The background to HMRC’s powers to inspect business premises (as defined) which are due to come into force on 1 April 2009 was set out in my previous two articles on the subject: Knock knock and Before the knock. This final article in the series considers the options available to taxpayers when an Inspector calls. All statutory references are to paragraphs of FA 2008, Sch 36.

Type of visit

Before deciding how to react to an imminent inspection, it is important to understand the precise statutory basis for the inspection and HMRC’s rights as a result.

It will be recalled that inspections can be carried out at any time provided that the occupier of the premises and the officer agree to the inspection at that time.

Therefore, if a taxpayer is invited to agree a time for an inspection, it is strongly advisable that the taxpayer consult a tax adviser (ideally one who is knowledgeable of HMRC’s investigatory powers).

That adviser should be able to tell the taxpayer whether or not he should agree to the inspection in the first place and, if so, ensure that the inspection takes place when the adviser can be present.

In the absence of any such agreement, HMRC can unilaterally request an inspection at a set time provided that:

• the timing is ‘reasonable’ and
• either:
  • they give the occupier at least seven days’ notice; or
  • the inspection is carried out (or agreed to) by an officer authorised for such purposes (para 12(2)).

Again, if notice is given, the taxpayer should consult a tax adviser to ascertain whether or not the inspection could be resisted or at least to ensure that the adviser is on hand to check that it is carried out in accordance with the law.

There is an additional provision applicable for VAT cases (para 11) but that is not considered further in this article.

An unannounced visit

Paragraph 12(2)(b) permits HMRC to make unannounced inspections. However, HMRC accept that there is a distinction between a right to enter premises and a right to force entry (if necessary) into premises.

They acknowledge that Sch 36 covers only the first of these. Therefore, despite Sch 36, no HMRC officer may insist upon entry.

As a general rule, it is my view that no officer should be given the immediate right to inspect premises. Whereas a taxpayer will usually be taken by surprise by any unannounced visitor, the officer will be fully prepared for the visit and will have the psychological advantage.

If the occupier is minded to allow the inspection to proceed, it is important that he has a chance to regain his composure and to ensure that any visit takes place on more equal terms.

I would recommend that the officer be asked to wait in a local café (or around the corner) for 15 minutes or so while the occupier stops, thinks, contacts his tax adviser before deciding how to proceed.

The occupier should resist the temptation to invite the officer to wait in reception or in a meeting room pending the occupier’s decision, even if it is pouring with rain. After all, the officer will be fully prepared and, in those circumstances, should have an umbrella.

However, this approach will not be appropriate in all cases. This is because para 13 provides that inspections can be pre-approved by the First-tier Tribunal, i.e. the tribunal that is shortly to take over the caseload from the General and Special Commissioners and from the VAT & Duties Tribunal.

The significance of such prior approval is considered below. While pre-approved inspections need not be without notice, it should be noted that the ‘protection’ given to the taxpayers in relation to unannounced inspections is the same as the condition required for HMRC before seeking approval from the First-tier Tribunal – that the move is being made by or with the agreement of an authorised officer.

Thus, unless the First-tier Tribunal makes it clear that the occupier of the premises must be given notice of the inspection, there is no statutory reason why pre-approved inspections need be anything but unannounced.

Prior tribunal approval

There is one fundamental difference between inspections under the normal para 12 powers and those where para 13 approval has already been given by the First-tier Tribunal.

And it is this difference that should be fully considered when responding to an inspection. If, and only if, an inspection has been pre-approved by the First-tier Tribunal, penalties can, under paras 39 and 40, be imposed on any person who deliberately obstructs an officer in the course of an inspection.

Paragraph 39 provides for a fixed £300 penalty; para 40 permits daily penalties of up to £60 for continuing default.

Therefore, if an unannounced inspection has been pre-approved by the First-tier Tribunal, any reasonable request by the occupier for a few minutes to recover his composure or to call his tax adviser could amount to the deliberate obstruction of the officer and render the occupier to a £300 penalty.

Similarly, if the occupier is temporarily absent from the premises when the officers arrive, it would not be unreasonable for the person then in charge (for example, the manager of a shop) to ask the officers to wait until the boss returns.

However, that request could mean that the manager would incur a £300 penalty for obstructing the officers.

In a civilised society, one would expect no officer to impose a penalty in such circumstances.

However, given that HMRC officers are instructed to ‘collect the maximum the law allows’ (see The Dave channel by Mike Truman), it will be interesting, perhaps in the Confucian sense, to see what happens in practice.

