Combatting money laundering, Pt 2

Posted on March 8, 2019 by admin

By: Alex Byrne

Dishing the dirt

Related articles

KEY POINTS

  • Tax practitioners should take care to ensure that clients are not tipped off about money laundering reports.
  • Understanding when a suspicious activity report should be made.
  • The difference between internal and external reports.
  • There are limited exemptions from making reports.
  • Advisers should take care not to risk their businesses by falling foul of the anti-money laundering legislation.

In the first part of this article (‘A dirty business’, Taxation, 29 November 2018), we considered the basic principles of the anti-money laundering (AML) regulations and recognising the circumstances that might indicate suspicious activity. In this issue we will consider ‘tipping off’, reports and exemptions.

Accountancy and tax practice staff must be properly trained on tipping off, which is covered in paragraph 6.1.20 of the CCAB’s Anti-Money Laundering Guidance for the Accountancy Sector. Similar paragraph references in this article refer to this guidance.

The offence of tipping off is committed when a relevant employee in the regulated sector discloses that a suspicious activity report (SAR) has been made and this disclosure is likely to prejudice any subsequent, current or contemplated investigation into allegations of money laundering or terrorist financing (MLTF).

There are some exceptions at paragraph 6.1.23 of the CCAB guidance.

  • A person does not commit an offence, for example, if they make a disclosure to a fellow employee of the same undertaking.
  • Nor is an offence committed if:
  • a relevant professional adviser makes a disclosure to another within the same profession (for example, accountancy) but from a different firm, who is of the same professional standing, when that disclosure relates to a single client or former client of both advisers and is made only to prevent a money laundering offence; and
  • is made to a person in an EU member state or a state imposing equivalent anti-money laundering requirements.
  • No disclosure offence is committed if an adviser attempts to dissuade their client from conduct amounting to an offence. And no offence is committed when enquiries are made of a client regarding something that properly falls within the normal scope of the engagement or relationship. This might be to understand a specific transaction or even, for example, to ask about an invoice that does not appear to have been included on a client’s tax return.
  • Individuals concerned about tipping off may wish to consult their money laundering reporting officer (MLRO). It is important that documents containing references to the subject matter of any AML report are not released to third parties without first consulting the officer.

The AML guidance advises that MLROs may seek advice from a suitably skilled and knowledgeable professional legal adviser or from the helplines and support services provided by the professional bodies (paragraph 6.1.29). A discussion with the National Crime Agency (NCA) and law enforcement may also be valuable, but the guidance warns that they cannot provide advice and are not entitled to dictate the conduct of a professional relationship.

Revealing the existence of a law enforcement investigation or destroying documents relevant to an investigation can lead to an offence of prejudicing an investigation unless the person who made the disclosure did not know or suspect that it would be prejudicial (paragraph 6.1.30).

Suspicious activity reports

The guide lays out what should be taken into account by a member of staff when considering whether to submit an internal SAR to the firm’s MLRO – see paragraph 6.2.6 and, usefully, Appendix D as in ‘A dirty business’ (see Taxation, 29 November 2018, page 10).

If in doubt, always report concerns to the MLRO (paragraph 6.2.7) and I would suggest that staff members should have a copy of the appendix in their AML file.

The following information must be included on an external SAR (one made to the NCA) and firms may recommend that similar information is provided in internal reports.

The following should be regarded as essential information.

  • Name of reporter.
  • Date of report.
  • The name of the suspect or information that may help identify them. This may simply be details of the victim if their identity is known. As many details as possible should be provided to the NCA to assist with the identification of the suspect.
  • Details of who else is involved, associated and how.
  • The facts regarding what is suspected and why. The ‘why’ should be explained clearly to enable understanding without professional or specialist knowledge.
  • The relevant NCA glossary code (if applicable).
  • The whereabouts of any criminal property, or information that may help locate it, such as details of the victim.
  • The actions the practice is taking that require consent (see paragraph 6.3 of the guidance).

All external SARs should be jargon-free and written in plain English. It is recommended that reporters should:

  • not include confidential information not required by the Proceeds of Crime Act 2002 (POCA 2002);
  • show the name of the business, individual or MLRO submitting the report only once, in the source ID field and nowhere else;
  • not include the names of the relevant employees who made the internal SARs to the MLRO;
  • include other parties as ‘subjects’ only when the information is necessary for an understanding of the external SAR or to meet required disclosure standards; and
  • highlight clearly any specific concerns about safety (whether physical, reputational or other). This information should be included in the ‘reasons for suspicion/disclosure’ field.

The NCA guidance, Submitting a Suspicious Activity Report (SAR) Within the Regulated Sector (tinyurl.com/y8ckbznv) is very useful. It states that it is helpful to summarise the suspicion and provide a chronological sequence of events. Describe events, activities, the transactions that led to the suspicion; and how and why these arose.

If the suspicion arises because the activity deviates from normal activities for that customer or business sector, it would be helpful to explain this briefly.

The SAR should also answer six basic questions to make it as useful as possible: who, what, where, when, why and how?

When the SAR is finished, check that it includes the date of the activity, the type of product or service, how the activity will take place or has taken place, and explanations of any technical aspects. It should not include acronyms and attachments, simply a reference to what is available and who to contact to obtain it.

According to the NCA’s Annual Report 2017 (tinyurl.com/yc65lgxv), about 600,000 SARs are made each year. However, in some areas HMRC could be accused of overkill and giving unnecessary work to the profession. Tax consultants dealing only with HMRC investigation cases have been told that they must make a SAR for every case despite the department’s involvement.

Reporting and the privilege exemption

Members of relevant professional bodies (which are referred to as ‘relevant professional advisers’) who know about or suspect MLTF (or have reasonable grounds for either) are not required to submit a SAR if the information came to them in privileged circumstances – in other words, during the provision of legal advice and acting in respect of litigation. In these circumstances, and as long as the information was not provided to enable a crime (including, of course, tax evasion), the information must not be reported (see POCA 2002, s 330(10)).

The privileged reporting exemption covers SARs only and should not be confused with legal professional privilege, which extends to other documentation and advice.

Under POCA 2002, s 330(14), a relevant professional adviser is defined as an accountant, auditor or tax adviser who is a member of a relevant professional body that tests professional competence as a condition of admission. Sanctions are imposed for failure to maintain professional and ethical standards.

There is no list of the professional bodies that meet these criteria. If businesses are in any doubt about whether these provisions apply to them, they should consult their own professional body or seek legal advice.

It is strongly recommended that careful records are kept about the provenance of the information under consideration when decisions of this kind are being made. Legal advice may be needed.

The accountancy bodies have given further advice on privilege because the reporting exemption is one of the most complicated aspects of the AML regulations (paragraph 6.2.22 et seq).

