A visit from the tax man: Preparing for an HMRC investigation
Be prepared: HM Revenue & Customs can visit anytime
If you’re an entrepreneur working from home, it’s a good idea to keep your house in order tax-wise: new legislation relating to inspection means that you can expect a visit from the tax man at any time.
HM Revenue & Custom powers are to be extended to allow inspectors to enter any business premises – unannounced – to check the ‘tax position’ of any individual or company. Impromptu inspections can be carried out whether a tax return has been made or not, and can take place within a return period that has not yet closed.
Business people and sole traders who claim expenses for ‘use of home as an office’ should be aware HMRC inspectors even have the right to enter their home to check on business records.
The legislative changes, which come into effect from April 1, 2009, are part of HMRC’s continuing programme to better co-ordinate inspection work across corporation tax, VAT and PAYE. The new rules aim to modernise and align statute and practice across the whole range of taxes and duties.
Appeals against notices are much more difficult under the new regime. You cannot appeal a request for statutory records, for instance, as HMRC has an absolute right of access to statutory records.
The new powers also make it easier for HMRC to carry out systems audits because taxpayers are obliged to provide reasonable assistance to HMRC when looking at computer records for the purpose of checking a tax position.
Much of the discretion formerly exercised by HMRC in not charging penalties has been removed by these legislative changes, and HMRC can use its new powers to charge penalties in relation to any tax position which gets adjusted where the taxpayer cannot show that reasonable care was taken in making the return.
The new legislation provides statutory bandings for penalties too, and penalties could now be chargeable as a result of technical changes, such as the removal of group relief from the penalty calculation and the introduction of cash penalties for adjustments to losses, as well as for timing differences.
The new penalty regime for corporation tax, VAT and PAYE applies to return periods starting after 31 March 2008 where the filing date is after 31 March 2009. Other taxes will be affected from 1 April 2010.
Further changes to HMRC powers are expected to be confirmed in the 2009 Budget. These deal with:
… Penalties for late filing
… Compliance checks regime for the ‘other’ taxes
… Interest on overdue taxes
… Payments, repayments and debt