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John M Taylor & Co | Accountants Paisley/Taxation/Vat Returns/Business Start Ups/Sage/Payroll/Bookkeeping

HMRC's new powers


On 1 April 2009 HM Revenue & Customs (HMRC) launched their new ‘Compliance Checks' regime which marks a significant change from the way it has previously checked the accuracy of taxpayers affairs. HMRC believe that the new rules provide a more efficient and flexible framework in which checks should be more proportionate to the risks identified.  It is also anticipated that such checks should take less time to carry out, thus reducing the burden both on taxpayers and their compliance teams. Time will tell!

From 1 April 2009 HMRC has a comprehensive tool kit of safeguards and powers which cover the main taxes including VAT, Income Tax, PAYE, Corporation Tax, Capital Gains Tax and the Construction Industry Scheme. As part of this toolkit HMRC have the power to visit business premises, inspect the premises, business assets and of course the business records themselves. Although this may sound alarming it does not give HMRC the right to enter a taxpayer's home unless they operate their business from home in which case HMRC have the right to inspect the areas used for business purposes, and only those areas unless you give permission for them to inspect other areas of your home.

HMRC inspections can either be announced or unannounced. In most cases at least seven days advance warning will be given of their intention to inspect a business premises. However, where deemed necessary, HMRC may visit unannounced provided it is approved by an authorised officer. If an inspection notice has been received there is no right of appeal against it. Should a taxpayer refuse entry to their premises, HMRC can seek authority to apply monetary penalties on the taxpayer for obstructing the course of their inspection and force them to permit entry.

Whilst the possibility of unannounced visits may provoke some anxiety there is no reason to be overly concerned. In most cases advance warning will be given as unannounced visits are typically reserved for cases where HMRC suspect fraud.

How do HMRC decide who to check?
Taxpayers are usually selected for compliance checks in one of two ways:-
Random selection – every year HMRC select a certain percentage of all taxpayers for enquiry through random selection.

  • Risk Analysis - Given that HMRC have access to a wide range of information about businesses in each sector they can compare businesses and their trading figures. For example, gross profit percentages can vary between businesses but it is reasonable to expect similar businesses to achieve similar margins within a certain tolerance range. If one stands out with a particularly low gross profit margin then it may be picked out by HMRC's risk analysis as a potential case for enquiry.
  • HMRC also maintain a sophisticated system which effectively manages a wide variety of information from various sources. Each tax office has access to this central system and the information it contains. Sources of information include:- auctioneers returns, entertainers, land and property transactions, licences and royalties, rent handled by property management companies, pensions, benefit payments, stockbroker returns, payments by insurance companies, private housing values plus many more.
  • All tax offices have Research, Intelligence and Analysis Teams (RIATs) whose only function to gather information according to their current focus of enquiry e.g. bed and breakfasts, rental properties etc. As they have no other responsibilities they can undertake long term reviews and investigative work. Common examples include reviewing the yellow pages to ensure the businesses are registered, checking number plates at taxi ranks, checking no vacancy signs at bed and breakfasts, checking planning applications etc.
  • Occasionally, HMRC may receive tips offs regarding certain business from members of the public which may lead to them opening an enquiry.

What will these Compliance Checks entail?
As compliance checks are aimed at ensuring that employers are acting in accordance with the law in relation to the various tax regimes. As a result a compliance check will likely involved HMRC checking that you:-

  • operate pay as you earn (PAYE) and pay the correct amount of Income tax and National Insurance contributions (NICs).
  • provide for and record benefits and expenses for your employees or subcontractors
  • operate the Construction Industry Scheme (if relevant)
  • operate the national minimum wage and calculate, pay and record statutory payments correctly.
  • Checking to make sure that your sales records match up to your sales declared on your VAT returns.
  • Claim business expenses only against your income and adjust correctly for expenses that have mixed business and private use.
  • Correctly record all transactions in your books and records without any omissions.

Where a business uses consultants or other self employed individuals in the course of their trade or profession HMRC will also likely check that you have considered the employment status of each individual and that they agree with your conclusions.
What is different about these Compliance Checks is that unlike previous inspections they don't necessarily focus on one tax. HMRC will typically carry out compliance checks focusing on PAYE, VAT and Corporation Tax/Income Tax as well as Capital Gains Tax where they are aware that there have been unreported asset disposals. It is important that taxpayers are aware of the possibility of a compliance check and what these checks actually entail.

Further Details
HMRC have published a range of fact sheets regarding Compliance checks so that taxpayers have an idea what to expect should they be selected for a compliance check. These factsheets are available at http://www.hmrc.gov.uk/compliance/factsheets.htm
We strongly recommend that all taxpayers review their record keeping to determine any areas of weakness that need to be looked at. If you require any assistance in this process please give us a call.

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