What constitutes privileged circumstances?

Here, we must consider legal advice privilege and litigation privilege.

Legal advice privilege applies when the client or his adviser seeks confidential legal advice on a situation, or if such advice is given. Although accountants and tax practitioners do not generally give legal advice, there are times when they do.

The guidance gives the following examples:

  • advice on tax law to assist a client in understanding their tax position;
  • advice on the legal aspects of a take-over bid;
  • assisting a client by taking witness statements from him or third parties on litigation;
  • advice on duties of directors under the Companies Act;
  • advice to directors on legal issues relating to the Insolvency Act 1986; and
  • advice on employment law.

Litigation privilege applies to a confidential communication between the adviser and their client or a third party (such as their solicitor) and is made for the dominant purpose of being used in connection with actual, pending or contemplated litigation. Contemplated litigation needs to amount to a real likelihood of litigation, not a mere possibility.

The guidance gives the examples of representing a client, as permitted, at a tax tribunal and when instructed as an expert witness by a solicitor on behalf of a client in respect of litigation. However, the guidance makes clear that audit work, book-keeping, preparation of accounts or tax compliance assignments are unlikely to be ‘privileged’.

Legal professional privilege is the main reason why inspection of documents is refused, and is regarded as a fundamental principle of justice.

Lawyers are protected by professional privilege from having to disclose advice that they may provide on clients’ tax matters. British accountants, unlike their American counterparts I understand, do not enjoy such privilege, and are under general obligations to make disclosures to HMRC. In February 2010, the department’s chairman criticised lawyers who exploited this difference to compete with accountants for clients. The suggestion was that instances of law firms saying ‘bring your tax issues to us so we can ensure that HMRC can never get access to them’ would be looked on very unfavourably.

The CCAB has not involved itself in whether privilege is legal advice privilege or litigation privilege; it doesn’t need to. The simple message is that if the information came in privileged circumstances it must not be reported to SOCA, unless it is information communicated or given with the intention of furthering a criminal purpose.

The crime/fraud exemption

The ICAEW has provided examples of privileged and not-privileged circumstances and applying the crime/fraud exemption.

An example of a case in which privilege applies could be when a long-standing client seeks advice on an undisclosed Swiss bank account containing money from undeclared income. The client is concerned about the arrangement agreed between the Swiss banks and HMRC. After the options are explained to him, he is advised to make a declaration to the Revenue.

Clearly, it is now known that the client has been evading tax and has therefore committed a money laundering offence. However, the client approached his adviser about his tax position under the legislation. It does not appear that this information was given with the intention of furthering a criminal offence, so it is covered by the privilege exemption. He must not be reported to the NCA. Having advised him to make a declaration, and explained the consequences, the advice remains privileged even if he subsequently decides not to follow the disclosure recommendation.

Now contrast that with the situation whereby, during the preparation of the client’s tax return, a member of staff encounters a bank statement from the Swiss bank account among the papers supplied by the client. When questioned, the client admits to tax evasion. The same information is received as before, but in a different and non-privileged way. In this situation a report must be made.

As another example, an adviser is acting for a wife in an acrimonious divorce that is heading for the courts and that she will be claiming 50% of her husband’s assets. In preparing for the hearing, she notifies the adviser of her husband’s undisclosed Swiss bank account and supplies full details. She wishes to claim 50% of that as well.

Although this appears to be covered by litigation privilege, her intention in providing the information is to acquire criminal property (half the money in the Swiss account). This would fall under the crime/fraud exemption, so would not be privileged and a report would be required.

In summary

Someone worried that they may be guilty of tax evasion can still seek legal advice from a tax adviser without fear of the exception being invoked. This remains true even when, having received the advice, the person declines a business relationship and the adviser never knows whether the irregularities were rectified. However, if that person’s behaviour leads the business to suspect the advice has been used to further evasion, then a SAR could be required.

It’s not easy – so take legal advice as necessary and read the CCAB guidance.

Conclusion

The use of suitable letters of engagement may smooth the way to enabling information to be obtained to satisfy the AML regulations. And use of an electronic customer due diligence identification tool and initial and regular risk assessments may make life easier. Further, advisers should ensure that their staff are properly and regularly trained and that they fully understand:

  • money laundering and tipping off;
  • simplified due diligence (SDD) and enhanced due diligence risk assessment;
  • politically exposed persons;
  • when to make a report to the MLRO and what should be in it;
  • the rules for privilege, outsourcing and subcontracting; and
  • the need to record everything they do.

Many risk assessments may conclude: ‘No unusual activity, no indication of asset or means issues, low risk.’ But get used to making SARs despite the online process not being user friendly; the paper form is unwieldy and slow.

In the 18 months to March 2017, 634,113 SARs were made, but only 6,693 (1%) were made by accountants. As there are about 24,000 accountants in the UK (some 87% of which employ fewer than ten employees), many are making no submissions and are leaving other accountants to fly the flag for the profession.

Do not think no one is paying any attention to SARs. One example from the NCA’s 2017 annual report confirms that SARs assisted in an investigation into a subject who had concealed monies that should have been paid to creditors. The SARs, together with other evidence and intelligence, enabled the investigator to make the links between the suspect and a relative who owned a bank account that was being used as the suspect’s own. Large amounts of monies were found to have been deposited in that account and a confiscation order for more than £2m was made.

In another case, an adviser wished to end a relationship with a client because there was suspicious activity on an account. This consisted of third-party transfers funding large cash withdrawals, extravagant expenditure and large payments. A money laundering investigation began because several SARs suggested that the client was operating a dating website scam. The subject received a prison sentence for offences of fraud by false representation and a confiscation order for more than £160,000.

The National Risk Assessment of Money Laundering and Terrorist Financing 2017 (tinyurl.com/ycdbap4x) found the key risks in the accountancy sector to be:

  • complicit accountancy professionals facilitating money laundering;
  • collusion with other parts of the regulated sector such as financial advisers and mortgage fraud;
  • coerced professionals targeted by criminals;
  • creation of structures and vehicles that enable money laundering;
  • provision of false accounts;
  • failure to identify suspicion and submit SARs; and
  • mixed standards of regulatory compliance.

The report said that investigations featured cases in which money laundering had been facilitated by a range of accountants, both those who were supervised by a professional body and those who were not, though it was admitted that some national agencies currently only have investigations focusing on professional body supervised accountants. It was felt by law enforcement agencies that accountants with professional body status are attractive for those seeking to engage in high-end money laundering due to the credibility that their services can offer.

The Treasury stated that 935 professionals, including accountants and lawyers, were fined for money laundering in 2016-17, down from a record high of 1,170 in 2015-16. Some 23 accountants were expelled from their associations for money laundering breaches.

