HMRC Compliance Checks FAQ

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The powers inherited by HM Revenue & Customs (HMRC) were unaligned and out of date.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.

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