For tax advisers and inspectors, these are interesting times. On the one hand, harmonisation of powers across Revenue & Customs is creating heightened anxiety about the ability of individual inspectors to push the boundaries in terms of access to businesses premises, documents and information. On the other, there are clear signals of a willingness from the Revenue's leadership to try to understand the needs of tax practitioners and potentially work in closer harmony with them. The question is, how will these potentially conflicting trends play out?
No one challenges the Revenue's move to harmonise its powers across all taxes. This was on the cards from the moment the merger of the old Customs & Excise and the Inland Revenue was mooted. The united Revenue has also taken pains to consult on the matter. But with the consultation proposals now part of the Finance Bill, there are some concerns about how exactly the new powers will be exercised and the adequacy of safeguards for taxpayers.
Paul Aplin, a tax partner at AC Mole & Sons and chairman of the ICAEW's Tax Faculty, says some of the proposed new powers are 'increasingly intrusive'. For example, if the Finance Bill is passed without amendment, there will be new powers of entry to business premises for inspection of records and assets in relation to relatively routine direct tax matters (in addition to VAT and PAYE, as now). Although the power to conduct VAT and PAYE inspections at private homes, without having to go through a legal process, is being given up, Aplin still feels that overall 'for the business community it's a major shift in what the Revenue can do'.
One fear is that the Revenue could use its enhanced access powers to conduct 'fishing expeditions', looking for tax-raising opportunities without just cause. Best advice to businesses facing even routine Revenue visits is to involve their tax adviser, with inevitable associated costs.Real-time records
The new right of access in relation to direct taxes is seen as going hand-in-hand with the Revenue's growing interest in real-time inspection. 'The Revenue is wanting to get the ability more and more to audit on a real-time basis, looking at transactions as they happen,' says Chris Oates, head of tax risk management at Ernst & Young. 'For the accountancy profession, that creates an interesting tension.' This is because, however transactions are recorded during the year, when it comes to filing the year-end corporation tax return, adjustments may be made to change the previous interpretation. 'Just because the client writes in a book that expenditure is all tax deductible, that doesn't mean it won't be changed,' Oates says.
If the Revenue does get involved in real-time reviews, then tax advisers need to be prepared. 'We need to make sure clients have proper systems in place to capture information correctly,' Oates says. 'We need to make sure we are very close to our clients, so they get the right advice.'
Although there could be benefits for companies from real-time Revenue reviews in terms of gaining greater certainty about their tax position more quickly, this remains to be proved. 'The jury is probably out as to whether there's that much in it for corporates,' says Stephen Camm, head of PricewaterhouseCoopers' tax investigations business. 'There looks to be more in it for the Revenue.'Third party information
One major new power relates to access to information from third parties. 'From 2009, if the Finance Bill is passed in its current form, an accountant, bank or any third party will be required to provide not only documents, but also information,' says James Bullock, national head of litigation and regulatory law at law firm McGrigors. 'Accountants could, for example, be asked to explain documents or make value judgments.' The Revenue will need to gain approval for the issue of a notice from the new tax tribunal, but neither the taxpayer nor the recipient of the notice will be able to attend the hearing at which consent is granted. This new power is causing some anxiety. 'Seemingly an officer of the Revenue may enter any business premises if reasonably required for checking the tax position of a person,' says John Whiting, chairman of the Chartered Institute of Taxation's management of taxes sub-committee and PwC partner. 'Does that mean that if I have advised you on your tax, they can kick down the door of PwC? That seems to go a bit further than we thought.' Clarification is required.Aggressive or more determined?
Are the new powers indicative of a more aggressive Revenue approach? 'People often say the Revenue is more aggressive now, but I wouldn't put it like that,' says Camm. 'I would say it is more strategic and determined, and better at pointing limited resources at risks and using the powers it has more fully.' He refers to the increased use of the long-available s20(8A) notices, through which the Revenue gained information from banks about offshore account holders. 'There have been more s20(8A) notices in the last 18 months than in the past 18 years,' Camm says.
Whether the Revenue is more aggressive or not, tax advisers have had to beef up their systems to ensure they don't fall foul of its disclosure regime. 'We have a system for grading tax planning arrangements,' says Stephen Herring, senior tax partner at BDO Stoy Hayward. 'There are some planning proposals that we wouldn't advise on because we think they are overly aggressive. We are putting more emphasis on formalising and codifying our system so we can make sure we are adopting a consistent response.'Call for safeguards
Are the Revenue's powers overall becoming excessive? 'Nobody would argue with the Revenue having the right powers and strong powers to deal with crime,' says Camm. But he fears the new changes potentially give it 'very strong powers to deal with tax planning, perhaps routine tax structuring'. He warns: 'If the Revenue is not careful, it will be perceived to be very heavy-handed in using these powers. It needs to be seen to use them carefully, and then we may all learn to live with them.'
