The Debate: Revenue inquiries and SMEs?

Inspector too-slow must go

By Andrew Hubbard

In a system where businesses are solely responsible for determining their own tax liabilities, some form of external validation is inevitable.

Nobody can object if people who deliberately evade tax are caught and punished. So why the unease among businesses over the way that the investigation process operates?

First is the matter of degree. In my experience the system is based on a flawed and over-simplistic assumption – if things are not right they must be wrong. There is a huge difference between deliberate evasion, lack of care, muddle and innocent error – but the investigation process does not appear to recognise this.

It is a matter of tone. Some inspectors are pragmatic and non-judgemental, but others still give the impression that any deviation from 100% accuracy is evidence of guilt.

Then there is the sheer length of enquiries. Some are dealt with efficiently, which others drift for years unless both sides keep the process moving forward. Contrast this with the due diligence process, where a detailed report can be produced in days.

Due diligence and tax investigations are not identical, but are they really so different that the same approach could not be adopted in both?

Surely, it is reasonable for an inspector be in a position to state, after several days’ intensive review, that either there are grounds for further enquires, or that no material irregularities have been found. If so, the enquiry should be closed.

There are too many cases where the provision of information only leads to endless requests for more. There is a suspicion that the inspector’s mentality is one of continuing to ask for information in the hope that something incriminating will turn up. This can be an extremely corrosive process.

Of course, a sceptical frame of mind is necessary. But an approach where the inspector makes a swift judgement on whether there are grounds for pursuing the enquiry would make a huge difference to the efficacy of the process. Also, the Revenue would have more time to go after businesses that really are falling foul of the law.

  • Andrew Hubbard is director of taxation at Tenon

We’re only doing our job
By Dave Hartnett Both the Exchequer and the public expect everyone to pay their proper share of taxes and rightly expect the Revenue to check that this happens.

Tax evasion robs the country of funds to support vital public services, such as health and education, and redistributes the tax burden unfairly on a do-it-yourself basis undermining honest citizens who meet their tax obligations in full. Our twin-track approach to ensuring compliance involves helping those having difficulty meeting their obligations, and dealing effectively with deliberate non-compliance.

Our approach to enquiries is largely based on an assessment of the risks of non-compliance. Where we can verify declared income from third-party sources – such as employment income and benefits – the risk is low. Where there is no independent verification, the risks might well be higher.

It is, therefore, inevitable that there are enquiries into business tax returns and there is evidence that returns from business are more than twice as likely to understate liability than other self-assessment taxpayers.

Our enquiries show that over 70% of all full enquiries into business tax returns identify that tax has been understated.

Whilst enquiries are necessary we understand that they are seldom welcomed. We need to get at the true picture but recognise that those under enquiry have businesses to run and lives to lead. So we want to get to the facts as quickly and painlessly as we can. We publish clear codes of practice so that those whose returns are under enquiry know the standards they should expect and what to do if they feel that an enquiry is not being conducted properly. Where any enquiry shows that the return is correct, or that any understatement for that year is not a consequence of fraud or negligence, any additional accountancy costs can be deducted in arriving at taxable profits.

Enquiries are a very important part of the work we do in protecting honest businesses from having to compete against those who don’t pay their fair share of tax. It is our aim to conduct them with impartiality, and due regard to the costs to business.

  • Dave Hartnett is deputy chairman of the Inland Revenue.

Related reading