Compliance Checks - powers to obtain information and inspect premises
Background
The new information powers regime arises from the integration of the Inland Revenue and HM Customs and Excise. Broadly stated, the Inland Revenue powers have been "upped" so that they are similar to the powers formerly enjoyed by Customs. There are civil powers and criminal investigation powers. Both are dealt with below. The criminal powers are already in place. The civil powers take effect from 1 April 2009. HMRC have issued guidance in their Compliance Handbook – see CH20000 ff and CH200000 ff. Whilst the taxes affected by these provisions are initially restricted (see below), the regime will effectively apply to most taxes after 1 April 2010.
Consent
It has always been the case that HMRC could enter and search premises with the consent of the occupier. It has also always been the case that if HMRC have asked for documents which have been provided voluntarily, or asked a taxpayer to attend a meeting at which he has attended voluntarily and given information, the information etc has been admissible. This has not changed. It is important to remember that once consent has been given it can, theoretically, be subsequently withdrawn, but this may not be easy (especially in the context of an inspection of premises).
Civil Powers
HMRC have the following civil powers;
(a) The power to obtain information and documents from a taxpayer.
(b) The power to obtain information and documents from a third party (known or unknown taxpayer).
(c) The power of entry onto business premises.
(d) The power to inspect business premises.
(e) The power to inspect documents whilst on business premises.
(f) The power to remove documents from those premises.
(g) The power to enter onto any premises and inspect them for the purposes of valuing them for tax purposes.
Triggering events
These civil powers may be exercised in the following circumstances:
(a) Where the information, document or inspection is "reasonably required for the purpose of checking the taxpayer's tax position".
(b) Randomly. "Occasionally we select some taxpayers for a random check to test the quality of our risk analysis. These checks are done both before and after a return is submitted". A taxpayer will not be told whether he has been selected at random or HMRC have other reasons for checking.
(c) Tax is widely defined. It includes relevant foreign tax. It is at present limited to income tax (include PAYE, NIC's and CIS), CGT, corporation tax and VAT, but will extend to most taxes after 1 April 2010.
(d) Tax position is also widely defined, and includes past, present and future liability to pay not only tax but also penalties, etc.
Restrictions
Whilst it seems that no information notice (see below) can be given in relation to a chargeable period in respect of which a taxpayer has made an income tax, CGT or corporation tax return, this looks like an empty restriction. It does not apply if any of the following applies:-
(a) There is an open enquiry.
(b) An HMRC officer thinks that there has been an under assessment, or a non-assessment of something that should have been assessed.
(c) If a notice is given for obtaining information or a document that is required for checking a person's VAT position (as well as their direct tax position).
(d) As above, where the information or document is also required to check a person's PAYE position.
Any documents must be in the relevant person's possession or power.
Legal professional privilege
Documents subject to legal professional privilege (privileged communications) do not need to be disclosed either pursuant to an information notice, or if premises are being searched.
For these purposes, information or a document is privileged if it is information or a document in respect of which a claim to legal professional privilege (or, in Scotland, to confidentiality of communications as between client and professional legal adviser) could be maintained in legal proceedings.
Communications, therefore, with lawyers are likely to be privileged.
Tax advisers, and communications between tax advisers and a client also enjoy an enhanced status. A tax adviser cannot be asked to give information or documentation about a client in relation to the client's tax affairs. The client, however, can!
Documents
Section 114 FA 2008 extends the obligation to produce documents and deems "any reference in [any statute] to a document [to be] a reference to anything in which information of any description is recorded".
In other words this applies to records, etc in electronic form.
Generally, HMRC may at any reasonable time obtain access to and inspect and check the operation of any computer and associated apparatus which has been used in connection with a relevant document. A taxpayer is obliged, under penalty, to give the HMRC reasonable assistance to access computer information.
The power to obtain information and documents from a taxpayer
HMRC can serve a notice on a taxpayer requiring a taxpayer to provide information or to produce a document. This is known as a "taxpayer notice".
Information need only be provided in written form. There is no obligation to provide the information orally, either over the telephone or at a meeting.
The information may need to be made up from existing material. It may not exist before the request is made.
A taxpayer notice may be given without any approval of the first tier tribunal ("FTT"), but in such circumstances the taxpayer can appeal against the giving of it.
If the FTT does consent to the giving of a taxpayer notice, there is no right of appeal. However, the FTT cannot give approval unless the taxpayer has been told that a hearing will take place and has been given a reasonable opportunity to make representations. The FTT will take those representations into account.
The power to obtain information and documents from a third party (known or unknown taxpayer)
This is known as a "third party notice", and it is given by HMRC to a third party. Usually the taxpayer must be named in the notice, but if the taxpayer is not known, a third party notice can still be given but only with the prior consent of the FTT.
The same provisions apply to third party notices where the taxpayer is known, as apply to taxpayer notices.
Taxpayer notices and third party notices are known as "information notices".
The power of entry onto business premises
In the past there have been, broadly speaking, two routes enabling HMRC to enter onto business premises. The first is with consent of the occupier. The second was pursuant to a search warrant (either an Inland Revenue, Customs or police search warrant). There is now, however, a third power under part 2 of Schedule 36 to FA 2008. This is described as a "power to inspect", and is a statutory right to inspect, irrespective of any notification.
