Concern at tax man's new intervention

A small business pressure group has given a 'mixed response' to a series of new compliance approaches announced by HM Revenue & Customs (HMRC) this week.

HMRC announced it would trial six new approaches aimed at providing a 'lighter touch' for tax payers. The Professional Contractors Group (PCG) has welcomed HMRC's aim to reduce bureaucracy and its willingness to consult stakeholders, but has criticised one of the proposals which would allow tax inspectors to change people's tax returns without having to justify their action.

According to the group, this would leave the taxpayer to prove that they do not owe the extra tax involved. A PCG spokesman said: "We consider this unacceptable, especially given our extensive experience of dealing with the inequitable IR35 legislation. We believe that this approach and some of the others could be applied very unfairly."

Modernising powers

The six new compliance approaches were outlined in a consultation document "Modernising powers, deterrents and safeguards" published by HMRC earlier this year. This week, the HMRC announced that it was going to trial the six approaches.

The document outlines the approaches in Annex B as follows:

Annex B: New interventions to assure compliance

The following are brief outlines of some of the ideas which HMRC is currently considering in order to provide a range of interventions which offers options that are a more proportionate reaction to risk and can be undertaken at less cost to both taxpayers and HMRC. We welcome views on these ideas and other suggestions.

HMRC will trial some of these ideas to test effectiveness after this consultation closes.

A. Current business record keeping review

This intervention would take the form of checking record keeping procedures rather than a full enquiry - aimed primarily at small businesses and sole traders. We may for example concentrate on cash trades. The review would focus on checks on cash, sales, drawings and wages. This proposal is likely to be of particular benefit in supporting joint interventions for direct and indirect taxes.

The intervention would allow HMRC to advise the business on any changes required to their procedures and how to correct any errors identified. These visits could take place at any time during the business's "live" accounting period. It would provide the opportunity to test the primary documentation and gauge whether the business's results reflect the current economic reality.

Taxpayers could not be required to undergo one of these particular checks under existing legislation.

B. Short risk review

HMRC would develop a risk profile for a particular trade, industry, risk or behaviour grouping. The "industry" profile would be compared with profiles for selected taxpayers and where there appeared to be continuing risks, questionnaires would be issued to businesses asking questions related to the perceived risks. The aim would be to work, involving any agent, over a period that would not be longer than around six weeks to assess whether significant risks exist. If they did not the case would be closed but if there appeared to be significant understatements they would be investigated further.

C. "Self audit"

An intervention to resolve general areas where smaller amounts of tax may be involved in a more cost-effective manner and to concentrate on putting right any weaknesses, gaps or misconceptions. Based around letters and telephone calls and visits or a mixture of activities and linked to

• "coaching" the taxpayer on statutory requirements,

• requiring the taxpayer to consider potential risks around a specific entry or entries on their return,

• allowing the taxpayer to take the steps to resolve the situation themselves, and

• notifying HMRC of the adjustment made.

D. Telephone contacts

Dedicated teams, trained in appropriate telephone and technical skills would contact taxpayers as a result of data matching and risk assessment. Using prepared scripts, the caller would outline why HMRC considers that an error has been made and explain how the tax declaration can be amended and outstanding monies brought to account. The outcome of the contact would be recorded and where the taxpayer agrees there is an error a "follow up" confirmation letter would be sent to the taxpayer to ask for payment.

E. "Correction challenge"

Could be used where the Department holds good quality information, from a reliable source, with a good confidence rating, and where the amounts involved would not warrant an enquiry. We would simply make a correction to a return notifying the taxpayer and explaining why the correction had been made. We would seek an explanation for the omission, so that we could provide advice to prevent it happening again and allow an appeal period. Only in exceptional circumstances would it be necessary to open an enquiry.