'There's clearly a balancing act here,' says Whiting. 'It (Revenue & Customs) needs to have some powers. If it is trying to conrol Mr Fraudster, it has to be able to bounce up unannounced and try to nail him. But it is not going to do that if your self-assessment return is a bit late, is it? Or if it's just doing a routine VAT visit, or a routine enquiry into corporation tax?'
Whiting feels the legislation needs a considerable amount of fleshing out in terms of supporting regulations and codes of conduct. The CIOT is also calling for the introduction of a taxpayers' charter, having already prepared a draft for discussion. 'We don't want it (the Revenue) to say it's too difficult to do,' Whiting says.
As the new powers bed down, E&Y's Oates believes there will be a need for 'constant vigilance' from the profession to check they aren't abused. 'There is no doubt that inevitably, as they push powers down to the inspectors to make decisions in terms of issuing penalty notices or visiting client premises etc, there is always the potential for individuals to try and push the boundaries.'
This could also be a good time to remind taxpayers - and professionals - that they should always check whether a Revenue request for information or access is valid. 'A lot of people, accountants included, will just answer the questions they get from the Revenue, without thinking whether there is a requirement to actually provide the answers,' Oates says. 'Unless people are vigilant about it, the Revenue will continue to be surprised at some of the information that is provided.' Oates knows this from experience, having worked for the Revenue earlier in his career in its special compliance office.Blossoming relationship?
There are signs of a melting of the recently somewhat icy relationship between tax authorities and agents. Aplin was heartened by the tone of the recent report into the role of tax intermediaries by the Organisation for Economic Cooperation and Development. The report concluded that tax intermediaries play a vital role in helping taxpayers understand and comply with their tax obligations. 'The great thing about the OECD study was that it gave us the opportunity to explain to them (tax authorities) what we actually do,' Aplin says. 'That convinced them that agents are a force for good and for better compliance, rather than non-compliance.'
Earlier this year Melanie Dawes, acting director general (business) at the Revenue, spent a day at Aplin's firm in Taunton. 'She listened, she asked lots of questions,' Aplin says. 'She was there while my colleagues were opening post and seeing incorrect PAYE codings and phoning the contact centres to try and get them corrected. Having someone from the Revenue come and spend a day in a relatively small practice is without precedent.'
Aplin believes this is an encouraging sign that the Revenue is serious about developing a more positive relationship with tax advisers. 'It's a relationship we have to explore carefully, because we have ethical and contractual obligations to clients that are not fully compatible with "cosying up" too much with the tax authorities,' he says. This is a view shared by Whiting. 'Though the Revenue would like us to be almost part of its agency, taking its part and policing the system - sorry, that's not my job,' he says. 'My job is to point out to you, my client, how you can best reduce your tax bill.'
Nevertheless, Aplin believes this is 'an incredibly interesting time' for the relationship between the profession and the tax authorities. 'There's a far better relationship to be had than in the past. It's worth putting effort into that relationship, but it's got to be one that works for both sides.'
Gloves off for the Revenue, p98
If the Finance Bill is passed unaltered, the Revenue's powers will be enhanced as follows:
• Access to business premises: new powers of entry to business premises for inspection of records and assets in relation to relatively routine direct tax matters (in addition to VAT and PAYE);
• In-year inspection: the Revenue will have the right to exercise its new powers of inspection before the filing of a return, for all taxes;
• Unannounced visits: where the Revenue considers there is significant risk of tax evasion, it will have the power to make unannounced visits to business premises without the need to obtain a search warrant from a court beforehand;
• Third party information: third parties will be required to provide information (not just documents) relevant to establish a taxpayer's position (with the consent of the taxpayer or the tribunal);
• Penalties: new tax-geared penalties for taxpayers who do not comply with information notices or allow an inspection;
• Class notices: the right to ask for documents in relation to a class of taxpayer (such as offshore bank account holders) will be extended to VAT.
12 June, London
17 September, Leeds
Understanding Revenue powers
This one-day conference outlines how the new Revenue & Customs powers will affect accountants and their clients.
It gives an overview of the new penalty rules for incorrect tax returns and it explains how to prepare for the new compliance landscape. It is an essential event for all practitioners who advise on tax.
For more information, visit www.cchpd.co.uk/tax.
To book a place, call 01635 588 898 or email.