When HMRC knocks II

HMRC business checks did continue to some extent over the past 18 months. However, between the Covid-19 safety measures and the fact that many businesses were closed, it is understandable why in-person checks reduced. Now as we step ‘blinking step into the sun’ and HMRC restarts in-person business checks, here is a guide on what to do when HMRC come knocking in real life.

There are two type of business checks: announced and unannounced. This article focuses on the former, although most of the points made apply equally to both. Unless otherwise stated, all legislation references are to the inspection powers contained in FA 2008, Sch 36.

Who is targeted?

Prevention is always better than cure, so the first thing to do is minimise the risk of a client having a business check in the first place. One way of doing this is ensuring that any ‘odd’ transactions or unusual activity are explained in the white space of the tax return. Areas that might be cause for concern include:

• Major fluctuations in income or profit ratios – when preparing to file tax returns for 2020-21, it is obvious that many businesses will be reporting much greater profits (due to reduced overheads for example) or increased losses (for obvious reasons). In normal years, these fluctuations are seen as risks and may be queried.
• Different results compared to others in the same industry – if all umbrella sellers report a loss but the client has a profit, it is worth looking into this. Are they the sole umbrella provider in a particularly rainy jurisdiction? Have they branched out into selling sunglasses as well?
• Unusual transactions – has the umbrella business recently bought a property that is unlikely to be used for the business, eg residential? If so, when preparing the tax return, an adviser should be checking the reason for this – are they providing accommodation to workers – and has the National Insurance been correctly calculated? Is the business going into property letting?
• Odd movement of funds – have there been any high value or high frequency transactions going to a new bank account? Or is there an account overseas?
• Cash businesses – HMRC tends to consider businesses that deal primarily in cash as higher risk than those that deal with cards, just because cash is not as easily traceable. There is not a lot the adviser can do about that in the whitespace, it is just something to keep in mind.

If there is anything that might raise alarm bells, it is worth asking the client the question, for professional curiosity if nothing more. When making a note in the white space, ensure to provide enough information to allay any concerns. Too much information can, however, lead to additional queries.

Before the business check

For announced visits, HMRC is required to give at least one week’s notice to the client of any proposed business check.

The check can be carried out at any time agreed to by the business owner (para 12) or at any reasonable time, provided that either the occupier has been given at least seven days’ notice of the time of the inspection (in writing or otherwise), or the inspection is being carried out with the agreement of ‘an authorised officer’ of HMRC. The latter is of course an unannounced visit.

If the time suggested is inconvenient, for example at 1pm when, say, a restaurant client expects a lunchtime rush, it is advisable to ask HMRC to change the time to better suit the client. Similarly, if the adviser is unavailable, it is better to suggest alternative times. There are no penalties for suggesting alternative times. Doing this continuously or attempting to put the check off for a long period of time, without any obvious reason, will probably be considered obstruction and HMRC is likely then to go to tribunal for authorisation.

Under the inspection powers (Part 2, Sch 36), HMRC officers are permitted to enter the person’s business premises and inspect the buildings, the business assets on the premises and business documents on the premises (para 10). Where a person works from home, HMRC should restrict the inspection only to the area used for work. An inspection can
also be used by HMRC to value the premises (para 12A). This may be, for example, when they consider the company might become insolvent with significant tax debts, or when they want to check a fixed asset addition has been correctly valued for capital allowances.

It may be useful for the adviser to be on hand to guide the client and handle HMRC. Many clients are so busy running their business, they do not have the time or inclination to deal with HMRC themselves. In addition, advisers often know the business better than the clients themselves and can be better placed to respond. Beware, however, of providing too much information.

The officer may provide in advance a list of the information they are looking for and it is useful to collate the documents ahead of time to streamline the check. In relation to VAT checks, the officers will want to see VAT records and day-to-day business records such as Z-readings and EpoS reports, invoices and management accounts. They may also request access to accounting software. For PAYE checks, the officer will likely focus on payroll records (and try to estimate the number of employees).

If relevant, officers will be looking at any new plant and machinery and checking that it has been declared in the
annual accounts or that the value declared in the accounts is reasonable.

When information is requested in advance, if possible, it is worth reviewing it ahead of time to ensure all is in order.
Discuss with the client any issues that might come up. If there is anything that might be contentious, it is possible to refuse to provide the information. This risks a penalty (see below) but buys the client more time.

If the business is in professional services for example, and if agreeable to HMRC, it is possible to arrange to have all the information available at the adviser’s office to minimise disruption to the business.

For unannounced visits, the client will not be aware that HMRC is going to turn up. This could be because the original letter to the taxpayer has gone astray or because the intention is for the visit to be a surprise.

During the check

The following are some tips on what the adviser and client should do.

Check ID

There have been known to be fraudulent HMRC checks so crooks can enter businesses and identify items of value. Check the badges are real (call HMRC to check if in doubt) and that the names correspond to the people named on the notice. In theory, it is possible to deny entry to those not named on the notice, but this may be more hassle than it is worth unless none of the names match up.

