Working Together - Issue 12

 

Contents

New Tax Credits

Last April, the Chancellor announced that two new Tax Credits will be introduced in April 2003: Child Tax Credit and Working Tax Credit.

These new tax credits replace Working Families' Tax Credit, Disabled Person's Tax Credit and Children's Tax Credit. From April 2004, they will replace the child-related elements of Income Support and Jobseekers Allowance. To receive their entitlement to tax credits, people need to claim them using a paper form TC600 or online at www.inlandrevenue.gov.uk/taxcredits. Claims can be backdated for up to 3 months.

Around half of the SA population, 4 million customers are represented by tax advisers. Working Tax Credit and Child Tax Credit will be available to a large number within that population.

As we mentioned in Working Together issue 11, the Revenue will require the client's written authority (usually a completed form 64-8) for it to deal with tax agents. Forms 64-8 submitted to the Revenue before 1 April 1999 will not be suitable for this purpose (see Working Together issues 1 & 2). It is important to bear in mind that the agent's authority only covers the named client, not his or her partner/spouse.

Child Tax Credit

Child Tax Credit replaces the Children's Tax Credit and the child-related elements of Working Families' Tax Credit and Disabled Person's Tax Credit. People who currently receive Child Benefit or Children's Tax Credit will not automatically move to the new Child Tax Credit but will need to make a claim. The child-related elements of Income Support and Jobseekers Allowance have been increased so that most people on these benefits do not need to claim Child Tax Credit yet. During 2004 they will be moved onto Child Tax Credit automatically.

Child Tax Credit comprises a number of elements including a "family element" payable to all eligible families, which is higher if the family have a child under the age of one, and extra elements for each child. Additional amounts will apply for disabled children. Child Benefit will continue to be paid separately, in addition to the Child Tax Credit.

Child Tax Credit will be available for children until the September after their 16th birthday or up to the age of 19 if they remain in full time, "non-advanced" education (i.e. studying for at least 12 hours per week and the course leads to A level, Scottish Highers, NVQ level 3, or below).

Child Tax Credit will be available for people with children where income is up to £58,000 (£66,000 for families with a child under one year old). Couples must claim tax credits jointly, and entitlement will be based on the combined income of both partners.

Most employees receiving Children's Tax Credit through their PAYE code numbers will, by now, have received their 2003/04 coding notices, and noticed that Children's Tax Credit has disappeared. This is because Child Tax Credit will, from April, be paid directly to the person in the family mainly responsible for looking after the children.

By March 2003 the annual Child Benefit uprating letter will be issued to all seven million Child Benefit customers. As well as informing them about the amount of Child Benefit they can expect from 7 April 2003, the letter contains information about the new Child Tax Credit and encourages people who have not yet claimed (other than people receiving Income Support or Jobseekers Allowance) to do so without delay.

Working Tax Credit

This is a tax credit for people in paid work who are on a relatively low income (for couples, joint income), including those with a disability. It replaces adult-related elements of Working Families' Tax Credit and Disabled Person's Tax Credit. It will also include support for the cost of eligible childcare. People who currently receive Working Families' Tax Credit or Disabled Person's Tax Credit will not automatically move to the new Working Tax Credit but will need to make a claim.

Working Tax Credit will include a basic element and extra elements for couples, lone parents, those working at least 30 hours a week, those who work while disabled, people aged 50 or over who return to work after unemployment (who would previously have claimed the New Deal 50+ Employment Credit) and people with a severe disability. There is also an element to help towards the cost of childcare.

Apart from the childcare element, Working Tax Credit will be paid to the working claimant. For employees this will normally be via their employer, but the self-employed will receive payments direct from the Inland Revenue. The childcare element of the Working Tax Credit will always be paid directly to the person in the family mainly responsible for looking after the children.

Basis of assessment

In future years, tax credit awards will be based initially on income for the previous tax year. At the end of the tax year, when income for the year is known, the tax credits position is finalised. During the year

  • if income rises significantly, people should tell the Inland Revenue so that the award can be adjusted. Otherwise, they may receive too much tax credit and have to pay it back when the award is finalised at the end of the year
  • if income falls, people can ask to have their tax credits paid on the basis of an estimate of their income for the year. But if they do that, they will have to tell the Inland Revenue straight away if they later think their income will be higher than their estimate. Otherwise, they may be paid too much tax credit.

To allow claims in respect of the tax year from 6 April 2003 to be made in the run up to the introduction of the new tax credits, awards for 2003/04 will initially be based on income for the tax year from 6 April 2001 to 5 April 2002.

