HMRC are launching their new Section 36 (FA 2008) compliance checks. HMRC Officers can now inspect any business to check the “tax position” which means past, present and future liabilities to Income Tax, PAYE, VAT ie any tax! The HMRC officer can enter any business premises, look at the assets, records and any document they wish. The old safety net of an enquiry window has effectively been abolished.
Now for the really scary bit … only 7 days notice is required of an HMRC visit and that can be verbal or in writing. There is no appeal. Penalties for obstruction are £300 and then £60 per day.
Think about it. This is a real time inspection so there is no opportunity to put things right in the records at the year end and so it is crucial that transactions are properly recorded eg drawings, dividends, salary etc. Also, how are leases, HP and entertaining recorded? Inadequate business records will inevitably lead to a discovery assessment. Can small businesses get their records all in order and reviewed by their accountant in just 7 days? Will they realise the significance of the visit??
Tax Tribunals will become more commonplace. Once an assessment is raised we can then appeal but new procedures must be followed under Section 54. We can ask for a review and once this is received we have 30 days to accept or decline the HMRC offer. This will be a very legalistic system. Penalties will be much higher in future and it is expected that many enquiries will be settled with an additional penalty of 30% to 70% of the tax underpaid.
Enquiry Selection criteria will also change as random enquiries have been abolished. However, a business may be selected for enquiry due to any reasons such as late Returns, change in accounting date, benchmarking (iXBRL), change in gross margin, using standard estimates such as £104 or £208 (multiple of 52 weeks) etc. It is essential that the “white space“ on Returns is used to explain any changes in the business.
Businesses must now be very careful with any estimates for private use of phone, motor, subsistence etc. The use of home and own consumption figures must be very accurately calculated. Details must be obtained to back up any estimate and they must clearly vary, year on year. Any significant analytical review points that suggest a change in the business model must be reported on the tax returns.
Accountants must become really proactive and tell clients which records they must keep right up to date at all times.
Accountants must visit clients immediately they receive a Section 36 Notice of an HMRC visit and check everything is in order.
This is a massive issue for us all businesses owners.
Finally, it should go without saying that anyone who receives a notice of a visit from HMRC should contact their usual Accountant immediately!
Jonathan Crowther FCA