Campaign for statutory rights for taxpayers

My previous article Knock, knock looked at HMRC’s new powers (in FA 2008, Sch 36) to inspect premises in order to check a person’s tax position. In that article, I considered the meaning of ‘tax’ – it covers more than merely UK taxes; the meaning of ‘business premises’ – it extends in many cases to taxpayers’ homes; and the fact that inspections can take place in real time – i.e. so that contemporaneous documentation may be checked, or even before any tax liability has arisen.

In this second article (of three), I discuss the statutory provisions that apply before an inspection takes place. If they are not fully complied with, any subsequent inspection could be unlawful and the courts (if notified in time) can order the inspection to cease.

All statutory references (unless otherwise stated) are to FA 2008, Sch 36. It should be noted that the provisions are not yet in force, but are expected to be introduced with effect from 1 or 6 April 2009. What is not clear is the extent to which pre-2009-10 years of assessment will be subject to these new rules.

It is surely to be hoped that HMRC will not be able to use the FA 2008 powers in respect of old years (where equivalent powers are not available to them). Otherwise, there would be an incentive for HMRC to drag out existing investigations until after the new rules come into force.

Timing of an inspection

Paragraph 12 provides for three scenarios (cunningly disguised as two) regarding the timing of an inspection.

1. Inspection by agreement

The first of those rules (para 12(1)(a)) provides that an inspection may take place at any time so agreed by the occupier of the premises.

Superficially, this rule does not seem controversial. However, after a few moments thought, it will become apparent how problems can (and, no doubt, will) emerge in practice.

For example, there is nothing in the legislation to prevent an officer making an unannounced visit – perhaps on the basis that he or she was in the neighbourhood – and asking to be let in. Once permission is granted, that would amount to an inspection being carried out ‘at a time agreed to by the occupier of the premises’.

Regrettably, the legislation provides no restrictions on how much pressure may be exerted by an officer standing on the doorstep of the premises when trying to persuade the occupier to consent to an immediate inspection.

Perhaps that is understandable and this could be one of the few occasions in which it is in fact appropriate for the rules to be set out in guidance.

More worryingly, however, is the fact that, currently, HMRC are often overstating their current rights of enquiry – with their frequent (but totally unlawful) assertion that the discovery assessment rules give HMRC a right to commence enquiries outside the self assessment framework.

Therefore, while I would like to believe the contrary, I have serious fears that undue pressure may in fact be exerted by overzealous officers – perhaps by the occasional mention of words such as ‘penalties’ and ‘lack of co-operation’.

Identifying the owner

A more legalistic problem that will arise from para 12(1)(a) is identifying the occupier of the premises. Does the legislation refer to the person with the legal interest over the land (or other asset that comes within the meaning of ‘premises’) that carries the present right to prevent strangers from interfering with the land (per Lord Denning in Newcastle City Council v Royal Newcastle Hospital [1959] AC 248)?

Or should the legislation be interpreted more widely, perhaps to cover any person who appears at the time to be lawfully present on the premises? If the former, then officers need to ensure that they get permission from the correct person before proceeding with an inspection.

For example, if an officer wishes to inspect a shop, the officer must obtain the permission of the owner of the shop; obtaining the permission from the manager who is left in day-to-day control will not suffice.

Other arrangements

Further difficulties will emerge if (as happens so often in real life, even if not in text books) there are casual arrangements concerning the use of business premises.

For example, suppose that a shop is owned and occupied by Eve but she permits (by licence) her husband, Adam, to use a spare room at the back as an office for the purposes of his nascent accountancy practice. The occupier of the premises is Eve – including those premises being enjoyed by Adam.

Therefore, an inspection into Adam’s ‘premises’ (i.e. the back room) will not be lawful unless consented to by Eve. In fact, Adam need not even know that the inspection is going on – he certainly does not have to give his consent for such an inspection to be considered lawful.