Income to be included in a claim

On the claim form, claimants will have to report, broadly, income that is taken into account for income tax purposes. The Revenue takes into account the gross amount of income received, that is, income before the deduction of income tax and National Insurance Contributions. However, contributions to a pension scheme approved by the Inland Revenue (such as a personal pension plan or retirement annuity) and payments under the Gift Aid scheme are deducted from the calculation of income in tax credit claims.

If claimants have their taxable income adjusted following a tax enquiry, that will be taken into account when assessing entitlement to tax credits.

Apart from taxable social security benefits and earnings, most other annual income is taken into account only to the extent that, in total, it exceeds £300. If a claim relates to a couple, the £300 limit applies to their joint income.

Changes in circumstances

Tax Credits are based on personal circumstances, which can of course change. When tax credits are claimed, there are some changes that need to be reported, and others that claimants will want to report (either to increase their tax credits in-year, rather than waiting until the end of the year, or to avoid being paid too much tax credit and having to pay it back). There is a full list on pages 42 and 43 of the notes to the claim form and pages 5-8 of the notes that accompany award notices. The changes that must be reported are where:

  • someone claims tax credits as a single person, and then they marry or start to live with someone as if they were married
  • people claim tax credits as a couple, but they stop living together or separate
  • someone is receiving the child care element of Working Tax Credit, and they stop paying the childcare provider they told us about on the form for at least 4 weeks in a row
  • someone is receiving the child care element of Working Tax Credit, and their average weekly child care costs go down by more than £10 a week, for at least 4 weeks in a row.

Any increase in tax credits can only be updated for up to 3 months, but reductions in tax credits are generally backdated to the date when the circumstances changed, so it is better to notify changes as soon as possible.

Changes in income

Claimants who expect their income to rise above the higher figure shown on their award notice (a figure at least £2,500 higher than their income for the year to 5 April 2002), should tell the Inland Revenue immediately so that their tax credits award can be adjusted. Otherwise, they may receive too much tax credit and have to pay it back when the award is finalised after the end of the year.

If customers expect their income for the year to 5 April 2004 to increase but still be no more than £2,500 above their income for the year to 5 April 2002, there is no need to tell the Inland Revenue during the year about the increase. It will make no difference to the amount of tax credit they receive for that year.

Claimants may also ask for their award to be adjusted if they expect their income for the current tax year to be lower. The award will be finalised at the end of the year on the basis of their actual income for the year.

Penalties

Failure to notify changes that must be reported (see above) could attract a penalty of up to £300. Claimants have three months in which to report these changes to the Inland Revenue.

In the event that an incorrect claim or notification of a change of circumstances is made fraudulently or negligently, a penalty of up to £3,000 may be charged. Failing to provide information or evidence required by the Revenue can give rise to an initial penalty of up to £300, followed by further penalties of up to £60 a day if the failure continues.

Where an employer refuses or repeatedly fails to pay tax credits and, as a result, the Board makes payments to the employee, a penalty of up to £3,000 may be charged. Fraudulently or neglectfully failing to pay an employee the correct amount can also attract a penalty of up to £3,000.

Appeals

As a transitional arrangement tax credit appeals from claimants will be routed to the Social Security Appeals Service, just as appeals by claimants about Working Families' Tax Credit are currently heard by the Appeals Service. In the longer term, tax credit appeals will be heard in the same way as tax appeals. Appeals from employers, who administer tax credits for their employees much like they administer PAYE, are not within these temporary measures. Their appeals, like PAYE appeals, are about administration and will continue to be heard by the General and Special Commissioners.

Further information

Customers can find out more by reading the comprehensive notes supplied with the claim form, or by contacting the Tax Credits Helpline on 0845 300 3900 (or 0845 603 2000 in Northern Ireland). The Revenue is preparing a detailed booklet about the new tax credit system for claimants - to be available online and from Inland Revenue Enquiry Centres.

The Tax Credits website www.inlandrevenue.gov.uk/taxcredits allows people to claim online, includes a facility for calculating amounts payable based on different levels of income and different circumstances, for illustrative purposes.

Customers can also visit one of the Inland Revenue Enquiry Centres (under `Inland Revenue' in the phone book). If customers want face to face help with understanding the claim form or the notes, or any other aspect of their claim, they are very welcome to go into those offices.

Schedule 1B Taxes Management Act 1970

When giving relief for Schedule 1B claims (claims involving two or more years) we have previously restricted any repayment in order to retain an amount to cover any outstanding liability for the earlier year. We have done this regardless of whether that liability was already due or due in the future. (Tax Bulletin issued December 1996 covered this in more detail).