Firms that do not operate AML procedures properly are in danger. Clearly, more consideration should be given to making SARs if some accountants are not making any. However, with careful organisation, it is possible to ensure that AML regulation does not take over the firm and affect fee-generating work while still complying with legal responsibilities and helping the authorities catch criminals. Advisers should not risk becoming a supervision report statistic, losing businesses they have worked hard to build up and having to defend themselves against a money laundering prosecution. 

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Money Laundering

Posted on March 7, 2019 by admin

Combatting money laundering

By: 

Alex Byrne

27 November 2018

Alex Byrne sets out the ways practitioners can protect themselves from the charge of money laundering and looks at published guidance.

Related articles

KEY POINTS

  • Why is money laundering so important to accountants?
  • The application of the rules and examples of money laundering activities.
  • Avoiding committing a money laundering offence
  • The ‘Flag it up’ campaign and signs of money laundering.
  • Risk assessment, potential tax fraud and deciding whether to report.

A dirty business

As the government relaunches its ‘Flag it up’ campaign against money laundering activity, Alex Byrne considers the important role played by accountants and tax advisers in combating the practice.

The Consultative Committee of Accountancy Bodies (CCAB) is the umbrella group of various chartered accountancy bodies: the ICAEW, ACCA, CIPFA, ICAS and Chartered Accountants Ireland. In March 2018, it published a new document, Anti-Money Laundering Guidance for the Accountancy Sector. My initial reaction was surely we did not really need a 73-page document that is not legislation and does not spell out the things to look for. Most accountants seek practical guidance on anti-money laundering, especially something they can pass on to staff to strike a balance between, at one extreme, failing to carry out the requisite procedures and, at the other, swamping the firm’s money laundering reporting officer (MLRO). However, on rereading, the guidance improves with familiarity.

Familiarity, not contempt

The anti-money laundering (AML) guidance has legal status, so accountants remaining unfamiliar with it or not applying its provisions do so at their peril. The regulations apply, with some exceptions, ‘to the persons (“relevant persons”) acting in the course of business carried on by them in the UK’. This includes (reg 8(2)(c)) auditors, insolvency practitioners, external accountants and tax advisers and (reg 8(2)(e)) trust or company service providers and company services in the UK, other than under a contract of employment.

The CCAB guidance confirms: ‘There is no definition given for the term accountancy services, however for the purposes of this guidance it includes any service which involves the recording, review, analysis, calculation or reporting of financial information, and which is provided under arrangements other than a contract of employment.’ So the regulations apply to businesses rather than their employees, although the latter will have responsibilities to ensure that the business is compliant.

The guidance also applies to bookkeepers, although it is suspected that many of these use their clients’ HMRC log-in details and are not registered with HMRC for AML purposes. But let’s begin with the basics to clarify money laundering and the measures that need to be taken to counter it – junior staff and some managers may have misconceptions.

What is money laundering?

In essence, money laundering is dealing with, or assisting someone else to deal with, the proceeds of crime; in other words, wealth of any sort – money, investments, land and buildings, cars and so on (Proceeds of Crime Act (POCA) 2002, s 327 to s 329).

Crime is defined as an action or omission that constitutes an unlawful act – an offence – and is punishable by law; for example, drug trafficking.

The ‘laundering’ is the legitimising of ‘dirty’ or illegal money obtained from crime, which cannot be deposited directly into a bank or other financial institution without raising questions. Consequently, criminals want to create financial records that give the money an apparent legitimate source. This might be by passing it through one or more legitimate businesses or using innocent individuals to deposit it in their bank accounts. By making the money appear to be from a legal source it is cleaned, hence the ‘laundering’ terminology. Anyone assisting with this even if not involved directly is also guilty of money laundering.

Large-scale criminal groups may use complex money laundering techniques to avoid detection, but there are other, more popular methods.

  • Bulk cash smuggling. Cash is smuggled into another country and deposited in offshore banks or other financial institutions that ask few questions.
  • Structuring. Also referred to as ‘smurfing’, cash is broken down into smaller amounts and used to purchase money orders or other instruments to avoid detection or suspicion.
  • Trade-based laundering. This is similar to embezzlement in that invoices are altered to show a higher or lower amount to disguise the movement of money. For example, a car dealer may show a sale for £30,000, whereas the true receipt was £27,500. However, they bank £2,500 of criminal money at the same time, which is then drawn out and passed to the criminal less the dealer’s tax and share. The £2,500 has been legitimised and the net amount can be spent without questions being asked.
  • Shell companies and trusts. These may be used to disguise the true ownership of a large sum of money.
  • Bank capture. A bank is controlled by money launderers or criminals, who move funds through it without fear of investigation.
  • Property laundering. This occurs when property is bought or developed with money obtained illegally, before being sold. Again, this legitimises the criminal funds and the proceeds can be spent without problem.
  • Casino laundering. An individual buys casino chips with illegal money, gambles for a while, then cashes out the remaining chips with a cheque or bank transfer and claims this as winnings. However, casinos have been forced to tighten their AML procedures so this may now be more difficult.
  • Money mule. Money is passed through an innocent individual’s bank account for which they are paid a commission. People are approached with different stories as to why this is necessary. Students in particular are susceptible. According to Cifas, the UK’s fraud prevention service, there were 8,652 cases of 18- to 24-year-olds having bank accounts used by criminals between January and September 2017.
  • Cash-intensive business. A business that deals legitimately with large amounts of cash uses its bank accounts to deposit money obtained from everyday business proceeds and illegal money. The business declares the whole amount as legitimate. Commonly, such businesses provide services rather than goods and with low direct costs. Examples are strip clubs, nail bars, car washes and the like, but takeaways, night clubs and bars, convenience stores and restaurants may also be used.

Recent estimates suggest that between £36bn and £90bn is laundered through the UK economy each year. The amount that cannot be explained is seized.

Money laundering can be widespread and low key. For example, if a plumber pays a pub for drink with cash from an undeclared job, it is money laundering. The plumber is introducing dirty money into the legitimate money system. Of course, the pub may not be declaring all its takings, but that will not affect the plumber; they have obtained goods or services for the undeclared cash with no questions asked.

Omissions and accountancy service providers

Just knowing about money laundering imposes a legal duty to report it and, with some exceptions, a failure to report is a criminal offence. There is no de minimis threshold value for reporting.

Since accountants and tax advisers practise in the financial (‘regulated’) sector, they are subject to special regulations because they deal with the very financial transactions criminals want to legitimise. Accountants see bank accounts and know about clients’ earnings and expenditure. If a client has bank transactions that do not make sense or a more expensive house or car than would be expected from their business results or drawings, the practice has a duty to consider reporting this discrepancy to ‘a constable, a customs officer or a nominated officer’ (POCA 2002, s 338) unless there is an explanation with evidence.