2. Inspection by notice

The second scenario is not much better than the first. It provides that an inspection may take place ‘at any reasonable time’ provided that the occupier of the premises has been given at least seven days’ notice of the inspection (para 12(1)(b) and (2)(a)).

Again, the difficulties of identifying the occupier set out above will apply in respect of this requirement. See Example 1.

The legislation specifies that the occupier must be given at least seven days’ notice of the time of the inspection – a welcome improvement on the original proposal of just 24 hours’ notice. That is seven calendar days – not seven working days.

Therefore, a person can be told at 5 pm on Maundy Thursday (next year that will be Thursday 9 April) of an inspection to take place on the following Friday (in 2009: 17 April), even though there are only three working days in between.

Of course, the timing of the inspection has to be reasonable. But there is no guarantee that a court would find a time that is merely inconvenient to be unreasonable. Some of the difficulties of the ‘reasonableness’ test were highlighted in the recent case of Mr A v CRC [2007] SpC 650.

In that case, the taxpayer sought to challenge a notice under TMA 1970, s 19A (requiring information to be provided in the course of an enquiry) on the basis that the taxpayer’s ill health meant that it would be difficult to comply.

The Special Commissioner, whilst sympathetic to the taxpayer’s case, dismissed his appeal because the statute did not allow him to consider the reasonableness of the request (from the taxpayer’s perspective) – merely the reasonableness of HMRC’s requirement for the information to be provided.

When is a time reasonable?

HMRC are currently preparing guidance on these rules and it remains to be seen how this point will be tackled there.

For example, will a time be considered reasonable just because the premises are then open for business, or staff are present there? It should be hoped that an allowance would be made for the availability of key staff or, perhaps, the reasonable sensitivities of the taxpayer.

For example, suppose the taxpayer is hosting a prospective client or investor at the time of the proposed inspection. The timing might meet the objective standards of reasonableness, but the success of the taxpayer’s other meeting could be seriously jeopardised by the knowledge that HMRC officers are poking around the premises.

Alternatively, suppose the premises are those of a restaurant, which is typically busy at lunchtimes and in the evenings. In such cases, it would seem unreasonable for an inspection to take place at such times – especially as the mornings or afternoons could be so much more convenient for the proprietor.

More interestingly, perhaps, is the situation where the proprietor is not generally available during normal office hours – perhaps because the business is one carried out in the proprietor’s spare time – in the evenings or at weekends.

In my view, those are the times when any inspection would be reasonable – even if they fall outside the normal working hours of the HMRC officers who may wish to carry out the inspection.

Written notification is not needed

Finally, it must be noted that HMRC are not obliged to give taxpayers written notice of their intentions to inspect premises. It is sufficient for oral notification to be given. Of course, if written notice is given, HMRC must ensure that the seven-day period runs from the date on which the written notification is received, rather than merely from the date on which the notice is sent.

However, the fact that the law permits oral notifications means that the announcement of an inspection can be given in the course of a telephone conversation or, where there is an unsuccessful attempt to persuade the occupier of premises to accede to an earlier inspection, as a parting shot: ‘we will be seeing you at nine o’clock a week tomorrow’.

3. Unannounced inspection

Despite the above two categories which permit taxpayers the right to say no to an inspection or at least give them seven days’ warning, there is a third scenario in which an inspection can take place without these modest safeguards.

That is found in para 12(2)(b) and provides that an unannounced inspection may take place provided that it is carried out either by or with the agreement of an authorised officer. (An officer is authorised for these purposes if that particular officer (or that particular grade or working group) is authorised by the Commissioners (previously known as ‘the Board’) (para 59).)

Thus, an officer who wants to make an unannounced inspection merely needs to get that rubber-stamped by a senior colleague (assuming, of course, that the officer is not himself an authorised officer for these purposes).

When an unannounced inspection takes place, the officer carrying out the inspection must provide a copy of a notice (para 12(3)), sometimes referred to as an ‘inspection notice’.