However following representations, we have now decided to relax this position for claims to carry back losses and/or pension payments. Any automatic repayment will continue to be restricted to cover the earlier year (so avoiding the situation where a customer receives a repayment from us and then has to pay it back at a later date). But if the earlier year's liability is not yet due we will now consider making an additional repayment up to the total tax paid for the earlier year through the SA account if specifically requested.

Capital Gains Supplementary Pages - Correction

The final sentence of the first paragraph in the article in Working Together issue 11 says: "Such claims must be made on the appropriate Helpsheet and signed by the taxpayer." This is not in fact the case. The normal route will be to use column G for the claim.

Important Changes to the Filing of Employer's End of Year Returns

The Government believes that encouraging employers to make greater use of new technology is the best way to help them deal with their payroll tasks.

As part of the measures to support this change all employers will be required to file their End of Year Returns electronically by 2010, either directly or through an intermediary, such as a payroll bureau or agent.

All employers with 250 or more employees will be required to e-file End of Year Returns by May 2005.

More detailed information about the compulsory filing of employers End of Year Returns, including financial incentives available, can be found on the Inland Revenue website at /employers/ppip/index.htm

Summary of key points

The compulsory electronic filing date will depend on the number of employees an employer has:

Number ofEmployees First compulsoryelectronic Return Filing Deadline
250 or more 2004/05 End of Year 19 May 2005
Between 50 and 249 2005/06 End of Year 19 May 2006
Fewer than 50 2009/10 End of Year 19 May 2010

The primary legislation for compulsory electronic filing is in sections 135 and 136 FA 2002. The draft regulations are expected to be published on the Inland Revenue website in March 2003. Copies may also be obtained from the Revenue Press Office.

What is e-filing?

E-filing means employers will have to send their End of Year Returns (both forms P35 and P14 together) by:

  • Internet service for PAYE or
  • Electronic Data Interchange (EDI) service or
  • using an intermediary, such as a payroll bureau or agent, who will submit End of Year Returns on the employer's behalf using one of the above.

Please note: Magnetic media (CD-ROM, flexible disk, data cartridge and open reel tape) are not considered electronic.

Penalties

There will be a new penalty of up to £3000 per annum per PAYE scheme for the employer's failure to make an electronic End of Year Return when they should have done so. This is in addition to the existing late filing penalty.

Financial incentives

There will be financial incentives for employers with fewer than 50 employees to encourage them to make the transition from paper to e-filing earlier. All qualifying employers who successfully e-file for these years will receive the payment shown in the table, including those who are already e-filing.

End of Year Return
2004/05
2005/06
2006/07
2007/08
2008/09
Incentive £
250
250
150
100
75

Most agents are employers, so will have to prepare to meet their own obligation to e-file as well as considering how they will help their employer clients with e-filing. Agents can also help their clients by letting them know that this change is coming. Agents should establish that they will meet the electronic submission requirements. Agents who want to e-file and are already using payroll software should contact their software provider to ascertain which of the 2 services (Internet service or EDI) it will support and from what date, and the range of electronic forms and returns it will support (e.g. forms P14, P35, P6, P9 etc).

Agents who do not already have payroll software should start considering their options now. If they use an IT payroll product they should find it will help them to deal more easily with their payroll obligations. When employers, intermediaries or agents decide to file electronically they need to consider:

  • which service to use; and
  • what software or hardware they need to buy. Employers and agents will need to make sure that the payroll software that they choose will include an electronic submission capability.

Details of software which is formally accredited by the Revenue can be found at: www.inlandrevenue.gov.uk/ebu/acclist.htm The Revenue accreditation process checks that the payroll software accurately calculates tax, NICs, Student Loan deductions etc and also ensures that it incorporates one of the two electronic transmission service requirements.

Details of software which is EDI certificated can be found at: www.inlandrevenue.gov.uk/ebu/eb4_paye_edi.pdf

Details of software which has been Revenue checked as meeting the requirements of Internet transmissions can be found at: www.inlandrevenue.gov.uk/efiling/paye/paye_software_forms.htm

Agents and employers can find more information about EDI, the Internet Service for PAYE and all the other services available on the Inland Revenue website at: www.inlandrevenue.gov.uk/ebu/emp_index.htm

Self Assessment 2002/03 Tax Returns

From 6th April 2003, the 2002/03 Tax Returns will be available to view on the Inland Revenue main Internet site. You can however view the changes in advance by visiting www.inlandrevenue.gov.uk/sa_drafts/. These draft versions are provided for software and substitute forms developers to create their products.