Advisers must be aware of the importance of the anti-money laundering provisions because a failure to report is punishable by up to 14 years’ imprisonment and/or an unlimited fine. Further, civil penalties or criminal sanctions may be imposed on the business and any individuals in the business deemed responsible for failures.

In 2016, 1,435 people were convicted of money laundering in England and Wales. In R v Duff, the Court of Appeal upheld a six-month custodial sentence against a solicitor who had failed to report the receipt of £70,000 from a client to invest in a business when the client was later charged with drugs offences.

Avoiding committing an offence

Under paragraph 2.2.2 of the CCAB guidance, no offence is committed if:

  • the persons involved did not know or suspect that they were dealing with the proceeds of crime; or
  • a report of the suspicious activity is made promptly to an MLRO – in other words, an ‘internal’ suspicious activity report (SAR) is made within the accountancy practice; or
  • a report of the suspicious activity is made promptly to the National Crime Agency (NCA) and before the offence takes place so that consent to proceed (referred to as a defence against money laundering by the NCA) is obtained in advance (POCA 2002, s 338, ‘Authorised disclosures’).

These are the exceptions most likely to apply, but the guidance does give others. To protect themselves, it is important for accountancy practices to train their staff to avoid unnecessary referrals while still complying with money laundering regulations. Section 5 of the CCAB guidance includes a table, Stages of CDD on customer due diligence.

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Undeclared Tax

Posted on November 25, 2012 by admin

HMRC are focusing on people who have been in business for years or have perhaps rented property, and not told HMRC. They have launched a new publicity campaign – “HMRC are closing in on undeclared income”.  The campaign encourages people to come forward and declare their income for back years in return for lower penalties than would be charged if HMRC find them first. HMRC’s website is not absolutely clear about what the reduced penalties are and how much better off people will be if they come forward. If people do come forward, HMRC’s Inspectors are under pressure to bring in as much money for the Exchequer as possible and may not offer the lowest penalties. It remains to be seen how effective HMRC’s new campaign will be. It is likely that unless HMRC make it clear that there will be a big saving for coming forward, people will probably wait for HMRC to find them. If that happens, how many people are found will obviously depend on the resources that HMRC put into the campaign.

People are fed up with what the banks, big businesses and wealthy individuals get away with. It is going to take a lot to persuade the ordinary businessman or woman to declare their earnings or all their earnings, if they can avoid it. If big businesses and rich individuals could be made to pay their fair share, and the basic income tax that everyone paid could be reduced,  more tax would be collected because the ordinary person would rather declare everything and sleep at night. Furthermore people would want to ensure others paid their fair share because if income tax was low, they would be more incensed about people who paid nothing!

Meanwhile, as a minimum should the government offer tax evaders who make a full disclosure no penalties at all if they come forward, and just collect the tax and interest, and give this full publicity on TV, radio and bill boards?

Also perhaps the public register of business names with the names of people running the businesses where different, should be reintroducing so people could have some comfort that the businesses they used were legitimate?

Just a thought.

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Real Time Information (RTI) & Centralised Deductions (CD)

Posted on November 25, 2012 by admin

RTI is to be implemented for most employers from April 2013. Instead of employers just paying PAYE & National Insurance on the 19th of the month and filing an annual PAYE Return (P35), employers will now have to return details of employees pay and PAYE/NIC deductions to HMRC EVERY TIME they pay them, so for weekly employees EVERY week. This will cost more in administration time or payroll charges if payroll agents are used. And if returns are late, there will be stiff penalties. April 2013 will be the biggest change in PAYE that most people will have seen in their lifetimes. If the government go ahead with CD, it will border on “1984”.

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Why the average UK company cant do what Starbucks can

Posted on October 20, 2012 by admin

Starbucks UK profits are apparently reduced by

· Paying royalties (eg so the UK company can use Starbuck products/brand name) to another Starbucks company in another country with low tax rates

· Buying raw material (coffee beans) through a Swiss Starbucks company (Swiss Company Tax is 5%)

· Paying high rates of interest on money lent by another one of its overseas companies

All this means that the UK Company has high expenses and low profits because the UK profits are effectively spread though other Starbucks companies around the world.

Starbucks as a whole still has to pay tax but in other countries at low rates.

This would not work for a normal UK business because under UK tax law the profits of all companies managed from the UK wherever they are in the world, have to be taxed here.

Setting up an overseas company to do something similar and pretending that it has nothing to do with the UK business when the same owners are running it, is fraud and criminal.

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PAYE CHANGES

Posted on April 11, 2011 by admin

PAYE REVAMP STILL ALIVE AND WELL.

I thought the proposals to revamp PAYE had died a death but reading past issues of Taxation I saw that a second  stage consultation had been issued by HMRC in December last year.

The overriding message from business and the accountancy profession is that they have serious reservations. Serious reservations?! Why isn’t everyone just saying a resounding “No way!”.

Is it because we think that HMRC will do what it wants to do anyway and all we can do is put pressure on them to tweak it so it is at least workable? I hope it is not that we think that the proposed system is better than the current system.

HMRC work to Ministers and their senior Civil Servants. If enough people make a fuss, it will not happen. The current PAYE system has worked fairly well since 1944. There must be a very good reason to change something that has served so well for 67 yrs and may merely need updating to make use of modern technology.

So why I am so against the PAYE revamp?

Firstly, I recommend reading the second consultation document never mind that the date for responding has passed. It is not HMRC that we need to persuade.

For your convenience I summarise it here but this is just my take on it so please read it for yourselves. I have not been able to avoid commenting as I go through.

The proposed new PAYE players are ‘Real Time Information’ (RTI) and ‘Centralised Deductions’(CD)

The Consultation document is in italics.

RTI will collect information about tax and other deductions automatically each time employers run their payroll. This information will be submitted automatically to HMRC at the same time the employees are paid. CD will move the responsibility for calculating and deducting tax, National Insurance contributions (NIC) and Student Loan repayments away from employers to the electronic payment system.

Ministers have decided to proceed with a phased introduction of RTI beginning in 2012. All employers are expected to be part of the new system by October 2013.

RTI is needed for the Department of Work and Pensions’ (DWP) plans for the introduction of Universal Credits from 2013. It will be used to award and adjust Universal Credit to take account of employment and pension income.

RTI will involve employers changing their current payroll processes and they will be expected to move over to paying  PAYE/NIC electronically.

