Budget Notes

BN97 HMRC REVIEW OF POWERS, DETERRENTS AND SAFEGUARDS: COMPLIANCE CHECKS

Who is likely to be affected?

1. Individuals and businesses who are within the scope of PAYE, VAT, income tax (IT), capital gains tax (CGT) and corporation tax (CT) and who pay tax or make claims.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to reform the rules for checking that businesses and individuals have paid the correct amount of IT, CGT, CT, VAT and PAYE or claimed the correct reliefs and allowances.

3. There will be three elements:

•    aligned and modernised record keeping requirements;

•    new inspection and information powers; and

•    aligned and modernised time limits for making tax assessments and claims.

Operative date

4. Information powers and penalties for failure to comply with these obligations will have effect on and after 1 April 2009. Time limits for making assessments and claims will need a transitional period and so will become fully operative on and after 1 April 2010.

Current law and proposed revisions

Record Keeping Requirement

5. Primary legislation requires records to be kept which enable a taxpayer to make an accurate return. Further detail of the required records is then set out in secondary and tertiary legislation. The current rules differ from tax to tax and this measure will pave the way for an aligned approach.

Information powers

6. For VAT and PAYE, HM Revenue & Customs (HMRC) has inspection powers with no rights of appeal. For IT, CGT and CT, HMRC has a combination of information powers, which need pre-authorisation by the appeal commissioners and can only be challenged by judicial review and enquiry powers that can only be used once a self assessment enquiry notice into a particular return has been issued. Authorisation levels, penalties and appeal rights differ across the different regimes. The relevant legislation is at sections 19A and 20 of the Taxes Management Act 1970 (TMA), paragraph 7 of Schedule 11 to the Value Added Tax Act 1994 (VATA), paragraph 27 of Schedule 18 to the Finance Act (FA) 1998 and Regulation 97 of the Income Tax (PAYE) Regulations 2003.

7. The new powers will align and modernise HMRC's access to records and information.

8. The new package will align existing powers and safeguards and introduce:

•    a power to inspect records required under the record-keeping legislation - this restricts the existing VAT and PAYE inspections to statutory records and introduces a new power of inspection for direct tax;

•    a power to require supplementary information which is relevant to establishing the correct tax position;

•    a power to require third parties to provide information which is relevant to establishing a taxpayer's correct tax position;

•    a power to visit business premises and to inspect records, assets and premises;

•    removal of VAT and PAYE powers to undertake inspections at private homes without taxpayer consent;

•    appeal rights against any penalty, and against information notices which have not been pre-authorised by an appeal tribunal;

•    penalties for failure to allow an inspection and failing to comply with an information notice, including a tax-geared penalty which can be imposed by the new upper tier tribunals; and

•    an updated criminal offence of destroying or concealing records requested under a notice authorised by a tribunal.

Assessment Time Limits

9. Time limits for changing the amount of tax due by assessment vary across the taxes. Current time limits are set out below:

Tax Mistake Failure to take reasonable care Deliberate understatement
VAT section 77 VATA 1994 3 years 3 years 20 years
IT and CGT sections 34 & 36 TMA 1970 5 years 10 months 20 years 10 months 20 years 10 months
CT Para 46 Schedule 1 FA 1998 6 years 21 years 21 years
PAYE sections 34 & 36TMA 1970 5 years 10 months 20 years 10 months 20 years 10 months

10. The new legislation will align the time limits for assessments to the following model:

Tax Mistake Discovery Failure to take reasonable care Deliberate understatement or Failure to notify liability
VAT 4 years N/A 4 years 20 years
IT & CGT N/A 4 years 6 years 20 years
CT N/A 4 years 6 years 20 years
PAYE 4 years N/A 6 years 20 years

11. Time limits for taxpayers' claims will also be aligned, at 4 years.

12. This measure was the subject of initial consultation in May 2007. Responses to that consultation together with draft legislation for further consultation were published on 10 January 2008 - A New Approach to Compliance Checks: Responses to Consultation and Proposals. A summary of responses to that consultation and a Final Impact Assessment, including an explanation of any resulting changes, will be published shortly.

Further advice

13. If you have any questions about this change, please send an email to powers.review-of-hmrc@hmrc.gsi.gov.uk or contact Maria Richards on 020 7147 3223. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk