FAQ: New Compliance Checks
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 are being introduced on 1 April 2009. New time limits will be introduced from 1 April 2009 for VAT (while ensuring no earlier period can be assessed under the new rules than could have been under the old) and 1 April 2010 for Income Tax, Capital Gains Tax and Corporation Tax (while leaving it possible to assess and repay non-Self Assessment PAYE (Pay As You Earn) taxpayers for 6 open years until 31 March 2012).
This FAQ provides you with answers to some routine questions about the new compliance checks framework.
General
1. Why are things changing?
The powers inherited by HM Revenue & Customs (HMRC) were unaligned and out of date. Many had not changed since the 1970s. They had developed as an approach per tax: VAT inspection, employer compliance record reviews, Income Tax and Corporation Tax written notices. 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 nature of taxpayer safeguards was varied and in some places legislative safeguards were felt to be ineffective: for example appeals against requests to see basic records. The new powers introduce consistent safeguards.
2. Do the powers follow the former Inland Revenue model or the old VAT model?
Most of the powers exist already for one or other of the taxes but not one of the old models is followed. These powers represent a sensible aligned approach to maintaining the tax system. 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, primarily for Income Tax, Corporation Tax and Capital Gains Tax but also restricts some powers, 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 complied with their tax obligations. It could be to check that records are kept or that a return needs to be filed or that a filed return is accurate.
Other terms had different meanings for different taxes, and we think this is the best phrase to describe the range of different types of checking across taxes. It includes, for example, enquiries, investigations, employer compliance reviews and VAT assurance visits.
Technical guidance and operational process guidance on the new powers is available in the Compliance Handbook
4. What does the guidance cover?
The guidance covers the new powers. It will be updated and new material added as the need arises.
The guidance does not cover new ways of working and does not change the existing guidance on things like enquiries. You should refer to the Enquiry manual, V-series, Employer Compliance Handbook etc as appropriate. New ways of working will be added to guidance as they are developed and other guidance, which is unchanged by Finance Act 2008 (FA08), will be corralled, updated and brought into the Compliance Handbook in due course.
5. Will the guidance be updated?
Yes. We will review it on a regular basis and we will change it as the need arises.
6. What training have HMRC staff received on these new powers?
Staff must firstly have completed a High Level Awareness training module before going on to Self Learning Modules (SLM).
The SLM consists of three modules covering inspection powers, information powers and penalties under Schedule 36 FA08. These must all be completed by all staff to a satisfactory standard.
HMRC staff will not exercise these powers unless their managers are satisfied that they can do so properly.
7. What happens about VAT or PAYE visits underway when the law changes?
The new powers will apply from 1 April 2009. Any information request or inspection activity carried out on or after 1 April 2009 must be made using the new powers.
8. What happens about Income Tax, Capital Gains Tax and Corporation Tax checks underway when the law changes?
In a long running enquiry it will usually be the case that any access to business records that is necessary will have taken place under the old powers. The new powers will not be used to seek information or documents that were required before they applied but that HMRC were unable to get under the previous powers.
The aim will be to conclude as many enquiries as soon as possible. It is not considered that HMRC will have anything to gain by postponing closure so that specific directions to that effect are probably unnecessary.
9. 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 be ignored
- 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
Use of this new power will be proportionate to risk and behaviour, and will be rolled out in a strategic and controlled way.
In these circumstances 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. What is not changing?
- Enquiry window for Income Tax and Corporation Tax returns
- Evidence of facts time limits for VAT assessments
11. Why is the enquiry window not being changed?
In consultation taxpayers have told us that the enquiry time limit structures in Income Tax, Capital Gains Tax and Corporation Tax provide a reassuring safeguard, and give taxpayers earlier certainty. We have therefore retained these structures and this was welcomed in consultation.
12. Why was the enquiry window not extended to VAT?
The enquiry structure is based on annual returns, and most VAT payers make monthly or quarterly returns.