Approximately 8.6 million telephone calls are received each year relating to PAYE. Most of these are from customers seeking help in completing forms, ascertaining whether tax codes are correct or asking about a repayment of tax. Many of these calls relate to sporadic or multiple employments or come from pensioners, who can find it difficult to understand the tax on their pensions.

I don’t see how this will change. If people are having trouble understanding now then this will not change with just a change in the method of reporting information.

Take this Notice of Coding example concerning someone who is receiving an Armed Forces Pension of £10000 and working, earning £35000. I have reproduced the exact wording (including capital letters or the absence of them) :

Code operated against Forces Pension    
           
2011-12          
           
Your personal allowance     £7,475
adjustment to tax rate bands   -£1,794  
Savings income taxable at higher rate -£156 -£1,950
a tax free amount of       £5,525

 

The Notes start by explaining “tax free amount” or personal allowance.

Then go on to say –

“We have to see if anything should reduce your tax free amount.

Where you have more than one employment or pension, the way the tax tables that employers use work means that too little tax can sometimes be deducted if some of your income is taxable at higher rates. Without this adjustment you would pay too little tax so that at the end of the year you would owe tax. Please phone us if you would like to talk this through.

Savings income – that is interest from banks or building societies etc or company dividends – is usually taxed before it is paid to you (tax at 20% is deducted on interest and 10% on dividends). As you will be paying some of your tax at 40%, extra tax will be due on your savings income. Making this adjustment to your tax free amount collects the extra income. You can make this payment directly if you prefer, if so please contact us.

If your pension is more than £5225 you will pay tax as follows:

at 20% on the first £35000

at 40% on income between £35001 and £15000

at 50% on anything over £150000”

The adjustments are not given note numbers so the taxpayer cannot easily link the notes to the adjustment they relate to and none of the notes explain why deductions of £1794 and £156 specifically have been made to the personal allowance, or what extra tax they will collect.

Give this scenario to any layperson you know and ask him or her if they fully understand the Notice of Coding. I would be surprised if you find someone who does.

HMRC believes that RTI will help to reduce circumstances which cause customer contact because more people will be taxed correctly in-year. It will also be easier to answer the questions that arise as HMRC staff will have access to in-year information about the individual’s income and so will be able to provide a better and quicker service.

But people will still not understand Notices of Coding after RTI/CD even if they are correct and my bet is they will still be unable to get through to HMRC then as now.

RTI will get information on those joining and leaving employment to HMRC more quickly. For example, RTI will enable the date of leaving to be submitted before the final earnings information.

This may enable HMRC to make any changes to coding they feel are due just before the employee leaves and if these are wrong leave a new employer to sort it out with a potentially negative affect on relations between the employee and new employer from the outset of the new employment.

On past form, errors of all sorts will be made as now no matter how much information HMRC have and people will not be able to get through to HMRC to sort them out.

Real time information will mean that HMRC can check that an employer is paying the correct amount at the time of payment rather than having to wait until after the end of the year as now. This will enable HMRC to take prompt debt collection action.

So the new system will enable HMRC to chase employers quicker for late paid PAYE. I thought that was why penalties had been brought in ie to encourage prompt payment. And which available staff do HMRC have to take advantage of this better information flow. We all know the grief that will result if the debt collecting work is passed to private contractors who do not understand the PAYE system and will not be interested in any mistakes that may have been made.

Then under the second stage, CD, ……

HMRC will set the deduction rules as they do now, but instead of each employer applying these, they would be applied automatically as part of the payment process system. The information about the employee’s gross pay would be sent by the employer to the electronic payments system. The money would, at all times, stay within the electronic banking system and would not be transferred to HMRC. On the date of settlement the net payment would move from the employer’s account to the employees’ accounts and on the due date the deductions made would go to HMRC.

Therefore effectively HMRC will control employees net pay and employers will merely pay what they are told to pay even if they know it to be wrong, and on the date HMRC say. Also they can hold up overpayments of PAYE brought about by code changes until HMRC are satisfied they are properly due, perhaps in case for example HMRC can find underpayments from earlier years which have not yet been dealt with. I am not even going to get into what will happen when an employer has made the wrong payment of pay for a month and then has to try to correct it through the new RTI/CD system.

 

Those are the bare bones of the proposals. And all this for what – some savings because employers will no longer have to submit End of Year Returns (form P35)? I am not persuaded by the statement that employee starting forms (P46) and employee leaving forms (P45) will no longer need to be done when much of the same information will still be required – it will just be entered into the computer for the new system. Many P46 and P45 forms are being submitted on line now in any case.

The employer will still be required to issue payslips to their employees, and issue P60s to their employees at the end of the tax year and employers will still be required to issue a ‘final’ tax/pay statement showing tax paid to date, and taxable pay to date to a leaving employee unless the employers’ payslips shows this information. At the end of the year the employer would still need to issue a P9D or P11D for relevant employees.

I do not see this as a significant reduction in the current administrative burden on employers.

One big advantage the Consultation document stresses is that HMRC will be able to correct wrong PAYE codes in year, but incorrect codes can be corrected in year now if only taxpayers could get through to HMRC to tell them of any changes (and I have some suggestions about this – see below).

There is a very important principle involved here –  there has always been a dividing line  between government and business with government legislating and the employers implementing – now government will cross the line and control people’s wages and salaries directly. This would be a very bad move and the beginning of a slide that could see government taking tax or other payments directly out of the bank accounts of companies and employees.

No tax authority can be trusted with such responsibility as is envisaged by RTI and then CD and then who knows what, no matter how efficient. And our tax authority has not been very efficient.

Where tax and national insurance deductions are doubted, businesses and individuals should always be able to make representations and have the choice to make the tax payments that they feel are right until they can check matters with HMRC. This puts the onus on HMRC to devote sufficient resources to dealing with these representations and enquiries. If the tax authority is running the show and controlling what tax payments are made, there is no inducement for it to provide sufficient numbers of properly trained staff to deal with problems. They can take the view that it will get sorted out when they can get round to it.

Government should make no mistake – mess with the earnings of their hard working citizens so people are at risk of getting less pay than they expected for a whole host of reasons such as claw back of one thing or another, or the ultimate sin of getting no pay at all! and those people affected are not able to get an instant response from the relevant tax authority as to why, and it is messing with dynamite. In my experience one of the most emotive subjects and certainly in the Top 10 up there with such things as how the national sporting teams are doing, the price of petrol, the weather and what Kate Middleton is wearing, is the amount of pay people receive at the end of the week or month. It would be a very brave government indeed that trusted their tax authority to get this right.

CD will follow RTI as sure as night follows day unless something is done to stop it all.

We should remember that the current problems with PAYE have come about because HMRC’s checking processes have been found wanting. But HMRC have been working on this with their new and I am sure very expensive, National Insurance and PAYE System (NPS). There is a lot that can be done without changing the whole system that has worked fairly well for so long and a lot more cheaply.