Be courteous

Keeping cool and rational will make the process a lot smoother for everyone. Make the officers a cup of tea and when they are reviewing paperwork, find them a place to sit – although ensure this is in a place where they are unlikely to be disturbed or overhear (and misunderstand) ‘water cooler’ comments. A throwaway remark about the financial woes of a company could have them reaching unwanted and incorrect conclusions far too quickly.

Take notes

Throughout the check, take notes of what the officers are looking at and the questions they ask. If possible, the adviser should shadow HMRC to ensure it is an inspection and not a search and of course to answer any relevant questions. Ensure that whoever is in close contact with the HMRC officers has been properly briefed about what they are permitted to discuss.

Take copies

If HMRC wishes to take any documentation, take a copy of it and ask for a receipt. The receipt is particularly important, even if HMRC is ‘just’ taking copies of old Z-readings. For example, one of our clients found out that the EpoS machine daily summaries did not reconcile to the weekly ones, even though both were produced by the same machine. This resulted in an overpayment to HMRC, though in other cases, it may result in the opposite. Thus, knowing what HMRC has retained means that if an issue is found at a later date, it can be traced back to the relevant transactions.

Additional information

It is important to keep HMRC on track and ensure that if the officer asks for additional information it is permitted by legislation – is it reasonably required, is it in the client’s possession or power? For example, if HMRC requests the client’s partner’s bank statements, even if those statements are in the office, they do not technically belong to the
client. Also consider whether it is relevant to the company’s tax position. For further detail on HMRC’s information
powers, see my article ‘Too much information’ (Taxation, 12 September 2019, page 16).

If in doubt, ask the officers to make a list of the additional information and agree to send it at a later date, after having a chance to review it. This is one of the benefits of arranging to meet HMRC outside business premises. It is better to state doubts and refusal immediately, than trying to recall documents already provided. Once information has been seen by HMRC it is very unlikely to be forgotten, particularly if recalled.

A few other points to bear in mind during a business check include:

• The officer can watch a member of staff cashing up but not check the till themselves. They cannot demand for the cashing up to be carried out – which is why they normally turn up towards the close of business.
• The powers permit the officers to inspect, not search. They cannot look into filing cabinets or demand drawers are opened, but if a file is left open on their desk, they can look at that.
• A business check is not an interrogation. HMRC should not take staff aside to ask questions and if at all possible, unneeded staff should be requested to leave once their tasks are done, to prevent this from happening.
• If the client has a warehouse, HMRC would be permitted to go to there and look around – counting visible stock for example. They would not be permitted to take products off the shelves and dig through to the back of each shelf.

There are some useful examples of what HMRC are and are not permitted to do in its Compliance Handbook at para CH21560 (tinyurl.com/cn7dp64v).

What not to do

The client should not under any circumstances, conceal or destroy documents that they know have been requested by HMRC. This can amount to a criminal offence, and would therefore make a bad situation worse.

Taxpayer safeguards

If a client considers there is a good reason for HMRC not to attend the premises, they can deny the officers entry. Where the notice of inspection has not been authorised by the tribunal, there will not be any repercussions, and the notice of inspection will specify whether it has been so approved.

This is the case whether the business check is announced or unannounced.

If denied entry, the officers are then likely to obtain tribunal authorisation. At this point, if entry is denied, there is an immediate fine of £300, and then a further £60 fine for each day the obstruction continues (paras 39 and 40).

The usual safeguards in relation to information requests apply throughout the check – the documents and information requested must be in the taxpayer’s possession or power to obtain, they must be relevant to the taxpayer’s past, present or future tax position and the request must be reasonable.

Afterwards

After the visit, HMRC will write to the taxpayer and their agent summarising the result of their checks. If the case officer has everything they need, they may raise an assessment, against which the client can appeal if necessary. Alternatively, they will provide a list of additional information required. Any further information requests should be reviewed in light of the information powers contained in Sch 36.

The adviser should review HMRC’s notes of the check carefully to see if they match their and the client’s notes. Make a note of any discrepancies and bring them to HMRC’s attention.

If anything occurs to the adviser after the check where HMRC may have got the wrong end of the stick, make a note of this and bring it to HMRC’s attention if the concerns prove relevant.

If the adviser was unaware of the check until after the event, they can request a copy of HMRC’s notes of the check together with a list of any documents or items HMRC took away. It is worth reviewing these to consider what HMRC is looking for and discuss with the client whether there are any disclosures to be made.

As always, the key to investigations is keeping the dialogue between the adviser, the client and HMRC open. A proactive approach will streamline the process and settle the matter quicker. Obstructing HMRC without a reasonable excuse will result in a more drawn-out process, with higher penalties.

This article by Mala Kapacee was originally published in Taxation Magazine on 24 August 2021.

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