This year, one new aspect of the Return design is that there are no longer `No' and `Yes' boxes to tick at the start of each question, just `Yes' boxes. There are also new boxes at 13.1A (enhanced capital allowances for environmentally friendly expenditure), 15.2A (ex-spouse's date of birth), 15.5 to 15.7 (Community Investment Tax Relief) and 19.9A (if the taxpayer's nominee for repayment is also their agent). There is also a new question 15A concerning Charitable Giving.

In the relevant supplementary pages there are also new boxes for `enhanced capital allowances for environmentally friendly expenditure' and on the Employment Supplementary Pages a new box 1.39A concerning Student Loans.

Three new Helpsheets have been introduced:

  • IR 235 - Calculation of Student Loan repayments on an income contingent Student Loan,
  • IR276 - Incorporation Relief and
  • IR277 - Trusts with settlor interest; Taper and losses.

Self Assessment Tax Return Guides

Copies of the:

    SA1000 Self Assessment Tax Return Guide for Individuals

    SA1001 Self Assessment Partnership Tax Return Guide

    SA1002 Self Assessment Trust and Estate Tax Return Guide

incorporating related forms, notes and help sheets are produced and issued on an annual basis as a service to tax advisers and Inland Revenue staff.

For 2002/03, we'll be using the agent details held on the Self Assessment system for bulk mailing purposes. We will send at least one copy of these Guides to any agent with more than five clients on the Self Assessment database. If you previously ordered extra copies then we will do our best to send you the correct number and your `top up' Guides should be with you within ten days of your initial delivery.

If you need extra copies after your supplies have been delivered, you can order them by:

    e-mailing saorderline.ir@gtnet.gov.uk

    faxing your order to the SA Orderline on 0845 9000 604

    telephoning the SA Orderline on 0845 9000 404

    or completing the tear-off re-order card that will come with your supply of the Guides and sending it to:

    SA Orderline, PO Box 37, St Austell PL25 5YN

Any additional orders must clearly state how many copies of each of the three Guides (Individual, Partnership or Trust) are required and where they are to be sent. Also, as last year, you will be asked to supply your Agent Code (located on the Clients' Account Information sent out in December and June each year).

Please allow sufficient time for your order (initial plus top up) to be received before contacting the Orderline(Note: SA Orderline will not be able to process any orders for Return Guides until after 6th April 2003)

The Tax Offices do not hold any copies of the Guides for issue to agents. However, if you find that the name and address details shown on the distribution are incorrect, or if there is a duplication, please contact your Tax Office and ask them to correct the details held on the Self Assessment computer system.

SA- Short Tax Return Pilot

The Revenue will be piloting a new simplified 4-page Tax Return, for people with straightforward tax affairs, in April 2003. This is a major step in meeting calls to simplify the SA Return, particularly for those on low incomes. The new form will be sent, instead of the usual Return, to people selected on the basis of their last completed Tax Return. The types of taxpayers likely to qualify for a short Tax Return will include pensioners, low turnover self-employed people and employees, provided they have simple tax affairs.

The Revenue has consulted with a wide group of representatives in the design of the new form and a short and simple guide. The design has also been influenced by several rounds of usability testing with taxpayers. These have been very encouraging, demonstrating that people find the guide more helpful in understanding the Return and that the form is easier to complete.

The short Tax Return will contain no facility to self-calculate. The idea is to make the task of completing the form as straightforward as possible. The Revenue will encourage participants in the pilot to submit it by 30 September to ensure they receive notification of any amount to pay in good time.

The Revenue are also planning to offer people an alternative option of filing their short Tax Return by telephone, using voice recognition software. Some other countries have introduced tele-filing and the Revenue feel the short Tax Return pilot is an ideal opportunity to test the demand for it here. The Revenue will also encourage people to file online, as an alternative to the short Return, if they wish. Those receiving the new form will have the option of not taking part in the pilot, and requesting the usual Return instead. Tax advisers may, also, prefer to use their standard software package to prepare a full Return. The short Tax Return cannot be used by any person outside the pilot.

The pilot will involve a total of around 50,000 taxpayers from Centre 1, Belfast, Warwickshire Coventry and Wey Valley Offices. No other Offices will be involved at this stage. If you have clients that are dealt with by any of the above Offices it is possible that they may be selected to receive a short Tax Return, if their circumstances qualify.

The Revenue will be evaluating the results of the pilot as the new Returns are sent back. This will inform the further development of the short Tax Return. It is not expected that the new form would be available nationally before April 2005.

Completing Employers' End of Year Returns

The end of the tax year is fast approaching and we'd like to remind agents (many of them employers), and their employer clients:

    to make sure their End of Year Returns reach us by 19 May 2003 and

    how to avoid common mistakes, especially concerning forms P14 and P35.

