HMRC Tax Investigations officials are entitled to investigate a tax return after the usual one-year limit has passed if their discovery assessment letter meets one of two tests, according to a recent Court of Appeal ruling that reaffirms a long-established power for the taxman.

Derek Hankinson v HM Revenue & Customs focused on whether HMRC used a section section 29 of the Taxes Management Act 1970 correctly when it investigated the taxpayer’s Self Assessment return for the 1998-99 tax year – six years after it was filed.

In 2005 HMRC assessed Hankinson’s tax return for 1998-99 and concluded he owed £30m in income tax and capital gains tax for the year because he was still a resident in the UK for tax purposes, despite having moved to the Netherlands.

Hankinson lost appeals against HMRC’s assessment of his tax liabilities in the first-tier and upper-tier tribunals.

In the Court of Appeal Hankinson challenged HMRC’s use of section 29 that was used to investigate his tax return for 1998-99.

HMRC usually has one year after a Self Assessment tax return is delivered to challenge and investigate it.

Under section 29 of the Taxes Management Act 1970 (at the time of the case), however, HMRC can investigate tax returns after the one-year window by sending a discovery assessment letter if one of two conditions apply. Firstly, the full and accurate facts were not available to HMRC officers due to incomplete disclosure, negligence or fraudulent behaviour by the taxpayer or agents; secondly the HMRC officer completing an enquiry could not have reasonably been expected to have been aware of the loss of tax.

In a judgment published in December last year Lord Justice Lewison concluded that HMRC’s use of section 29 was valid.

HMRC is to change its Pay As You Earn (PAYE) system to detect owed deductions on a monthly basis, rather than yearly, in a bid to make the system easier for employers.

Using Real Time Information (RTI), tax and deductions will be transmitted to HMRC each time an employee is paid, meaning employers will no long be required to provide information using forms P35 and P14 after the year end or to send p45/46 when employees start or leave employment.

The phased introduction of RTI will begin in April 2012 with an initial pilot. HMRC hope to increase the number of employers joining RTI during 2012-13 following the scheme’s success.

However some advisors and employers are being a tad nieve about the introduction of this, believing all they read. Please do not fall into this trap, the number of professional bodies that are urging HMRC to delay its introduction is huge but HMRC are beligerantly pushing ahead, which spells a recipe for disaster. Still not convinced, well don’t forget there are now in year business record checks and potential for in year penalties, to encourage you. If you need advice on this and more importantly a review of what you are doing to make sure you can handle this, call us today on 0800 917 9176

A new HMRC unit, the Offshore Co-ordination Unit (OCU), based in Birmingham, has written to tax advisers as part of its ongoing attack on offshore tax evasion. The unit recently sent out letters where HMRC believes that a tax adviser has clients who have, or have had, offshore bank accounts or investments. This is believed to be part of HMRC’s ongoing project into account-holders with HSBC in Geneva, following the receipt of stolen data containing details of UK taxpayers with accounts there. Further letters will be sent out in the coming weeks and months, as HMRC work their way through the information held.

The strongly-worded letters give tax advisers advance warning that HMRC will be contacting their clients (within a short time period). The letters indicate that the client will be given an opportunity to make a full disclosure in advance of HMRC starting an investigation into their tax affairs.

Advisers should treat any such letter seriously, and immediately contact their client. Those who have undisclosed liabilities need to act quickly, to prevent an intrusive HMRC investigation, or, potentially, criminal proceedings. Caution should be observed where the client claims to be compliant in relation to the offshore account to ensure that there are not any undeclared liabilities.

PAYE Tax Codes continue to be a problem. The upper limit for collecting tax debts via a taxpayer’s PAYE code has been increased from £2,000 to £3,000, by regulations that took effect from 20 July 2011. However, it appears that these regulations do not work in quite the fashion that HMRC thought they would, which is a worrying development.

The PAYE underpayments shown on forms P800 for 2010/11 will automatically be coded out in a taxpayer’s 2012/13 PAYE code, where the debt is less than £3,000. However, the new upper limit of £3,000 does not apply to balancing payments arising from a self-assessment for 2010/11. This is because the tax debt regulations were drafted too late to amend the programming for the 2010/11 self-assessment tax returns, brilliant isn’t it?

Tax underpayments arising from self-assessment returns for 2010/11 will only be automatically included in a PAYE code for 2012/13, where the amount owing is less than £2,000, and the return is submitted by 30 December 2011. However, HMRC is trying to be flexible on this point and will allow balancing payments of between £2,000 and £3,000 to be coded out if you request this treatment. To arrange this facility you need to contact HMRC before 30 December 2011

Note that if you have already made arrangements to pay the tax due by instalments under a payment plan, those arrangements cannot be overridden by a coding-out request – TAX DOES HAVE TO BE TAXING

PAYE tax code underpayments as the result of tax code issues are now becoming common place and once again this year is no different many people will be receiving end of year PAYE tax demands from HMRC for underpaid taxes emanating from HMRC’s reconciliation of its PAYE “backlog.”

But there could be light on the horizon in the shape of Extra Statutory Concession (ESC) A19. This states that HMRC should not persue an underpayment if it has not followed its procedures correctly.

In English this means that HMRC should not claim tax back if it has failed to properly use information supplied by a taxpayer, their employer or the Department for Work and Pensions.

The Telegraph quotes Jeff Taylor, editor of The Economic Voice:

“This concession applies to income tax and capital gains tax and allows someone to ask to have the tax debt remain uncollected as long as two important circumstances exist.

The first is that HMRC must have been in receipt of all the relevant information and have used it within 12 months from the end of the tax year concerned.

The second is that HMRC must be satisfied that the taxpayer had a ‘reasonable’ belief that their tax affairs were in order.”

However, a word of warning, HMRC being there usual helpful self have removed any detail of this Concession from their website and replaced it with the following, “This text has been withheld because of exemptions in the Freedom of Information Act 2000″, beggars belief!

During a business records check (BRC) an HMRC officer will view the business records of the current accounting period and assess whether those records are ‘adequate’. In this context ‘adequate’ should mean the records are sufficient to compile accurate tax and VAT returns, but the BRC brief implies the HMRC officer will be looking for the following errors in the business records:

• Understated sales;
• Overstated expenses; and
• Private expenditure claimed as business costs.

If the HMRC officer concludes the business has failed to keep adequate records he can impose a penalty of up to £3,000.

HMRC tested their BRC programme between 4 April and 15 July 2011, during which up to 800 businesses were advised about their records, but no penalties were levied. However, since mid September HMRC has expanded the BRC programme and is increasing the number of HMRC officers involved from 30 to 120. HMRC plan to conduct approximately 12,000 BRC visits before 1 April 2012, and a further 20,000 BRC visits in 2012/13. On those numbers at least one of your clients is likely to be subject to a BRC in the next 18 months.

Business who were visited in the first stage of the BRC programme, and who were judged to have issues with their record keeping, are receiving follow-up letters from HMRC requesting a repeat visit; ‘to check that the appropriate improvements have been made.’ Remember the records under inspection are those raw documents that have not yet been sorted or vetted by someone who understands exactly which expenses can be claimed for tax purpose

In this second stage of the BRC programme HMRC is prepared to impose penalties for serious record keeping failures. However, certain professional bodies, including myself are not convinced of the legal basis for charging such penalties, before the tax return has been submitted.