Taxman can inspect 'at-home' companies

The taxman can gain automatic entry into people's homes if part of their residence is set aside for business, under new laws to be published today.

Under the Finance Bill 2008, HMRC officials can "inspect" the assets or records of a home-based business if they believe the inspection is "reasonably required."

But the bill is expected to confirm that there will be no right of appeal for the taxpayer against such a visit, which would normally require notice from the Revenue of just 24 hours.

Critics of the proposals, due to take effect from April 1, 2009, worry that taxpayers will not be able to object or, in the spirit of the law, assert that the visit is not "reasonably required" if they have no right to appeal.

They also wonder how HMRC will advise its inspectors to act lawfully, given that they will not be allowed to access parts of the taxpayer's home which are not for business use.

Without a day's notice, an inspection can still proceed "by, or with the agreement of an authorised officer" but, HMRC claimed in notes, this will be used only "exceptionally."

"This is not reflected in the draft legislation, however, and the officer will be at liberty to choose either route," warned John Kell, policy officer at the PCG.

The freelance trade group worries that using an official, instead of a notice, will become the "standard" for inspections, because it is the "less burdensome" option for HMRC.

The group also understands that visits to a business premises, including homes, to "inspect", not 'search', materials, would only take place where there is activity which can be witnessed.

However, the group said more protections for taxpayers are needed, as no section of the draft legislation confirms the need for witnessed activity to be a criterion when the Revenue visits.

Refusing to allow an inspection will result in a penalty, as will failing to comply with a notice. Reflecting on the legislative draft, the UK's leading chartered accountancy body described the powers within as "draconian."

"The use of any statutory power to visit business premises ought to be a last resort," the ICAEW added in statement.

It said that the power should be used only where the taxpayer has refused to make their records available, where fraud is suspected or where a visit to the premises is the only way to establish the tax position.

To complement these wider inspection powers, the Finance Bill also arms the Revenue with greater scope to obtain taxpayers' information, with refusal deterred by cash penalties.

The authority can inspect records that taxpayers must keep according to UK law, as well as demanding additional details it deems relevant to establishing the correct tax position.

For the first time, the agency's information reach extends to third parties: the Revenue can therefore approach any accountant, recruiter or end client associated with the taxpayer.

The taxpayer, who will not be informed of such third party data requests, has no appeal right against HMRC's approach of such parties, even if they end up supplying inaccurate details.

Yet third parties who deliberately provide false information or deliberately withhold information "with the intention of causing an understatement of tax" will be eligible for a penalty.

As proposed, the penalty regime for the taxpayer will see 30% of tax owed for not taking "reasonable care," 70% owed for a deliberate understatement and 100% owed for a deliberate and concealed understatement.

The penalty regime, introduced in last year's Finance Act to cover VAT, PAYE, CGT, ITSA and CTSA will now be extended to other taxes and duties, and will apply for return periods after April 1, 2009.

More positively, all penalties can be significantly reduced if the taxpayer discloses information to HMRC, there will be no penalty for an innocent mistake and taxpayers can correct past errors on VAT returns for the associated period.

It is partly for these reasons that groups who have consulted with the Revenue on its new powers feel that; overall, the right balance has been struck between what's good for the taxpayer and what's good for the tax authority.

But the green light for the Revenue to approach third parties will heighten contractors' worries about the prospect of IR35 investigations, as the PCG explained.

"Currently freelancers are experiencing HMRC approaching their end-clients, often in an insensitive manner that disrupts their commercial relationships, and also often without identifying the correct person to speak to and obtaining accurate information about that freelancer's engagement.

"In recent IR35 cases to go to the Special Commissioners, the results have been strongly influenced by the evidence given by a representative of the freelancer's end-client on behalf of HMRC, even though the representative, who might often lack first-hand experience of the freelancer's work for the client, may not have been suitable to give evidence.

"Thus, the true nature of the freelancer's working arrangements with a client may not have been accurately portrayed in the hearing, with potentially disastrous consequences for the outcome of their case."

The group said the freelancer's position can be "further undermined" in that they do not have access to the upper contract between the agency, where there is one, and the client.

"They therefore do not know what terms were included in this contract, and whether or not they accurately reflected the working arrangements."

As a result, HMRC was recommended to initially ask the taxpayer to request the information from the third party, as it would allow the freelancer to manage how the subject is broached with an end client.

Not only would this ensure the correct details are obtained, as a person with knowledge of the contractor's work would respond, but it would also be cost-effective for the Revenue.

New laws to be published today will also allow HMRC to introduce a credit card payment service from the autumn, though the charge for use will be passed onto the taxpayer.

It will also work with repayments, whereby the Revenue will set the level of repayments to individuals and businesses alike.

Reform to payment services will also see the tax authority able to collect unpaid tax by seizing goods in England and Wales, or by taking action through the civil courts.

This measure, and the raft of others to safeguard the Exchequer, comes after HMRC calculated that up to £23.4bn was lost in income tax, capital gains tax and national insurance evasion and avoidance from 2000 to 2005.

In the consultation, the Revenue gave another reason why it was beefing up its information and inspection powers: it was taking action on the "grounds that businesses are concerned about the ability of the noncompliant [sic] to undercut their compliant competitors."

"Far more [of our members] are concerned about the possibility of HMRC itself disadvantaging their business directly," said the PCG, pointing to its 2007 survey, which found just 6 per cent of members were worried about such undercutting.

"It is therefore not sufficient for HMRC to offer this rationale as a justification for all manner of strong new powers."

The ICAEW said Her Majesty's Revenue and Customs has been pushing for one set of powers across its merged department for the last two years.

Although a consultation has been taking place in quite a low key way, "many of the proposals are controversial," the institute said.

It added: "It was entirely reasonable that the two departments had different powers, because those of HM Customs & Excise were much more geared towards preventing illegal activities such as smuggling and gun running.

"The current alignment seems designed to end up in a position whereby HMRC will be able to apply the more draconian powers that once belonged to HM Customs & Excise to the activities that were once undertaken by the Inland Revenue."