    Getting the forms right first time saves agents, employers and the Revenue time and effort because:

    there will be fewer follow-up enquiries

    records will be updated more quickly so repayments of overpaid tax and NICs to both employers and employees will be processed more quickly

    the information provided to pension-providers is correct and up-to-date.

Help Book E10(2003) - Finishing the tax year up to 5 April 2003 - gives comprehensive guidance on completing forms P35 and P14, and can be found in the 2003 Employer's Annual Pack and on the Employer's CD ROM 2003.

If the payroll is manual, switching to a computerised payroll that uses software which is Revenue accredited may generate fewer mistakes. More information about this software can be found in the article above about changes to the filing of End of Year Returns.

Common mistakes and how to avoid them

The wrong version of form P14 is used.

    Check the example shown in the Employer's Pack for 2003.

    If payroll software is used, make sure the P14 matches the 2002/03 format.

Wrong number of paper P14s submitted with P35.

    The correct number of P14s should be submitted along with the relevant P35 to your Inland Revenue Office, if paper returns are made.

National Insurance number missing or incorrect .

    This should be taken from the front of form P11.

    It must be two letters, six numbers, followed by one letter (for example AB123456C)

    Help book E13 - Day to Day Payroll - in the Employer's Pack 2003 and on the 2003 CD ROM gives advice on tracing NI numbers.

Wrong or incorrect NI category letter recorded on P14 .

    This should be copied from the End of Year Summary section of form P11 (2002)

    Further guidance on finding the right category letter for a particular employee is in the National Insurance tables.

    The employee's tax code should not be used instead.

    Where tax credits need to be entered on forms P35 & P14 - Employer Reference for P35 and P14 does not match that shown on Tax Credit Notifications TC01/TC03

    Where the Tax Credit Notification shows a different employer reference number, phone the Employer's Helpline on 08457 143 143.

    The employer reference for the payroll under which the tax credits are paid should be entered on forms P35 & P14.

Details of the employee's earnings and NICs not recorded correctly in columns 1a to 1e of form P14.

    These amounts should be copied carefully from the End of Year Summary section of form P11(2002)

Employer's Contracted-out Number (ECON) not recorded on form P35

    This must be entered on form P35 if a pension scheme that was contracted out of the State Earnings Related Pension Scheme (SERPS) was in operation.

    The ECON can be found on the Contracting-out Certificate

Scheme Contracted-out Number (SCON) not recorded on form P14

    This must be entered on form P14 if the employee was a member of a Contracted-out Money Purchase (COMP) or COMP Stakeholder scheme. The SCON should not be recorded on form P14 however if the employee was part of a Contracted-out Salary Related (COSR) scheme.

    The SCON can be found on the Contracting-out certificate.

Help and advice

We have Business Support Teams (BSTs) in all areas of the country who offer free face-to-face consultations and workshops on various aspects of payroll. The BSTs can offer advice on how to total P11s, transfer the information to the P14s and complete a P35 - along with all the other things that need to be done at the end of the tax year.

To arrange a visit from a Business Advisor from a local BST, or to book a place on a workshop:

Form P11 from 6 April 2003

For the new tax year please ensure that the correct version of form P11 is used and/or payroll software is updated because:

    the new statutory payments - Statutory Paternity Pay and Statutory Adoption Pay - will have to be recorded and reported. Two new columns have been added to the P11 to allow for this.

    it is no longer a requirement to report details of employee and employer NIC rebates where contracted-out occupational pension schemes are in operation. These columns have been removed from the P11. Instead the NICs that will be recorded and reported are the amounts due, following offset of the NIC rebates. Because these columns have been removed, it may be necessary to record negative amounts of NICs. This can be done by using an "R" indicator on form P11.

An example of the P11 for 2003/2004 can be found on the Employer's CD-ROM and in the Employer's Pack for 2003.

As well as the changes above which affect the recording and reporting of NICs and Statutory Payments, April 2003 also sees the introduction of changes to Class 1 NICs arising from last year's Budget. To assist with the correct completion of form P11 from 6 April, it is very important that the information about these changes, contained in the Employer's Pack, is followed.

What Do You Think of Revenue Leaflets?

The Revenue is reviewing all its printed leaflets, as part of the wider programme to improve guidance material (explained in the last edition).

The review is underpinned by a number of objectives. In particular, leaflets should:

    reflect what our customers need and want

    take more account of guidance we provide elsewhere, for example Self Assessment Helpsheets and guidance routinely sent to employers, so avoiding unnecessary duplication

    be kept up to date, and accessible to the audiences at which they are aimed.