An umbrella enquiry covering all tax returns would mean that HMRC checks would have to consider all issues across all taxes, or risk losing the one chance, apart from the discovery provisions, to check a tax return that the enquiry structure allows. 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.
Exercise of Powers
13. Are these simply revenue raising powers?
Well, yes but only to the extent that we 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. Most of the powers being introduced already existed for one or other of the taxes and these powers represent a sensible aligned approach to maintaining the tax system.
The powers allow us to try and put people on the right track before they submit an incorrect return, and where things have gone wrong the penalties are reduced for those who help us to put things right. There are no penalties at all for those who make mistakes despite taking reasonable care. And those who fail to take reasonable care can also reduce their penalty to zero.
14. How will I know if staff are using the powers correctly?
A comprehensive training programme is currently underway across HMRC. Staff must successfully complete the learning before they can exercise these powers.
HMRC managers have a crucial role to play in monitoring the use of these powers and helping staff to develop where any shortcomings have been identified.
When staff have been trained, checks will be carried out to monitor and evaluate the use of these powers under the new rules.
Finally, a broad based implementation governance group, with external representation, has been set up to monitor the use of these new powers across HMRC.
15. Can HMRC check across taxes?
Yes, but the new powers only apply to Corporation Tax, Capital Gains Tax, Income Tax and VAT.
16. How do I know what records to keep?
Essentially we give taxpayers the flexibility to keep what they know is needed to complete an accurate return. There are some situations in VAT and PAYE where specific records are required and these are set out in regulations.
The guidance sets out what types of records need to be kept including some which must be maintained in their original form. We have also shared some draft fact sheets on record keeping with our external readership panel and we are taking views on the usefulness of these
Authorisations
Why do some actions need to be approved by an authorised officer?
This is to ensure that some of the more intrusive powers can only be used after approval by senior, experienced and specially trained officers.
18. Who will be an authorised officer and how will this work?
Each business unit will decide its own approach to authorised officers and this will be underpinned by a set of key principles as follows:
- no self authorisations
- independence from case worker
- authorised officers must have the relevant training and experience to do the job
- in some cases authorisations will be undertaken by specialised teams
- some flexibility will be incorporated where there is a requirement to meet an urgent operational need
- authorised officers will be accountable for their decisions
In the first 12 months the authorised officers will be restricted to senior grades so that we can monitor the use of powers needing authorisation and can improve guidance and training accordingly. If, after 12 months, we are satisfied that powers are being used appropriately the authorised officer role will be extended to others, likely to be the line managers. This is to ensure that managers are accountable for the actions of their staff.
19. Can an authorised officer self-authorise his or her own use of powers?
In legislation yes but in practice the decision has been made not to allow this for the immediate future.
The power to ask a third party about an unnamed taxpayer can only be used by specially authorised officers, who are very few in number.
Information powers
20. What about the other existing information powers?
These are being reviewed. Many repeals are planned as part of this year's Finance Act and many other taxes and duties will be aligned, Ministers willing. We will continue to review other powers and will repeal or reform them as appropriate after full consultation in accordance with Cabinet Office guidelines (minimum 12 week public consultation).
21. How have the existing VAT powers been restricted?
The existing VAT powers allowed officers to require any person concerned in the supply of goods or services to supply relevant information. There was no statutory requirement to say who was being investigated, to give notices in writing or for pre-authorisation. Nor is there any concept of third party powers. VAT officers can also currently visit homes.
This is replaced by a clear framework of information notices, and clearer restrictions on visiting homes.
22. Does this mean that HMRC can no longer ask for things informally?
Co-operation and sharing of information is still HMRC's preferred way of working where possible.
23. Does this mean an HMRC officer can ask for information once the enquiry window is shut? Does discovery still apply?
An information power can be used 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.
24. Is there a right of appeal against an information notice?
There is a right of appeal against an information notice but not against any requirement to produce statutory records. There is no right of appeal if the independent tax Tribunal has approved the issue of a notice.