As originally drafted, there was no power to inspect third party premises, only a taxpayers'. However, amendments to Schedule 36 have been included in FA09 which will enable HMRC to inspect the premises of "involved third parties". These are specifically defined and broadly speaking are intermediaries eg. a person involved in insurance business, or a child trust fund provider.
The power of entry can only be exercised over business premises. This however includes part of premises and any "means of transport"! Front rooms used for an office will be subject to it. There may be logistical difficulties if an office is inaccessible save through solely domestic premises.
The power of entry (and subsequent inspection) can be carried out in three situations:-
(a) at a time which has been agreed with the occupier.
(b) If no such agreement then at any reasonable time, prior notice of the proposed visit having been given by HMRC. At last 7 day's notice must have been given.
(c) However, if the inspection is to be carried out with the agreement of an authorised HMRC officer, 7 days notice is not required. HMRC can simply turn up at any reasonable time unannounced.
In any event, remember that if HMRC arrive and are invited onto the premises, then they are there by consent and any search, etc is likely to be legal.
FTT approval to the inspection may (but doesn't have to be) obtained by HMRC. A taxpayer has no right of representation.
The power of entry onto any (ie including residential) premises
An officer, who can be accompanied by anyone necessary to assist (probably a valuer) may enter any premises to value them if reasonably required to check a persons tax position.
This can only be with either the consent of the occupier, or with the prior approval of the FTT.
Obstruction
A taxpayer may obstruct (basically prevent entry) of an HMRC officer if he reasonably believes that the officer does not have reasonable grounds to enter.
Whilst this may be a risky strategy, it is likely that an HMRC officer who is obstructed will not insist on entry.
An FTT sanctioned inspection attracts penalties if the HMRC officer is obstructed. It is not an offence. However these penalties may be reduced if the taxpayer has a reasonable excuse for the obstruction.
The power to inspect documents whilst on business premises
The HMRC officer may only inspect the premise, business assets and business documents on the premises. He/she may not "search".
Business documents relate to the carrying on of a business by any person and form part of any person's statutory records.
The power to remove documents from those premises
HMRC may make copies of documents which they can take away.
Furthermore any document shown to HMRC or inspected by them can be removed and retained for a reasonable period if "it appears to the officer to be necessary to do so".
Offences and penalties
There are penalties for failure to comply with information notices or deliberately obstructing FTT approved inspections (£300 plus daily penalties of up to £60 a day if the failure to comply continues). This includes concealment, destruction, or disposal of documents, etc.
A person also commits a criminal offence if he conceals, destroys or disposes of a document which is subject to an information notice approved by the FTT.
Role of the FTT
The FTT plays an important role in providing taxpayer safeguards. Please click here for further details.
Criminal Powers
These are already in force. Broadly speaking, HMRC powers of entry and search are now under the Police and Criminal Evidence Act 1984 (PACE) save that HMRC officers do not have powers to charge, bail, detain after charge or take finger prints.
Power to obtain documents
HMRC can obtain documents in cases of suspected serious tax fraud. There is no need to issue a search warrant. The documents are limited to those which may be required as evidence of the fraud.
The power, under Section 20BA TMA is to obtain an order that a person delivers documents to HMRC within a specified period of time.
The order can only be made by a circuit judge, and only bites on documents which are in a person's power or possession. Privileged documents need not be disclosed.
The order can be served on any person (third party, taxpayer, institution). After service of an order, it is an offence to conceal or destroy any document, or tip off another person that an order has been served if by tipping off it is likely to prejudice the investigation.
Power to enter premises under a search warrant
The old powers under Section 20C TMA and paragraph 10 of Schedule 11 to the VAT Act 1994 have been repealed with effect from 1 December 2007.
The power to enter premises under a search warrant is now pursuant to PACE. To apply for a warrant (to a magistrate) an HMRC officer must have reasonable grounds for believing that an indictable tax offence has been committed and there is material on the premises which would be of substantial value to the investigation of that offence.
Privileged documents cannot be inspected/removed. Note that items held with the intention of furthering a criminal purpose do not attract legal privilege.
Power to search premises under a search warrant
The power to search premises stems from the search warrant or consent. Remember it is difficult to withdraw consent once initially given and officers are on the premises.
The search is for material which is likely to be of substantial value in the investigation.
Powers to remove documents from premises searched
These powers of "seizure" also stem from the warrant, but are subject to the PACE codes.
Where it is not reasonably practicable to determine, on premises, whether material is something HMRC is entitled to seize, the material can be removed if the officers think that it contains material they are authorised to seize.
Powers to request answers to specific questions
Under SOCPA 2005, an HMRC prosecutor can authorise an HMRC officer to serve a disclosure notice on a person who the officer believes has information relating to a tax crime.
The recipient may be required to produce documents or information but also "answer questions with respect to any matter relevant to the investigation". However, a person may not be required to answer any privileged question or provide privileged documents or information.