We are conducting research with various customer groups and are keen to learn more about the needs and views of tax advisers. For example:

    Do you use our leaflets, and if so which ones are particularly helpful?

    In what way do you use them? For example, do you hold them as reference material, or give them out to clients?

    How do you obtain our leaflets?

    How do you ensure that your copies are kept up to date?

    How useful are our leaflets in your work, compared with guidance you get from other Revenue sources or commercial publishers?

    Do you feel that there are any significant `gaps' in the issues covered by our leaflets?

    Do you have any other points that we should consider in the light of our objectives set out above?

Please let the Working Together Team have your views and suggestions by the end of March. Contact details are shown below.

CTSA Enquiry Framework

Summary

A new framework for ITSA enquiry work was published in Working Together Issue 8. This article sets out:

    where the ITSA Enquiry Framework applies to enquiries under CTSA

    certain amendments to deal with the differences between ITSA and CTSA enquiries

Introduction

The ITSA Enquiry Framework resulted from extensive research and consultation carried out jointly between the Inland Revenue, the Chartered Institute of Taxation and other representative bodies. Many of the findings and recommendations apply to enquiries in general, whether into CTSA or ITSA Returns. However, at the date of publication the Framework was limited to ITSA with the intention that the Inland Revenue would extend and align the approach to CTSA enquiries. The result of that work is set out in this article.

The majority of the ITSA Framework applies directly to CTSA. Some amendments have been made to accommodate the statutory and practical differences between ITSA and CTSA. CTSA enquiries should now follow the guidelines set out in this framework.

The Framework is not intended to be overly prescriptive, as CTSA enquiries cover the whole corporate spectrum. In order for enquiries to progress in a manner agreeable to all involved, flexibility and judgement as to what is appropriate are essential for all concerned.

Drafts of the Framework have been discussed with the external representative bodies involved both in Working Together and in the Revenue's Corporate Tax Operational Consultative Committee and Inland Revenue enquiry teams.

The Framework is operating now for all new and existing enquiries.

Dealing with correspondence

Inland Revenue Enquiry Teams will aim to deal with all correspondence, including business records, in a 30-day turnaround time. In CTSA enquiries business records may be extensive and it may be necessary to involve other Revenue offices to obtain advice on complex technical questions. Advisers experience similar difficulties. Where it is anticipated that this target cannot be met, enquiry staff and advisers should agree a reasonable timetable for dealing with correspondence.

Opening letters

Opening letters requesting information will be tailored to the particular circumstances of each enquiry. They should take into account the nature of the business and the risks identified by the enquiry team. Inevitably requests for information are likely to be broadly similar but there is not a standard list.

The opening letter should contain:

    a formal notice of enquiry under Paragraph 24(1) Schedule 18 FA 1998 and

    the appropriate code of practice

Examples of opening letters are provided at EH1092 (see below). Several standard letters were published with the ITSA Enquiry Framework that illustrate preferred tone and style. It was not thought necessary to replicate that approach for corporate taxpayers.

The opening letter will often contain a request for appropriate books and records. This may include items which were not used in preparation of the accounts but which are relevant and can be reasonably required in order to check the Return. Alternatively, the enquiry team may consider it appropriate to request a meeting with the adviser and/or directors in order to understand the nature of the business and accounting systems before asking for the business records.

Time limits

Where it is warranted, the Inland Revenue will take a flexible approach. Enquiry teams will endeavour to take into account peaks of work experienced by advisers and companies in the annual cycle. Teams are encouraged to discuss and agree time limits for a response to the request for information with the adviser. This will normally be 30 days.

Copying opening letters to the Company Secretary

The Inland Revenue is obliged to send Paragraph 24 notices to the "proper officer" of the company, usually the company secretary, together with a copy of the Code of Practice. EH1374 (see below) sets out the Inland Revenue approach in the case of enquiries into the accounts of large groups of companies

For an experimental period concluding in June 2003, opening letters sent to the adviser will be copied to the "proper officer" of the company. The practice was piloted following publication of the ITSA Enquiry Framework. Please make any comments through your local Working Together group.

Paragraph 24 notices and copies of opening letters sent to the company secretary will be marked "Private and confidential - to be opened by the addressee".

Identification of enquiry as full or aspect

The combination of the formal notice and the opening letter will make it clear whether the enquiry is a full enquiry or into only aspects of the return. No reason will be given for opening the enquiry.

