TAX: INVESTIGATIONS - Taxmen in black

It’s six o’clock in the morning and there’s a fierce banging on the door. A sleepy-eyed guard sits upright in his chair, tips back his peaked cap and sees a host of grainy faces, noses squashed against the frosted glass.

A voice shouts: ‘Open up.’ Keys in hand, he moves warily to the door.

There’s nothing in the overnight sheet about early morning visitors. But closer inspection of the unexpected arrival reveals an impressive court order that can’t be ignored.

The hand holding the piece of paper may belong to a policeman but the swathe of bodies behind him are investigations officers from the Inland Revenue, itching to search the accountancy firm’s files. It’s a routine Section 20c raid, conducted with the backing of a judge and the Taxes Management Act 1970. A tough day beckons for all concerned.

Few taxpayers realise the full extent of the Revenue’s investigation powers until they wake up to a knock at the door while their accountants get an unwelcome dawn call. Only then does the true extent of the department’s right to search and seize become frighteningly clear.

Ever-increasing powers

The Revenue is quick to deny the much-touted urban myth that it has greater powers than the police when it comes to searching suspects. But it also brags that it now has an extra 2,000 officers assigned to investigations, thanks to Spend to Save. The initiative, launched by former chancellor Kenneth Clarke and designed to yield an extra #6.7bn from tax compliance, has enabled the department to offer competitive salaries to anti-avoidance experts keen to fill the public purse. And, contrary to earlier fears, there has been a rush of accountants eager to serve.

The Revenue mantra repeats the often used excuse that the law-abiding public expects it to ensure that anyone suspected of tax dodging is caught, punished and made to pay up.

Nobody can complain at a fair cop. But last year Group A accountancy practice Kingston Smith found itself on the wrong end of the unwarranted attentions of a Revenue investigation squad. The draining, day-long raid – it was only wound up at 9pm – continued relentlessly, even though the firm had managed to secure an emergency High Court injunction. The high-profile special compliance unit seized computers and documents from Kingston Smith’s Croydon and City offices. Staff were searched, humiliatingly, on the stairs.

The bungled raid, superficially targeting one high-profile client, resulted in the Revenue’s deputy chairman, Steve Matheson, being forced to apologise in the High Court for his staff’s behaviour.

Kingston Smith senior partner Michael Snyder was furious. He recalls: ‘It was outrageous. They found what they wanted and then went on a fishing expedition. They saw one or two names they recognised, but had no connection with their original search, and started digging out files.’

Surprisingly, this debacle – for which the firm has just won #28,000 in costs – was not the Revenue’s investigative low-point of the past 12 months.

This dubious honour was reserved for Michael Allcock, the maverick ‘ghostbuster’ of the special compliance office, who was convicted for taking bribes in return for favourable tax treatment.

Despite the ever-present doubts about this Essex man’s intellectual ability, his unerring ability to swell Treasury coffers by anything up to a staggering #20m a year allowed him to escape sterner examination for several years.

Allcock’s bosses largely ignored his shenanigans, which included jetting off for exotic holidays paid for by foreign nationals under investigation and accepting the services of a prostitute.

The rogue inspector’s inevitable imprisonment led to calls for major changes to the way the Revenue runs its most important cases. The department has acted publicly by banning paid-for trips abroad, tightening up on investigation rules and introducing new codes of practice. But the inbred culture of secrecy means we are unlikely ever to know the full extent of the remedial action. And tax experts remain deeply unsatisfied by what they do know.

Despite repeated enquiries, the Allcock affair appears to have been sealed away in the ‘file closed’ cabinet. Former Revenue chairman Sir Anthony Battishill glossed over it when he appeared before a parliamentary committee earlier this year, insisting that, as far as the Revenue was concerned, it was an internal matter and the situation had already been dealt with.

John Gwyer, head of tax investigations at Levy Gee and a former senior Revenue investigator, is one of many practitioners who remain far from convinced by the explanations so far. Gwyer has acted on behalf of former Polly Peck tycoon Asil Nadir and says: ‘They claim it’s an internal matter but it would reassure the profession and taxpayers if the Revenue revealed what stage that internal investigation had reached. With an unprecedented scandal such as Allcock, the taxpayer is entitled to know whether this was the full extent of the corruption.’

Communication problems

But officials remain uncommunicative, citing staff confidentiality as the reason for their refusal to reveal the fate of the other employees facing disciplinary action over the affair.

Communication has never exactly been a Revenue strong point but the sheer scale of the public relations disaster over the past 12 months is unprecedented.

Confidence in the department as an investigative body plunged to an all-time low after a series of critical rulings by the special commissioners.

Last October, investigators were branded ‘heavy-handed and wholly unreasonable’ after wrongly demanding #20,000 from the owners of Farthings Steak House in Southend. Special commissioner Thomas Everett described it as a ‘vindictive’ campaign against the owners and their accountant. Traditionally, the Revenue has enjoyed a high degree of success with the commissioners, but even they have tired of the department’s investigative tactics.

