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Just how far back can HMRC go?

HMRC’s information and inspection powers are contained within Schedule 36 Finance Act 2008. These powers enable HMRC to obtain information and documents from either the taxpayer or a third party where such information or documents are ‘reasonably required’ for the purpose of checking the taxpayer’s tax position.

 The Revenue also have at their disposal the ability to make ‘discovery assessments’, under S.29 Taxes Management Act 1970, where a person has not made a full disclosure and:

(a)the loss of tax is the result of a failure to take reasonable care or deliberate understatement by the taxpayer or their agent; or

(b)HMRC could not reasonably be expected to have been able to identify the circumstances giving rise to the loss of tax either before the end of the normal enquiry period, or by using information available to them.

The time limits for making such assessments are as follows:

Circumstances  Time Limit
Loss of tax not due to careless or deliberate behaviour 4 years from the end of the year of assessment
Loss of tax due to careless behaviour of person or agent etc 6 years from the end of the year of assessment
Loss of tax due to deliberate behaviour by person or agent etc 20 years from the end of the year of assessment

In 1999, a group of three companies restructured their businesses to enable all golfing activities, with exception to non-golf club members, to be carried out by Whitefields Golf Club Ltd. This reorganisation came to the attention of H M Customs & Excise (HMCE), as it was then, in the course of a routine inspection in June 2003. There then followed some correspondence between the two parties and HMRC were provided with copy documents.In a recent Tax Tribunal case, however, HMRC were given licence to ask for information going back years because of their own negligence and tardiness.

In November 2003 one of the companies’ hotels suffered a fire causing it to cease trading for nearly a year.

Further documents were supplied to HMCE in February 2004, at which point the investigation into the reorganisation effectively ground to a halt. The reason for this was not explained but it appears that the retirement of the investigating officer was the cause.

Nothing then happened for about 6 ½ years and the companies could have been forgiven for thinking that HMRC had given up the ghost. Not so, because in November 2010 HMRC paid a further visit and then sought to re-ignite the VAT investigation in July 2011. In the meantime, the documents that had originally been supplied by the companies had either been lost or destroyed by HMRC. No matter, HMRC simply requested duplicates but the companies did not play ball, causing HMRC to serve the companies with formal information notices to force them to comply.

The companies appealed against the issue of the information notices on the grounds that;

  • Their issue was unreasonable in all circumstances;
  • The documents and information were not ‘reasonably required’; and
  • The purpose for which the documents were required were not for checking the companies tax position but rather to correct HMRC’s administrative error in losing or destroying the copies originally provided and/or failing to follow up their original enquiries.

The Tribunal concluded that the companies’ complaints were effectively matters of good administration and that they were seeking to persuade the Tribunal that it could “effectively assume a general quasi-judicial review power through the back door.” The Tribunal judges stated that they could not “embark upon a general supervisory review of the conduct of HMRC” but had to confine themselves to simply deciding on what was ‘reasonably required’. As such, the appeals failed.

Some commentators believe that the ruling in this case may give HMRC licence to go back further than the normal 6 years but there are certain restrictions imposed on the Revenue as to the circumstances when an information notice can be issued.

Perhaps a more different lesson to be learned is that any contractor who is faced with an IR35 enquiry that appears to have fizzled out over the course of time should not assume that that is the case. Rather than allow HMRC to let matters drag on freelancers can ‘manage’ an enquiry by exerting pressure on the Revenue, such as requesting that they respond to correspondence within good time, reminding them of the Taxpayer’s Charter and the ability of a taxpayer to complain when things are unsatisfactory – such as lengthy delays!

By Andy Vessey

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