?

No. They will be looked at in a further phase of the review including the scope for suspending penalties. In the meantime the current penalties will continue to apply.

Where can I find more information?

New standard systems for tax
Compliance Handbook
Enquiry manual
Keeping records for business (PDF 32K)
Factsheets
Time-limits