Challenging a decision

With such intrusive powers, one would have thought that taxpayers would have some opportunity to challenge a decision by HMRC to inspect a taxpayer’s premises.

Until 31 March 2009, any unlawful action (including unjustified visits) could be challenged only by way of judicial review.

However, as Richard Davey of HMRC’s Powers Reviews team reported in Taxation, ‘one of the objectives behind FA 2008, Schedule 36 is to create a simpler and less expensive safeguard in legislating that HMRC have to act reasonably’.

Unfortunately, however, the Schedule contains no provision that permits a taxpayer to challenge an officer’s decision to inspect premises, or the First-tier Tribunal’s approval of such an inspection.

Thus we have the simplicity and lack of expense promised by Richard, but not any actual safeguard.

The only option for taxpayers when HMRC are not acting reasonably is still to seek judicial review.

What officers may do

Once an officer has entered a taxpayer’s business premises, the officer has the power to ‘inspect the premises, business assets that are on the premises and business documents that are on the premises’ (para 10(1)).

What does this mean in practice?

Arguably, ‘to inspect’ can mean ‘to look into’ as its etymology would suggest and this could be extended to mean that HMRC inspections can amount to a lawful ransacking of the business premises.

On the other hand, the policy team at HMRC responsible for the implementation of the new rules is taking a more conciliatory approach and distinguishing between ‘inspect’ and ‘search’. In draft guidance and at various industry-wide seminars, it is being suggested that an officer may ask for boxes and other items to be brought to the officer, but may not start poking around unilaterally.

When the guidance goes fully online, it would be well worth printing off a copy as the guidance will represent the taxpayer’s only real safeguard against an over-zealous officer.

However, the guidance can evolve over time and I am concerned that the good intentions of those currently responsible for HMRC policy in this area will be eroded by their successors who will wish HMRC to have at their disposal the full rigours of the powers conferred on the department by Parliament.

Privileged material, etc.

Paragraph 28 provides that an officer’s power to inspect business documents does not extend to any document that is of a type set out in paras 18 to 27 of the Schedule.

Such documents are those that a taxpayer need not be compelled to produce following the issue of an information notice, i.e. the notice that compels taxpayers or third parties to produce information to HMRC, and cover:

• documents that are not in the taxpayer’s possession or power;
• documents relating to a pending appeal;
• journalistic material;
• personal records such as medical histories; and
• documents subject to legal professional privilege.

The concept of legal profession privilege, it will be recalled, is jealously guarded by the courts. See, for example, R v Special Commissioner & Anor, ex parte Morgan Grenfell & Co Ltd [2002] STC 786.

It should be noted that correspondence with a non-legally qualified tax adviser does not qualify as subject to legal professional privilege. Therefore, a letter from a (non-lawyer) CTA containing tax advice would not be exempt from disclosure to an HMRC officer.

Conversely, however, para 25 provides that such tax advisers are not required to provide copies of this information to HMRC.

Therefore, were HMRC to inspect a tax adviser’s premises, the tax adviser would not be required to disclose a copy of any such advice.

An officer leaves?

It remains to be seen what will happen when HMRC officers leave the business premises at the end of a day.

I have heard it suggested that HMRC will expect their officers to be able to return the next day to continue the previous day’s inspection.

In my view, unless the return visit had been part of the original ‘appointment’, that would have to rely upon an extremely broad reading of the legislation.

Instead, it would seem to me that (absent any prior approval from the First-tier Tribunal) any return visit would have to:

• be with the agreement of the occupier of the premises; or
• satisfy the criterion of reasonableness and be subject to seven days’ notice or duly authorised by a suitable officer (para 12(1)).

Practical solutions

Given the very narrow opportunity for taxpayers to challenge HMRC inspections, one precaution that taxpayers should take now is to set up a procedure that should be followed if and when an Inspector calls.

As appropriate, this could include a hotline to the nearest professional adviser and a pro forma application to the High Court for an emergency injunction in cases where officers step out of line.

There should be different contingencies, depending on whether or not the inspection is announced and/or pre-approved.

However, taxpayers should ensure that whoever is in practical charge of their business premises, at any time during business hours, is fully au fait with the procedures to be followed.

Conclusion

The next few months are likely to be busy as businesses and their advisers prepare contingency plans for HMRC inspections.

After all, HMRC would not have spent so much time extending their powers in the direct taxes arena if they did not intend to use them.

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

This feature first appeared in Taxation on 5.3.09

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