Firstly Notices of Coding could be redesigned to be intelligible and could show all sources of income for the year and how HMRC have calculated them, total personal allowances, how the allowances have been allocated and the source of income that particular Code is being applied against. They can carry a prominent note that if the taxpayer does not understand the Notice he should contact HMRC, AND HMRC should be contactable ie by phone without waiting for 20 or more minutes before an HMRC member of staff answer, by letter without waiting for 3 mths for a reply and by internet.

Why shouldn’t HMRC add a page to their website where a taxpayer can answer a few simple questions about his employment/pension income and send this to HMRC for them to act on it? Why shouldn’t HMRC send a message inviting the taxpayer to ring them if HMRC don’t understand the information, which I would expect to be a limited number of cases if the website page is clear and asks the right questions? Or even why should HMRC not ring the taxpayer if it is impossible for the taxpayer to get through on the phone to HMRC. Why does a failure in HMRC systems need to result in turning the PAYE system on its head and giving control of people’s income to the State, if not immediately then only a small step away.

For Tax Credits too, notices could be intelligible and explain clearly how the Tax Credits have been calculated ie on what level of income and carry a clear notice that if this is not correct, claimants should contact HMRC preferably by phone (and not an 0845 number that claimants cannot afford from the only phone they often have ie their mobile phone) or internet as above to provide correct information and that if they don’t, they run the risk of having overpaid Tax Credits reclaimed from them later or losing out because they are being underpaid tax credits and any underclaimed amounts may not be able to be paid retrospectively. Oh and while we are on the subject of contacting HMRC, could they appear somewhere sensible in the phone book please and save accountants rerouting calls that are for the Tax Office?

These suggestions will cost very little to do and at time when cuts in public expenditure are being made everywhere and a new PAYE computer system has been paid for, this does not seem the time to introduce another new expensive system even if HMRC could operate it effectively which I am sorry to say everyone I speak to, severely doubts. HMRC need to greatly improve their telephone service and written explanations before they make any fundamental changes. If introduction of RTI/CD was dependent on them doing that first, RTI/CD might well never happen. But however much HMRC manage to improve in these areas, and they certainly need to, RTI/CD is simply a step too far and we just do not trust HMRC to operate them effectively for PAYE taxpayers.

So what should you do if you are against the new changes – it is the same as I always say about such important issues – write to your MP and encourage anyone you meet to write to their MP. If you do that, you have a good chance of stopping it. If you don’t you will be part of a major unworkable step towards the State taking control of the net income of more than 20 million people on PAYE. And when your children ask you in the future as mine do about past events on subjects they expect you to have been involved with – “did you know about that?” and “what did you do?”, you will not have to mumble an apology about being too busy earning a living but can hold your heads up and say “yes” and “we did all we could to stop it” and “we did stop it”.

 

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BUSINESS RECORD CHECKS

Posted on April 11, 2011 by admin

Are HMRC right to focus on Business Records in isolation?

When I predicted in a recent article that I foresaw no push on the part of HMRC towards making traders keep contemporary records of sales and expenses, I had not seen HMRC’s Business Records Checks Consultation document.

HMRC feel that the absence of proper business records leads to underassessment of tax and quote the Organisation for Economic Cooperation and Development (OECD).

The Consultation Document states ….

Whilst the need to keep proper records in order to comply with tax obligations is widely acknowledged, HMRC’s random enquiry programme indicates that poor record keeping is a problem in around 40% of all of SME cases (circa 5 million). Research by the OECD indicates that poor business record keeping generally leads to an underassessment of tax even where there is an audit-type check into a return for the period covered by such records.

I went on the OECD website and I found a Report from 2004. One of the aims of the Report was (and I quote)-

Promote effective record-keeping

171 One of the keys to more effective treatment of the risk to revenue collection from

the ‘shadow’ or ‘cash’ economy is better record keeping by taxpayers and third

parties.

172 Better record keeping increases the visibility of cash by creating an audit trail. One of the most effective counter measures to money laundering and tax evasion is for

citizens and organisations to take steps to establish the identity of people they

transact with and to keep adequate records of transactions such as invoices and

receipts. The potential ‘win-win’ for the revenue authority is that good record

keeping is an important element of running a successful business — the foundation

of good financial control. The challenge for the authority in establishing

record-keeping requirements is to strike the right balance between the value to the

business and the cost of compliance. Demands must be consistent with what is

required for good business practice. 

Note the mention of “cash” to which I will return later.

HMRC say in the Consultation that a trader will fulfil his legal record keeping obligations if he accurately records business ‘money in’ and business ‘money out’, in whatever form, showing the  matters in respect of which the money was received and expended.

Several examples are given

Trader ‘A’ issues a paper invoice for every job he does, keeping a copy for himself.

He obtains a receipt for every business expense he incurs. Day by day he puts all of

those bits of paper into a box to be sorted out later.

Trader ‘C’ has a sophisticated record book into which he neatly enters details of

business income and business expenditure, accurately separating capital and

revenue. However he records only some of his business takings and only some of

their business expenditure.

HMRC feel despite the absence of record books, the business records of ‘A’ are capable of being turned into a correct and complete return of taxable business profit and that he will have fulfilled his statutory obligations, but Trader “C” will not.

To me this is not about “C’s” records, however good or bad they are. It is simply about C evading tax.

HMRC want to make greater use of the penalty legislation for inadequate records and are looking at the level and timing of penalties.

They say that record keeping penalties for  VAT have previously been set in fixed amounts and where a trader has failed to keep the required records it has been HMRC practice not to impose this penalty in the first instance but to warn the trader and safeguard the future position by serving a formal ‘Notice of Requirement’ to keep specified records. At the moment therefore penalties have been imposed only if has been a failure to comply with the ‘Notice’. HMRC regard this as a ‘free go’ and feel that it does nothing to deter record keeping failure from the outset. They want to adopt a consistent approach for IT, CT and VAT and penalise traders straight away when significant record keeping failures are identified. They are looking at levels of penalties which could be anything from perhaps £50 to £3000.

There is apparently no statutory power to suspend collection of a penalty for a record keeping failure which is a shame if HMRC are looking at charging more and higher penalties. This to me would be a reasonable middle way ie no free go but neither does the trader suffer penalties straight away without being given the opportunity to put things right and with penalties being charged only where a follow-up Business Records Check showed there were continuing and significant record keeping failures.

HMRC are intending to use Schedule 36 Finance Act 2008 to enable an officer of HMRC to enter a person’s business premises and inspect statutory business records, where that is reasonably required for the purposes of checking that person’s tax position. Any premises on which the statutory records are kept are, for these purposes, ‘business premises’ but this power does not cover entry to any part of premises used solely as a dwelling.