You might think the situation could hardly get any worse, but the future doesn’t look good. The new tax collection system and friendly cartoon face of self-assessment brings with it the random audit, a new form of investigation that has increased suspicion among tax professionals, although much of this can be blamed on fear of the unknown.

Revenue figures reveal that 45,000 taxpayers will have their 1996/7 tax affairs investigated, with up to 8,000 already selected by computer. Many will never know that anything has happened: others will feel the full weight of the beefed-up enquiry machine. The Revenue insists those with nothing to hide have nothing to fear. Taxpayers and accountants are not so sure.

There is very little known about the background, experience or training of the hordes of new inspectors. Instead, for a detailed portrait of the Revenue investigator, we must rely on those that have already left the fold – not a pretty picture.

Tax consultant with Fox Associates Paul Charlwood warns that inspectors live in a different world, enveloped in a ‘fog of ignorance’, to tax professionals and businessmen. ‘Inspectors always used to say, and still do, that they are fully aware of commercial realities, but this is rarely true. Few inspectors have run a business of any sort, fewer still would succeed.

They will certainly not be experts in the client’s business, whatever it is.’

A poacher-turned-gamekeeper who quit the Revenue in 1984, Charlwood argues that Section 20 notices are a powerful weapon but ‘a weapon’s effectiveness depends on skilled hands and many of Her Majesty’s inspectors do not have skilled hands’.

Pressure on investigators

Steve Besford, a tax investigations specialist with Moores Rowland and another Revenue alumnus, warns of the dangers of the new powers. He claims that piling on the pressure to produce results will force inspectors to get results. ‘Old habits die hard,’ he warns. ‘Inspectors will be looking to get a result from every enquiry, even with cases that are randomly selected.’

Others fear the department will use the cloak of random audits – where no reason has to be given for opening an investigation – to delve into cases that have previously been out of touch.

‘Self-assessment provides the opportunity to get into cases without the Revenue having to justify its actions,’ Besford adds.

John Andrews, president of the Chartered Institute of Taxation, notes: ‘It would only take one inspector in one district to say that they have already marked someone for review in such a way to throw the system into disrepute.’

Again, the Revenue rejects such ‘scaremongering’ out of hand. But few professionals are convinced.

In a bid to stifle the burgeoning rumour mill, the embattled tax collectors last month released a special edition of Tax Bulletin, the Revenue’s technical information service for practitioners, detailing their ‘neutral, fact-finding and non-confrontational’ approach to self-assessment enquiries.

To deny that the system is naturally, if not wholly, adversarial belies the national distrust of state-run authorities, a sentiment that the actions of tax inspectors have only confirmed. Even so, Besford believes confrontation can be avoided – but only if tax agents and the Revenue work together at the front line.

‘A lot of the profession will rely on our good working relationships with the district offices,’ he says. ‘It is vital that we get on well with our local inspectors and a lot of firms who have regular dealings with the Revenue at that level will feel they can rely on that continuing.’

Efficiency drives

Self-assessment and Spend to Save have prompted a massive efficiency drive within the department and a rethink of how best to improve the tax take.

For big business, it is placing an ever greater emphasis on co-ordinated case working where its inspectors, auditors and specialists work together to streamline their attack on a particular sector.

Co-ordinated case working teams are using their increased resources to demand detailed investigations of several different tax areas for one year, calling in the Contributions Agency and Customs & Excise when national insurance or VAT queries come up.

So, instead of one investigation a year focused on a single area of tax, some major PLCs are faced with the daunting prospect of a multi-layered, multi-agency trawl through their records.

The huge change in Revenue procedure is forcing the investigations departments of the major firms to evolve a new response to match. Increasingly, accountants want to stand between their clients and the Revenue and perform the investigation themselves.

Chris Isaacs, director of VAT investigations at Price Waterhouse, reveals that the tax trackers are happy for private-sector accountants to do the work for them – with clients bearing the cost rather than the state.

Firms present the Revenue with a ‘warts and all’ report on a company’s tax affairs, which allows the co-ordinated case working team to move on to another target.

‘We are seeing a much more determined approach,’ says Isaacs, adding that Customs, as well as the other tax collectors, appear at last to be learning the lesson that confrontation is not the best, or most productive, approach. In the cases that we have dealt with so far, Customs has shown a high degree of consideration.’ With any luck, some of this may rub off on the Revenue.

But the case working teams are only involved in companies with multimillion-pound turnovers, which leaves most smaller fry to the tender ministrations of an unreconstructed Revenue – unreconstructed, that is, as far as the public and profession can tell.

It is difficult to see how good working relationships can really be established, if the Revenue’s only comment when things go badly wrong is ‘no comment’.

OPPRESSIVE TACTICS

A blatant Inland Revenue abuse of power was curbed last year after its tactics were condemned as ‘unfair and oppressive’ by the commissioners.

Fishing expeditions based on loosely worded third-party notices were all but outlawed after the court ruled that the Revenue had sought every scrap of information possible during a raid on Northern Bank.

In future, notices must refer to actual, rather than possible, documents.