Meetings

The following points are for guidance and are not intended to introduce inflexibility. Following the issue of the enquiry notice, the enquiry team will make early contact with advisers to arrange a meeting. It is important that all parties have a clear idea of the purpose and desired outcomes of the meeting. This will help determine who should attend and agenda items.

Who attends and what is discussed will depend upon a number of factors including:

    the size of the company

    the nature of the business

    the role of the agent in producing the accounts

    whether or not there are in-house accountants and tax specialists.

Initial meetings held before the records examination may provide a useful context to the documents and data. As with all meetings, the Inland Revenue will bear in mind cost to the company.

In the great majority of cases, a meeting with the agent will not replace a meeting with the directors of the company. Their knowledge of the business and company operating systems is crucial to the effectiveness of the enquiry.

Agenda

The enquiry team will provide an agenda covering the main areas for discussion at a meeting with the adviser/directors. This should enable all parties to carry out any necessary preparation or research in advance of the meeting. The agenda will list topics for discussion. It will not set out a detailed list of questions and should not be seen as exhaustive or restrictive. It would, however, be unusual for a completely new major agenda item to be introduced at the meeting unless something unexpected is revealed during the course of the meeting.

Place and time

Enquiry teams will adopt a flexible approach to the time and place of any meeting. However, the location should be suitable for purpose and satisfy health and safety and personal security considerations for all attendees.

Meetings at business premises should be the norm rather than the exception. This will help to make the meeting less intimidating for the directors and provide opportunities for Inland Revenue staff to see the business. Arrangements will be discussed and agreed with the advisers who may liaise with the directors.

Directors' private financial information

This includes: bank and building society statements, charge, credit and store cards and information on investments.

Enquiry teams will not request directors' private financial information in every case nor as a matter of process. However, where company accounts are not based on a robust and effectively operated record keeping system which is supported by adequate and appropriate safeguards and/or include unvouched or unverified sums, the Inland Revenue believe that it is reasonable to request the directors' private financial information with the other records. Enquiry teams may explain the basis of their request to the adviser in a telephone call or by setting it out in the opening letter. It is considered reasonable to request such details at an early stage to ensure that the enquiry is brought to as speedy a conclusion as possible.

Under the Human Rights Act 1998 (Article 8) any interference with a person's rights of privacy must be in accordance with law and proportionate to the aim of the enquiry. Where the inadequacies of the record keeping system are concerned solely with unvouched or unverified items of a minor nature, the Inland Revenue will generally not seek access to directors' private financial information.

Advisers are asked to consider whether it would be helpful to supply the details in order to highlight any particular issues or to assist in early completion of the enquiry.

EH 2937 (see below) sets out the Inland Revenue approach. Enquiry teams will invite the company to supply the documents and information voluntarily. If formal action for this information becomes necessary, statutory powers are provided by Section 20(3) TMA 1970.

EH 399 (see below) relates to ITSA enquiries but provides a useful description of "what is reasonable" in these circumstances.

Appendix 1 - CTSA Enquiries - alignment with ITSA Enquiry Framework

Extracts from Revenue Manuals

Inland Revenue guidance is subject to regular review and updating. Current versions at the time of printing have been reproduced below. You should check the guidance manuals for any amendments.

EH 1092 General: Enquiries into returns and amendments: Form of paragraph 24(1) notice: enquiry into a Return

Where there is an agent acting, you should set out the notice to the company in the following terms:

    `Thank you for the company's tax return for the period (../../.. to ../../..). I am writing to tell you that I intend to enquire into the return. I have written to the company's agent (name) to ask for the information I need.

    I enclose a copy of our Code of Practice. It explains how we keep our promise of fair treatment under the Revenue's Service Commitment to you. When you have read the booklet (leaflet in aspect cases), please contact me if you require further information.'

At the same time you should send a letter to the agent as follows:

    `I have today given notice under paragraph 24(1) Schedule18 FA1998 to your client company (name) of my intention to enquire into the company's return for the period (../../..to../../..). I attach a copy of the notice.'

The letter to the agent should go on to request the documents and information you need to check the return. It should always state the date by which you expect the documents and information to be provided. The time allowed should normally be not less than 30 days and should take account of the nature and scope of the information requested. There may be particular circumstances in which a longer period would be appropriate. You should only specify a shorter period if you are confident that the company can produce the documents or provide the information quickly and easily, and you have already discussed and agreed this with the company or its agent.Where there is no agent acting you should give notice to the company in the following terms:

    `Thank you for the company's tax return for the period (../../.. to ../../..). I am writing to tell you that I intend to enquire into the return.

    I enclose a copy of our Code of Practice. It explains how we keep our promise of fair treatment under the Revenue's Service Commitment to you. When you have read the booklet (leaflet in aspect cases), please contact me if you require further information.'