It is intended that Business Records Checks be pre-arranged with at least 7

days notice and appointments made. It is envisaged that typically a Business Records Check will consider a ‘sample’ of the records kept (not the records in totality), to check that a full and clear record is being kept of all business ‘money in’ and ‘money out’, and that the records allow an accurate interpretation to be made as to the nature of those receipts and expenditures

It is envisaged that there will be 50000 checks per year taking up to 4 hrs each

and that an estimated £600m extra revenue will be collected over 4 years.

HMRC want to begin Business Record Checks (BRC’s)  in Sept 2011.

By way of explanation of their approach, HMRC refer to 2 main changes in the law.

Firstly “the new penalty legislation for inaccurate returns, introduced by Schedule 24 Finance Act 2007, does not allow for any record keeping failures to be reflected in the size of the penalty for any understatement of tax. The penalties can no longer be ‘rolled into one’. “

Secondly, Parliament has given HMRC powers, in Schedule 36 Finance Act 2008, to make checks of business records whether or not a return has been made.

I feel that HMRC’s approach is based  on two flawed premises.

 

Firstly the premise that there is a significant loss of tax from poor record keeping. There is a significant loss of tax from people who go out of their way to evade tax but keeping poor records does not mean that you are a tax evader neither does keeping a perfect set of books mean you are not, as can be seen from HMRC’s own examples above. People can keep very impressive records of what they want to. They will have a record of business incomings and outgoings and the records may be very good but the incomings may not be all the income of the business and the outgoings may not all be business. The proper place to test this is in a targeted Enquiry as part of a serious check of the accounts and returns.

And this is also the proper place to impose penalties, not to have one set of penalties for understated tax and another set for poor record keeping.

Poor record keeping is commonly the result of ignorance and /or a trader being too busy and with one exception it may well result in very little income being omitted but almost certainly results in some genuine business expenses not being claimed. This is because bills and receipts may be lost and the relevant expenditure not included by the trader in the business books because he has not kept the books contemporaneously but writes them up at best after the quarter end in VAT cases and  annually in non VAT cases, if he writes them up at all.

The one exception is cash trades. Even here if the cash trades involve a modern till then the till records can be very good indeed. A failure to keep such basic records as till printouts could merit a penalty but to deal with this outside of an Enquiry into returns and accounts seems incongruous, and if an Enquiry involving a case of poor records discovers nothing untoward then it seems wrong to impose a penalty for poor records. Better to threaten the penalty and return at a later date to see if records have improved. If they have not, impose the penalties then and if the records have improved, then apply the tests of the records that it was not possible to apply before. If irregularities are found at this second visit then the trader can be penalised in the normal way depending on the seriousness of the case. In other words penalise people for understating their tax and for not keeping records but do not impose a penalty just for poor records.

So the second flaw in HMRC ‘s approach is to separate Enquiry work and record keeping even if the penalty legislation seems to push them in that direction. The fact that the legislation gives HMRC the power to look at business records independently from the return is surely so that HMRC are not stuck looking at just one years records relating to one tax return when they may need to look at records and gather information for other years whether or not there is an Enquiry into those years. It is not a reason in itself to go for 2 tiers or types of penalties. The legislation could be changed. This might be desirable if it lead to a restricting of HMRC powers which some already feel are too widespread.

I guess HMRC think that their proposed approach will be quick and inexpensive. A short visit to the premises, a penalty for poor records and move on to the next one.

If this initiative is not properly targeted, all that will do is annoy the majority of traders who do their best to pay the right tax and more or less succeed with any income that slips through being offset by expenses that are not claimed but whose record keeping leaves something to be desired.

HMRC may well fail to achieve their target. 50000 visits pa at say an average of 2 hrs per visit is 100000 man and women hours pa x 2 because no doubt 2 officers will be required at each visit, never mind the hours taken up with recording the visit, the records seen and what was said (even if on hand held computers), and with the issuing penalty notices. Where are HMRC going to find say some 400 – 500 officers in their current state particularly as along with other government depts they come under pressure to make further staffing cuts?

Surely all HMRC need to do is to focus Enquiry work on cash and other high risk trades and force those trades to keep more accurate records, then revisit them when they do and fine them if they don’t.

If the evidence is clear that poor record keeping leads to significant tax loss, then HMRC could invite a statement in the Additional Information box of the Self Employed section of the Tax Return about the records being kept and could use this or its absence to help them evaluate risk. All good accountants include notes about the basis of adjustments such as private adjustments or the source of capital introduced in Additional Information boxes. The Tax Return notes could state clearly HMRC’s view on poor records, what they expect and encourage the taxpayer to specify briefly what records he or she kept for the year of the return and whether the taxpayer needs advice to improve their record keeping. Assistance could be provided mainly by telephone.

HMRC could contact the clearly high risk trades via their accountants of course (we don’t want contact with traders generally and a repeat of the Interventions policy a few years ago which did not work) and obtain a written statement of the records being kept. The involvement of the accountant ie a 3rd party should give HMRC some comfort that the statement had been considered and was correct. HMRC could then consider a full enquiry at that point or at a point further down the line after giving the trader a chance to improve his records. HMRC could take a hard line then if the trader had done nothing.

HMRC should encourage and assist with better record keeping and penalise only the recalcitrant or those they demonstrate have used records to evade tax in the course of normal Enquiry work. I do not believe that it is good use of HMRC  resources even if they have them to look at 50000 traders records pa. The resources would be much better employed in improving compliance using the prime document of tax collection for the self employed, the tax return, and its notes, plus gathering information for the high risk cases and then making Enquiries into those high risk cases. I certainly believe it is a big mistake to overcomplicate and make 2 penalty issues of what is essentially one.

I wouldn’t be surprised if Inspectors felt the same way.

This article was forwarded to HMRC in time for the closing date for the consultation.

I am indebted to Taxation and to Will Silsby in his recent article “Checking It Out” for bringing this issue to my attention.

 

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Complaining about the Tax Inspector

Posted on December 23, 2010 by admin

HMRC have been HM Revenue & Customs for several years now and yet we see “Inspectors of Taxes” working Enquiries and settling Income Tax liabilities as they always have and then handing over to the “VAT Officer” who makes his VAT calculations and asks for another chunk of tax, interest and penalties. This is not in accordance with successive government initiatives to ensure Departments dealt with everything in one go as far as possible to reduce administration and businesses costs.