25. 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.
26. Has anything changed on legal professional privilege?
No
27. Will precursor letters still be used?
Yes. They are currently required in some direct tax investigations where there is no appeal and the notice needs pre authorisation from the tribunal. There is a similar pre authorisation process to support new compliance checks but it will be used in more limited circumstances.
In the future, supplementary information powers will mostly have a right of appeal for taxpayers and this will replace the need for pre authorisation.
In other cases, where the issue of the notice has been authorised by the independent Tribunal and there is no appeal right, there will be a safeguard similar to the precursor letter. The person will need to be told that information or documents are required and will have a new right to make representations. This is a stronger safeguard.
28. Are the penalty levels for information failures changing?
Yes. The current penalty levels have not changed for many years, and some are now ineffective as a deterrent against a failure to provide information. The levels are being aligned with the higher of the existing penalties. The standard penalty is now £300 and the maximum penalty for continuing failure is £60 per day.
29. What is the new unlimited tax-related penalty?
In some cases, normal penalties are ineffective. This might be because the benefit to the taxpayer of withholding information is far greater than the cost of the penalty, for example when a large amount of unpaid tax is at stake.
In these circumstances 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.
Inspection powers
30. Is it true that VAT officers can no longer visit homes?
Homes which have no business use cannot be visited without permission from the customer. Where a home is the VAT registered address it may have business use but, as before, an officer of HMRC cannot insist on inspecting at someone's home unless there is a real need to do so.
31. Is it true that unannounced visits have been given up?
No. Where the risk merits an unannounced visit this can be done. The visit must be authorised by an authorised officer.
31. Do the new powers apply to excise/environmental taxes/other taxes?
No. There is ongoing consultation about extending the framework but no decisions have been made. This is a matter for Ministers to decide.
33. Is there a right of appeal against the power to inspect?
No. But the law says that an inspection must be reasonable. Guidance includes examples where an inspection would or would not be reasonable. If HMRC breached this guidance, the taxpayer could either make a formal complaint, or could refuse to allow the inspection to take place. A penalty for obstructing an inspection can only be charged where the first-tier Tribunal has approved the inspection. HMRC must demonstrate to the Tribunal the inspection is reasonable before approval is given.
34. Is the power to inspect new?
Not for VAT and employer compliance. It is new for Income Tax, Capital Gains Tax and Corporation Tax It should help speed up checks by avoiding protracted correspondence. Seeing the business can provide an officer of HMRC with a better commercial perspective and a more complete picture of records, assets and business activities.
35. Can visits be made without being arranged in advance?
Yes, but these need to be approved by an authorised officer or the first-tier Tribunal.
36. How much notice of a visit is required?
At least seven days but in most cases a period of three or four weeks is more likely so that a convenient time can be found. This has always been the practice with the exception of VAT - visits where repayment claims have been queried by HMRC before payment has been made. These can still take place earlier than seven days with the customer's agreement.
37. What is an officer entitled to do at a visit?
An officer can enter business premises and examine statutory records, inspect the premises and business assets. 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 taxpayer agrees or they are produced in response to an information notice.
38. Can HMRC still visit homes?
HMRC will not be able to visit homes that are not used for business purposes without the taxpayer's consent except in criminal investigation cases. For taxes not covered by these changes the current provisions continue.
HMRC can only visit homes used for business purposes if there is a clear reason why this is necessary.
39. How will HMRC decide what is private?
In most cases it will be clear whether premises are business or private. Some examples are provided in the guidance.
40. How will the decision on what is reasonable be arrived at?
HMRC staff will be required to ensure any action taken is:
- appropriate to the circumstances
- does not infringe a person's rights under the Human Rights Act
- consistent with the requirements of the Data Protection Act
All the relevant operational staff must successfully complete the training before they can exercise these powers.