Your letter should go on to detail your request for documents and information following the guidelines above.

EH 1374 Groups: Large groups: opening letter

Paragraph 24 requires the Revenue to give notice to "the company" of intention to enquire into a return. This means that the notice must be served on the proper officer, normally the company secretary, of each company in the group.In large group cases, the issue of a separate letter in each case in which you need to issue a notice of intention to enquire into the return of a company in the group could result in large numbers of enquiry notices being sent at the same time to one person. In the case of large groups of companies, where

    the same person is the proper officer for a number of companies in the group, and

    correspondence for all companies in the group is addressed to an in-house tax department, and

    it is probable that each year you will need to open enquiries into a large number of companies in the group at the same time

you may agree that notices of intention to enquire into the returns of more than one company in the group can be incorporated in a single letter.The agreement should include confirmation of all companies in the group which are to be covered by the agreement and arrangements by which you are notified of companies entering or leaving the group. The agreement must be signed by a proper officer of each company included. The letter should also spell out that each enquiry will be concluded by the issue of a separate closure notice.Where you come to such an agreement the notice of intention to enquire must be set out in the following terms:

` I am writing to tell you that I intend to enquire into the company tax returns of the following companies for the period (.......):' (followed by a list of the companies to be covered by the notice). You must give notice of enquiry in respect of every return on which you propose to ask questions. Where most companies in a group are covered by the above letter you should make a note in the file of any companies which are not included, and ensure that a separate notice of enquiry is given in those cases.

EH 399 Extent of enquiries: what is reasonable?

The over-riding test (EH398) is based on what is reasonable (that is, fair and sensible) in the circumstances. The question of whether it is reasonable to request private documents including bank and building society accounts (EH 398) can only be determined by reference to the facts in each individual case.Non business bank details should not be requested in the opening letter as a matter of course. However, where accounts are not based on a robust and effectively operated record keeping system which is supported by adequate and appropriate safeguards and/or include unvouched or unverified sums, it would be reasonable to request the private bank details with the other records. The position could be established through telephone contact with the agent or by making the basis of the request clear in the opening letter.Where the limitations are concerned solely with unvouched or unverified items of a minor nature e.g. use of home as an office or weekly laundry, then it would not be appropriate to seek access to the non business bank details.

In determining whether a request is reasonable you should consider factors including those listed below before making a request or issuing a Section 19A notice. You must have grounds for the request which would satisfy a Commissioner you should therefore consider any objections from the customer or agent before the Section 19A notice is issued.

    Where payments from an account to the business are treated as non-taxable e.g. capital introduced (where not independently verified).

    Where it is reasonable to suppose that business records (or the equivalent for non-business transactions) are incomplete.

    Where it is reasonable to suppose that undeclared income or gains have been credited to the account.

    Where you have doubts or questions about means or capital growth.

    Where it is reasonable to suppose that the return was based, wholly or partly on the "private" bank account documents.

    Where taxable receipts or expenditure are unvouched or estimated and it is reasonable to expect that this expenditure could have been vouched/recorded.

When determining whether you require non-business information you should consider the customer's costs (in time and money), and pursue the matter only where you are satisfied that the potential benefit to the enquiry is proportionate to these costs. This is particularly relevant in seeking duplicate statements for non-business bank accounts.NB. Correctly and contemporaneously recorded business drawings being deposited in a non-business account is not sufficient reason alone to request the details of that account.

IH 2937 Close companies: CT Enquiries and requests for Directors' Bank Accounts 1996-97 and subsequent years

Where, in order to check that a company's return is correct and complete, you need to examine the private financial accounts of the director(s), you should:

    first ask the company to supply them voluntarily, in your letter to the company's agent if the same agent acts for the company and the director

    if there is no response to the informal request, consider using formal information powers.

Unless you are opening an enquiry on a director, the appropriate statutory authority for your request is Section 20(3) TMA 1970 and you can ask for any documents, which the director holds, and which you think may contain information relevant to the company's tax liability.When you have opened an enquiry into the directors' returns you should always use the information power at Section 19A TMA 1970 to obtain information relating to those returns, just as you would for any other SA taxpayer, in preference to S20 (see EH387 and EH1451).For further guidance on requests for private bank and building society accounts see EH319 and EH398+.

Editorial

    Working Together is a partnership with the CIOT, ICAEW, ATT, ACCA, ICAS and AAT. Although the material in this publication obviously reflects discussion and consultation with these bodies, the Revenue is solely responsible for its contents and for the views expressed in it.

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