Tax group calls for end to HMRC's trials

The controversy surrounding the Government's attempts to pilot a 'lighter touch' approach to tax enquiries continues, as one leading tax body has called for the trials to be suspended.

HM Revenue & Customs has now begun piloting their alternatives to the formal enquiry processes, known as "interventions". Until now, if HMRC wanted to enquire into a taxpayer's business or return, they had to follow formal procedures laid down in the Taxes Acts.

HMRC is piloting six new approaches to tax enquiries, including identifying a risk profile for a particular group of tax payers; identifying a target group from past compliance activities; self audit based around letters and phone calls to 'correct any weaknesses, gaps or misconceptions'; and the power to 'simply make a correction to a return notifying the taxpayer and explaining why the correction had been made'.

The Chartered Institute of Taxation (CIOT) has reported on the letters which HMRC are sending out to taxpayers as part of this pilot and has called for the pilot to be suspended.

Tone of letters

One of the concerns it identifies is the tone of the letters, including an example of a letter sent to IT consultants.

The original consultation document suggested that the self-audit letters were to be sent where the revenue lost is expected to be less and the errors have been made through 'misconceptions or gaps'.

The CIOT suggests that this means that these taxpayers are most probably in the group of generally compliant taxpayers who make a few mistakes.

However, the CIOT did not consider that the self-audit letters were any less threatening than the usual enquiry letter and that the distinction made in the consultation document between taxpayers who try to comply and those who deliberately do not comply, is not demonstrated by the letters.

It adds that it felt that the tone of many of the letters was likely to be seen by taxpayers as patronising at best, and sometimes insulting, and cited one example aimed at IT consultants, which said:

• "In our experience IT consultants commonly make errors when they calculate the VAT on expenses charged to clients".

CIOT's findings

The CIOT has reported its findings to HMRC. In principle, it welcomes any measures to minimise the stress of an HMRC compliance intervention, but is concerned about several aspects of the trial, including:

• Overpayment - The CIOT says: "We would also like to see any such initiatives extend to those who have overpaid as well as those who have underpaid their taxes. The letters state that 'HMRC want to help taxpayers get their tax returns right', but the focus of this pilot is entirely on catching underpaid taxes.
• Voluntary Is the trial voluntary? What would happen to people who decide not to participate and what are the statutory rights of those who do participate?
• Timing - What year is being reviewed? The CIOT thought it was 2004/5 for income tax, but, if so, the wrong form P810 has been sent out.
• Scope - The CIOT claims that a number of pilots go beyond the 'light touch' approach.
• Technical issues - Technically inexact references could lead the tax payer to believe tax is due when it is not. And the group is critical of the inclusion of technically difficult areas such as asking tax payers to self audit the difference between repairs and improvements.
• Agents - The CIOT had understood that agents would be contacted in advance of a telephone enquiry, but it appears this may not be happening. They also refer to HMRC's assertion that they "expect that the area that we are looking at can be resolved easily without an accountant."

John Cullinane, CIOT President, says: "The CIOT welcomes the principle of looking at more flexible forms of dealing with taxpayers on compliance issues and the approach of piloting proposed approaches. However, we do have many and significant concerns with the approach taken with these letters, even in the context of a pilot."

The CIOT has written to HMRC setting out its concerns in a report. The report concludes that the CIOT "believes HMRC should consider urgently whether the pilot should be suspended and its key elements reviewed in consultation with the profession".

The CIOT has discussed its report with HMRC. HMRC will be continuing with the pilots but have pointed out that the numbers affected are relatively small (around 14,000 people) and that the purpose of a pilot is to identify problem areas so that they can be improved for the future.

John Cullinane added: "We are pleased to have been invited to work with HMRC and intend to do this with regard to the results of the pilot and on future intervention letter drafts. In the meantime, we are posting our report to HMRC on the CIOT's website as we believe this will benefit taxpayers and their advisers who may have been confused or made anxious by receipt of the letters sent out in the pilot."

The full CIOT report is available on its website - (pdf).