Time limits
41. What will the new time limits be?
The new assessing time limits will be:
| 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 |
|---|---|---|---|
| VAT |
4 Years |
4 Years |
20 Years |
| Income Tax and Capital Gains Tax |
4 Years |
6 Years |
20 Years |
| Corporation Tax |
4 Years |
6 Years |
20 Years |
42. What are current time limits?
The current assessing time limits are:
| Tax |
Ordinary time limit |
Tax lost due to negligent conduct by the taxpayer or a person acting on his/her/its behalf |
Tax lost due to fraudulent/dishonest conduct by the taxpayer or a person acting on his/her/its behalf |
|---|---|---|---|
| VAT |
3 Years | 3 Years | 20 Years |
| Income Tax and Capital Gains Tax |
5 years 10 months approx. | 20 years 10 months approx. | 20 years 10 months approx. |
| Corporation Tax |
6 Years | 21 Years | 21 Years |
43. What are the transitional arrangements for VAT?
The arrangements ensure that a VAT accounting period will not go out of time during 2009-10 and then come back into time on 1 April 2010. Assessments can be made going back to accounting periods ending 1 April 2006 throughout 2009-10.
44. What are the transitional arrangements for Income Tax, Capital Gains Tax and Corporation Tax?
The new time limits will not be brought in until 1 April 2010. This gives time for people to make claims for earlier years. For individuals outside self assessment, the new time limits for claims will not be brought in until 1 April 2012.
45. Can taxpayers still make late claims?
Taxpayers can make claims outside the normal time limits in certain cases. They will continue to be able to make late claims in similar circumstances.
46. Have the enquiry time limits changed?
No
47. 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.
48. 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.
49. Why extend the 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.
50. Why extend 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 time limit removes a potential incentive for taxpayers not to notify liability, and hope they won't be found and evade paying tax.
51. Why four years and not three years?
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.
52. 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. HMRC's new PAYE service will mean that many repayments can be made without a formal 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.
53. How will it help cross-tax working?
At present, if an issue is raised during a Corporation Tax check, it is often not possible to also check any VAT implications because the three year time limit for a VAT assessment may already have passed. Aligning time limits at four years gives a greater 'overlap' period where both Corporation Tax and VAT can be checked.
54. Why is the Corporation Tax Self Assessment (CTSA) closure process changing?
The current process for making amendments at the end of an Enquiry into a company tax return takes an unnecessarily long time. This causes unnecessary costs for companies and for HMRC.
In future the closure notice at the end of an Enquiry will set out the amendments which need to be made to a company's CTSA return, and make these amendments. As now, if the company disagrees, it can appeal against the amendments. In short, CTSA will be aligned with the change made to ITSA years ago.
This change will take effect from 1 April 2010.
Record keeping
55. What is the current requirement?
For Income Tax, Capital Gains Tax and Corporation Tax the law say that records must be kept in order to enable a complete and correct tax return or claim to be made. These include records of receipts and expenditure and sales of purchases of goods where relevant.
For VAT business and accounting records must be kept plus any specified records.
56. Have the time limits for keeping records changed?
No. They remain six years for Corporation Tax, 5 years 10 months and 1 year 10 months for Income Tax and Capital Gains Tax respectively depending on whether or not the taxpayer is in business.
In consultation respondents felt that a reduction would not provide major savings since records need to be kept for other purposes. They thought the new flexibility being offered was likely to be of more use.
57. What sort of conditions will be set for keeping information instead of records?
HMRC already specify some high level conditions for Income Tax, Capital Gains Tax and Corporation Tax. Taxpayers can keep information instead of records but need to be able to show 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.
For VAT HMRC's prior approval was required. This legislation does away with the need for approval. To balance this HMRC will be able to set conditions and exceptions.
58. Does this mean changes to keeping information instead of paper records?
There are existing rules about keeping information instead of paper records but they differ across taxes. This legislation aligns the rules. In practice, taxpayers will be able to keep their records in electronic format very much as they do now.
59. 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.
60. 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
V-series
Employer Compliance Handbook
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