The new compliance regime

The Finance Acts of 2007 and 2008 introduced provisions for the wholesale reform of HMRC's compliance procedures. The new legislation introduces effectively re-writes the rulebook in the following areas:

• penalties
• record-keeping
• compliance checks and HMRC powers
• taxpayer safeguards.

The main aims of the new penalties regime are as follows:

• To introduce a more consistent approach across the taxes that fall within HMRC's remit, and
• To introduce a behavioural-based approach, under which the penalties reflect the behaviour and intentions of the taxpayer.

The new provisions are contained within Finance Act 2007, Schedule 24.

ACCA have produced a Guide to... the new penalties regime, outlining the main features of the system, available in 'Related documents' below.

Finance Act 2007, Schedule 24, paragraph 1, details the returns to which to the new regime applies. See 'Related links'.

Finance Act 2008, Schedule 37 introduces new record-keeping provisions with the aim of aligning requirements across all taxes and to be flexible across the spectrum of business and non-business taxpayers. The provisions require a taxpayer to “keep all such records as may be requisite for the purpose of enabling him to make and deliver a correct and complete return for the year or period” (Taxes Management Act 1970, s12B(1)(a) as amended by FA 2008, Sch. 37).

The new provisions are intended to permit greater flexibility and HMRC, as part of their compliance checks, may set specific record-keeping requirements for businesses.

A penalty of up to £3,000 may be levied for failure to keep adequate records. In their published guidance, HMRC indicate that if a failure to keep or preserve records comes to light during enquiries into a return which results in the imposition of other penalties, that failure is usually a factor in determining the amount of the overall penalty. In such circumstances, a separate penalty for that failure is only sought in serious cases, eg where records have been deliberately destroyed or there has been a history of serious record-keeping failures. The penalty for failure to keep records is not imposed as a matter of course, and HMRC have indicated that any penalty is only charged after taking instructions from head office specialists in cases approved by Compliance Divisions.

Further HMRC guidance on record-keeping may be found on HMRC's website.

 Finance Act 2008, Schedule 36 introduced changes to the way in which HMRC officers check the tax position of taxpayers. From 1 April 2009, HMRC has one unified set of powers across the range of direct taxes, VAT and national insurance contributions under which, they are entitled to:

• visit business premises to inspect books, records and assets;
• request information and records from both the taxpayer and third parties (eg accountants); and
• make cross-checks across different taxes and inspect books and records for different taxes in one visit.

The inspection powers enable HMRC to undertake reasonably required checks for the purposes of tax positions. Checks that:

• require taxpayers to provide information and produce documents that are reasonably required for checking a tax position. HMRC will normally ask for the information to be provided and, if this is not forthcoming, will issue an Information Notice; and
• require third parties (eg a bank or supplier) to provide information and produce documents.

HMRC may conduct a check either in advance or retrospectively for the purposes of checking a tax position.

An authorised officer of HMRC is entitled to enter business premises and inspect the premises, business assets and statutory records.

Appeals Procedure:

Following the implementation of the Tribunals, Courts and Enforcement Act 2007 the existing tax tribunals, ie the General and Special Commissioners have ceased to exist and replaced by the First-Tier Tribunal (Tax) and the Upper Tribunal (Tax and Chancery Chamber). Appeals against an HMRC decision must now be made to First-Tier Tribunal. If the appeal to the tax tribunal is unsuccessful and you would like to make a further appeal, the onward right of appeal is to the Tax and Chancery Chamber of the Upper Tribunal.

Further details on the new tax tribunal system, including appeal forms, are available on the Tribunals Service website. See 'Related links'.

As an alternative to appealing to the Tribunal, is to request an internal review.

This is a new feature of the new compliance regime, the concept of which is that it is possible to ask for disputed issues to be reviewed by an internal HMRC officer who is otherwise unconnected with the case. The HMRC officer will conduct the review and generally notify the taxpayer/agent within 45 days. If any matters remain in dispute after the internal review has been concluded, an appeal may then be made to the Tribunal but this may not be done while the review is still in progress.

HMRC have produced guidance on the new appeal and internal review procedures.

HMRC officers do not have any right to enter any part of a premises used solely as a dwelling. This is the case whether to carry out an inspection or to examine documents under notice. They may, however, enter if invited in. 

HMRC may only make unannounced visits where this has been sanctioned by an authorised officer, which is defined in Finance Act 2008, Schedule 36, Para. 59 as “... an officer of Revenue and Customs who is, or is a member of a class of officers who are, authorised by the Commissioners for the purpose of that provision”. 

Other Safeguards:

The law and Codes of Practice offer the taxpayer certain safeguards, eg

• HMRC use their powers proportionately
• Clarity about when a compliance check begins and ends
• HMRC have produced guidance on taxpayer safeguards under the new regime.

The new compliance regime represents a big learning curve for agents and HMRC alike. HMRC, in association with the major professional accountancy bodies will be staging a series of roadshows around the country aimed at educating advisers on the new regime.