Clearly the profession will continue to make representations about all these issues and continue to resist extension of powers or policies which are patently unfair, unnecessarily intrusive or that just leave the ordinary every day taxpayer  completely at the mercy of the tax authorities. This can be done during the consultation process for new measures proposed by HMRC……when there is one although of course there are many instances where HMRC do not listen. At least we have the Taxpayers Charter which the profession fought hard to obtain but who is to rule for example on whether or not HMRC has dealt with a case “even handedly”?

Where the profession fails to change HMRC’s mind, at present the taxpayer has 3 places to go to seek redress – the HMRC Complaints Team for the area dealing with his affairs, the Adjudicator and the Ombudsman. Our experience is that the Ombudsman will not be much interested if the Adjudicator has seen the case so in practice the later 2 avenues are really only either/or and are just one avenue. In addition there is always Judicial Review but as a barrister will almost certainly be needed, legal costs prohibit this being an option for all small to medium tax liabilities.

Complaining to HMRC can feel like complaining to a shop assistant and then asking for the manager at which point the shop assistant says he or she is the manager! HMRC appear to have organised itself into more specialist sections eg concerning the operation of PAYE or residence, so after a challenge to the ordinary local office, the case is referred to one or more specialist officers, and then a senior officer before can be referred to the Complaints team. This is all very long winded. And can take 6 or so months before a final response to the Complaint is received and the case can be taken further. HMRC insist that they be given a proper chance to answer the Complaint before it is referred which is eminently reasonable, but only if this happens quickly.

So what about the Adjudicator? Who is the Adjudicator and how has this Office performed in dealing with complaints?

In brief the Adjudicator is an appointed, respected figure often with considerable experience in public office. The current Adjudicator is Judy Clements OBE  who previously worked at the Independent Police Complaints Commission. Working to the Adjudicator have always been seconded HM Revenue & Customs staff. The Adjudicator can only make recommendations although their recommendations are nearly if not always accepted by HMRC.

Tax credit complaints account for some 70% of the cases in 2010. Substantially upheld complaints were 17% of the total, partially upheld 29% of the total. However only 20% of non Tax Credit Complaints were substantially or even partially upheld. That is a matter of concern. Even ruling out a proportion of taxpayers who complain without any substantive justification, I find it very hard to believe that some 80% of complaints were unjustified.

The Adjudicator Office does not seem to be handling that many non tax credit complaints for the size of the taxpaying population. Even taking into account that there are appeal processes which effectively absorb disputes with HMRC into the appeals system so they never reach the Adjudicator, the organisation which taxpayers will see as their main champion does not seem to get called to battle that often and the results are not at all encouraging.

So the professions strategy must be two fold. Firstly to continue to fight for any unmerited extension of powers and for a fair tax system. But secondly, push and push hard, for a complaints body with more of its most senior staff not on secondment from HMRC and with proper teeth.

Just the existence of a strong, powerful and independent Adjudicator will encourage the Revenue to think twice about their actions. If we don’t all push for an independent complaints body, then we deserve the tax regime that we get.

Photograph courtesy of Rafael Mèdeiros

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HMRC Mistakes & Delays

Posted on December 23, 2010 by admin

An area that has received a lot of scrutiny recently is ESC A19 (HMRC delays in using information). The Adjudicator called together representatives of the Parliamentary and Health Service Ombudsman (PHSO) and HMRC to discuss the handling of these cases. This ESC is particularly relevant at present with all the extra tax bills that have been arriving on people’s doorsteps as a result of HMRC’s  new PAYE computer systems becoming effective at checking PAYE tax deductions of the last couple of years.

The HMRC view on A19 in PAYE cases is that it rarely succeeds because the taxpayer should have known by virtue of  coding notices that he was not paying the right amount of tax along the way. On our side, we know that most taxpayers do not understand notices of coding and trust HMRC to get their PAYE tax deductions right. It is a concern that the Adjudicators Office has a tendency to view A19 as HMRC do and not put themselves in the shoes of the taxpayer and look at what is reasonable for a person to understand taking into account the layout and content of coding notices.

The vast majority of PAYE “tax corrections” that received much publicity recently were overpayments due to taxpayers. This just proves that taxpayers believed their tax affairs were in order. If they hadn’t they would have been on the phone to HMRC at the time to ensure their codes were corrected so they paid less tax. But of course this did not happen because taxpayers did not understand they were paying too much tax.

HMRC website reference – http://www.hmrc.gov.uk/esc/esc.htm

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HMRC writing direct to clients

Posted on December 20, 2010 by admin

HMRC have been writing direct to clients in investigation cases. There are no grounds for this if there have been no delays and the client has not asked requested it.

hmrc writing direct to clientsClients do not want to hear direct from HMRC. I always write back to HMRC dealing with the points I need to deal with and ask them politely not to write to the client direct.

Eventually a referral to HMRC’s published policy about professional representation and a threat to make a formal complaint normally results in the Inspector agreeing not to write direct to the client and an apology.

This has apparently been HMRC policy since 2008. Since then in many cases I have been asked to act, HMRC start by sending copies of letters to me to the client until I ask them firmly not to. Sometimes I have to ask them twice. In one case after I had asked twice the Inspector wrote back and said “I note your comments about not sending Mr x copies of correspondence. However I would like to ensure he understands the position and will be copying him in on anything I believe he needs to be aware of. I am sending him a copy of this letter.”

Needless to say I had to be much firmer with this Inspector. It is obviously up to the client who he would like to explain things to him and with a 64-8, he has obviously chosen his professional adviser to be that person.

That case is not a 12 yr old investigation for nothing but that is a story for another time.

I have checked HMRC’s leaflets on the internet and provided they are still current, I found the following statements

For Self Assessment Local Office Enquiries, HMRC publications say –

“We will deal with any professional adviser you have appointed,
unless you ask us not to. If there is little progress in settling
matters, we will tell you and may then deal with you direct (or
with any other professional adviser that you appoint).”

“In Company Self Assessment Enquiries HMRC say –
The company can choose to be professionally represented, for example, by an accountant or tax adviser. The company may exercise that right at any time and likewise may change or stop using a professional adviser at any time.
And again……..
We will deal with any professional adviser the company appoints unless you ask us not to. If there is little progress in settling matters, we will tell you and may then deal with you direct (or with any other professional adviser the company may then appoint).”

In specialist investigations eg Code of Practice 9 cases HMRC say –
“We would encourage you to appoint a professional adviser to represent you during our investigation although this is a matter for you to decide.
You should give your professional adviser all the facts because you are personally responsible for your tax affairs and the accuracy of any information supplied to us. You are also responsible for ensuring that your adviser complies with timetables agreed between us.
We expect high standards from professional advisers. We will normally deal with your adviser but if there are delays or difficulties we may deal directly with you.”

Image published under creative commons license from Flickr user Lincolnian Brian

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