Presenting the inspection notice

In cases where the occupier of the premises is present at the time that the inspection is to begin, the inspection notice must be provided to the occupier (paragraph 12(3)(a)). However, the risk with unannounced inspections (or perhaps the intention) is that the occupier might be absent.

In such cases, the inspection notice should be given to the person who appears to the officer to be in charge of the premises (para 12(3)(b)) or, where no-one appears to be in charge, the inspection notice should be left in a prominent place on the premises (para 12(3)(c)).

This final situation is probably unlikely to arise in practice because it would be almost as simple for HMRC to give the occupier of the premises notice of the inspection.

However, presumably, where HMRC cannot wait and entry to the premises would not be difficult to effect (for example, an unstaffed car-park or other similar open space), HMRC will still need to leave a notice on prominent display.

This could lead to some rather interesting data protection issues because the other visitors to the premises (lawful and otherwise) might learn of HMRC’s interest in the premises long before the occupier. In fact, in some cases, it is possible that the occupier will never be aware of the inspection.

One would have thought that the inspection notice would contain some information useful to the occupier of the premises to set out, perhaps, the statutory grounds under which the inspection is taking place or the occupier’s rights to challenge the legality of the inspection.

However, the statute requires the notice merely to state the possible consequences of a person obstructing the officer in the exercise of his power (para 12(4)).

Approval of the tax tribunal

It is worth noting that para 13 permits officers to ask the new first-tier tribunal to approve an inspection. Where such approval is given, the inspection notice provided at the beginning of the inspection must state that fact (para 12(5)).

Obtaining such approval will not extend the officer’s rights in the course of the inspection, for the simple reason that the legislation does not generally restrict officers’ powers in the course of an inspection.

Nor does the prior approval of the tribunal compromise the taxpayer’s rights to appeal to the tribunal against the officer’s decision to carry out an inspection, for the simple reason that the taxpayer has no such appeal rights in any event.

In fact, the only possible advantage of HMRC obtaining the prior approval of the tribunal is the fact that, where such approval is obtained, para 39 provides that any person who deliberately obstructs an officer in the course of an inspection will be liable to a penalty of £300.

Presumably, so that the tribunal system is not unnecessarily clogged, such applications will be limited to those cases where an inspection is expected to be obstructed and the threat of the £300 penalty is therefore going to be of some use to officers.

Para 39 is drafted widely and the £300 penalties can soon mount up. See Example 2.

The conditions for authorisation

Paragraph 13(2) provides the two conditions (both of which must be met) for an inspection to be pre-authorised by the first-tier tribunal.

The first is that the application for approval is made by or with the agreement of an authorised officer. Thus, not every officer (one assumes) will be given the internal authority to approach the tribunal for prior approval. In theory, there can be a distinction between those officers who are entitled to carry out (or approve the carrying out of) unannounced inspections and those who can apply (or sanction an application) to the first-tier tribunal.

However, I suspect that authorisation for one purpose will in practice mean authorisation for the other.

The second condition requires the tribunal to be satisfied that, in the circumstances, the inspection is justified. This condition hardly seems worth the paper that it is written on: a tribunal would be unlikely to approve an application if it were not so satisfied – and, if it did, it would be subject to judicial review.

But worryingly, does it imply that HMRC officers might consider inspections where such is not in the circumstances justified?

More worryingly, what is to stop officers simply ignoring the decision of the tribunal? See Example 3.

Conclusion

It is clear that the new rules contain a lot in the way of HMRC powers and little in the way of taxpayer safeguards. It is therefore important for practitioners to become fully acquainted with the new rules so that they can advise their clients accordingly – for example, the preparation of a procedure to follow should an inspection occur.

In the final part of this series of articles, I shall consider what HMRC officers can, and, implicitly, what taxpayers should, do during the course of an inspection.

Keith appreciates the suggestions made by Mike Down of Baker Tilly during the preparation of this article.

This article first appeared in Taxation on 6.11.08

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