Tax investigations – an inspector calls

With the changes ushered in by the Finance Act 2008, many professionals face
uncertainty in regard to what legal rights they have should the inspector come
calling ­ either announced or unannounced.

With the increased powers of the 2008 act, HMRC can inspect the business
premises and, if unhappy with what they see, can start a full enquiry into the
business. In recent years HMRC had a target to collect more tax in 83% of such
cases. They do not always give any justification for extending an enquiry beyond
a mere expression of dissatisfaction. In the cases we have seen so far it has
been clear why the enquiry has been extended and HMRC have made no secret of the
reasons.

Accountants are now more than ever before being put into a position of not
only maintaining accounts, but also defending them.

Knowing your client’s rights

There is a popular misconception that HMRC can now legally descend on a
business and begin an inspection of all records and the actual premises
themselves. Generally, they will give seven days’ notice but visits can also be
unannounced.

There has been much publicity about these so called ‘martini visits’ (any
time, any place, anywhere) but the clients do have rights and without the
correct knowledge of these rights, as a professional, you may be left with an
unhappy customer.

Inspectors have the right to ask to come in to the business premises only,
but do not have the right to forcefully enter. Such visits must be reasonably
required for the purposes of checking the tax affairs of the business or
individual concerned.

As an accountant, how would you cope with this sort of demand? What will you
say to your client if they call to say the inspector is at the door? Should they
let them in? Once inside, what should your client show them? What if HMRC asks
to review private bank statements as part of their inspection? Similar rights
exist as with the enquiry regime.

Failure to let them in can attract penalties of £300 but, currently, these do
not look like being imposed very often. No one should reasonably argue that HMRC
are not absolutely right in wishing to carry out compliance checks. However,
there is clearly a difference in being deliberately obstructive and defending a
clients rights.

It is not unheard of for individual inspectors to operate under a seemingly
different set of rules than those laid out by their superiors at head office. So
why not prepare a helpsheet for clients informing them of the correct procedures
and an outline of their rights?

Once on the premises they have the right to inspect but not to search. A
client’s ignorance will not keep them safe. It is not a defence and failure to
correctly declare any information, no matter how innocent a mistake may be,
could still render your client guilty and facing penalties.

There is, of course, a new set of penalty rules now in operation, which is
expected to significantly increase the amount of penalties levied.

There is also recent information that suggest, as a result of the new act,
more than 2,000 people are now facing tax demands going back up to seven years,
along with punitive interest charges for late payments rights.

The impact of investigation on many of these individuals and their families
appears to be so severe that a firm of tax advisers tried to push legislative
scrutiny through the government that finds the Finance Act 2008 in breach of
human rights.

In a series of surveys conducted of those affected (between 1 and 5 June
2009), 57 said they could not meet the tax demand, even if they sold all of
their assets ­ including their family home. A further 29 could only settle by
selling or remortgaging their family home. A number of people face personal
bankruptcy. The related financial worry is causing mental health problems and
marital breakdown.

With such an enormous amount of pressure placed on professionals,
accountants, now more than ever, are at the forefront of not only working for
their clients, but also defending them. This is certainly an environment which
makes tax investigation insurance potentially far more valuable.
Kevin Igoe is head of claims at PFP