Tax Investigations
FAQ - Advisers
Questions frequently asked by advisers of clients under investigation by the Inland Revenue
At Tenon Tax, we recognise that many advisers are happy to negotiate with the tax authorities on behalf of their clients in tax investigations. However, some situations may be outside your experience and you may need specialist support and assistance. If so, please see the Assistance for the Professional Adviser? page.
Some of your possible questions on tax investigations may be answered by the clients’ FAQ page. Additional questions are answered below. Click on the question to obtain the answer.
At the start of an Inland Revenue investigation
- > The Inland Revenue have indicated that they are investigating one (or more) of my clients but have not issued a Code of Practice. What should I do?
- > One of my larger clients is being investigated by the local Tax Office in circumstances where I believe it would be more normal for SCO to investigate. What should I do?
- > What is the difference between the two Codes of Practice (8 & 9) issued by SCO?
- > What does the “Hansard extract” say?
- > Some advisers suggest that a Hansard meeting should be ended immediately after Hansard is read. Is this the best way to proceed?
- > The tax inspector has requested that a disclosure report should be prepared on behalf of my client. Is this the correct way to proceed?
- > Special Compliance Office (SCO) inspectors want to ask my client questions in a major investigation but have not offered to read Hansard. Should I allow this?
- > Do the Inland Revenue ever prosecute accountants and other professionals?
- > What is the Inland Revenue's new prosecution power which came into force on 1st January 2001?
During an Inland Revenue investigation
- > What powers do Inland Revenue officials have to obtain information from third parties?
- > Should I agree to allow the inspector access to my working papers?
- > Do tax inspectors ever have unlimited rights of access to all of an accountant’s working papers?
- > Special Compliance Office (SCO) inspectors, who are investigating my client, are asking detailed questions about my working practices. Should I be concerned?
- > Can information be obtained by the Inland Revenue from overseas?
- > Can the Inland Revenue search my offices?
General queries
A tax inspector has started an investigation but has not issued a Code of Practice to my client(s). What should I do?
Ask for a Code of Practice to be issued for each client under investigation straight away. One of the investigation Codes of Practice should always be issued at the start of an investigation. This is particularly important when Special Compliance Office (SCO) are involved as they may be considering a prosecution, and the protection offered by one of their Codes of Practice is vital. If you have limited experience of SCO, it is strongly recommended that you seek specialist advice when they become involved.
One of my larger clients is being investigated by the local Tax Office in circumstances where I believe it would be more normal for SCO to investigate. What should I do?
This is becoming more common. Many local Tax Offices now have teams of investigators, some of whom are qualified accountants, capable of investigating larger companies. Previously, this capability was lacking at a local level and such large and complex investigations would only have been tackled by SCO. This can cause problems. For example, if there are substantial tax irregularities which fall within the Revenue's definition of "serious fraud", such cases would, in the past, always have been worked by SCO undercode of practice 9, commonly known as the Hansard procedures. It is now perfectly possible for local Tax Offices to investigate in such cases without issuing the Hansard extract. This could increase the risk of the client being prosecuted and we would, therefore, recommend that you seek specialist advice in cases of doubt.
What is the difference between the two Codes of Practice (8 & 9) issued by Special Compliance Office (SCO)?
Taking them in reverse order, Code of Practice 9 is used in "serious fraud" cases where SCO are not, at least initially, considering a prosecution, providing that a full disclosure of all tax irregularities is made. This is used by SCO Hansard Groups. Code of Practice 8 is used by SCO Avoidance Groups, in all non-prosecution cases which do not fall within the Revenue’s definition of "serious fraud". Typically, these are cases where SCO suspect there has been a large loss of tax to the Crown, involving some sort of tax avoidance, perhaps bordering on evasion. Many of these cases have some sort of offshore connection. Please contact us if you need additional explanations.
What does the "Hansard extract" say?
IIn reply to a Parliamentary Question on 18 October 1990 the Chancellor of the Exchequer gave the following answer regarding tax fraud:
"The practice of the Board of Inland Revenue in cases of tax fraud is as follows
- The Board may accept a money settlement instead of instituting criminal proceedings in respect of fraud alleged to have been committed by a taxpayer.
- They can give no undertaking that they will accept a money settlement and refrain from instituting criminal proceedings even if the case is one in which the taxpayer has made full confession and has given full facilities for investigation of the facts. They reserve to themselves full discretion in all cases as to the course they pursue.
- But in considering whether to accept a money settlement or to institute criminal proceedings, it is their practice to be influenced by the fact that the taxpayer has made a full confession and has given full facilities for investigation into his affairs and for examination of such books, papers, documents or information as the Board may consider necessary."
Some advisers suggest that a Hansard meeting should be ended immediately after Hansard is read. Is this the best way to proceed?
It depends on the circumstances but, in our view, this is generally not in your client's best interests. For one thing, it may be regarded as poor co-operation by the inspector and thus lead to higher penalties if additional liabilities arise. Also, an adviser with a broad experience of Hansard meetings can often gauge something about the nature of the investigation and the extent of the inspector's concerns from the detailed questions asked at the meeting. If you have little or no experience of such meetings, we strongly recommend that you ask a tax investigation specialist to attend all meetings with SCO.
The tax inspector has requested that a disclosure report should be prepared on behalf of my client. Is this the correct way to proceed?
This is standard practice in Code of Practice 9 investigations by Special Compliance Office (SCO), and may also be suggested (or advisable) in Code of Practice 8 investigations or large investigations by local Tax Offices. If no Code of Practice has been issued in an SCO investigation, seek specialist and/or legal advice immediately as the Inland Revenue may be considering a prosecution. Evidence contained in a report could be used against your client in such a prosecution if the client has not received the protection offered by the issue of one of the Codes of Practice. If the investigation is being conducted by a local tax inspector, great care must also be taken in using a disclosure report if the tax irregularities are large or serious. Disclosure reports sent to local Tax Offices in such circumstances have been used as evidence in a subsequent prosecution by SCO. If in doubt, we recommend that you seek specialist advice.
Special Compliance Office (SCO) inspectors want to ask my client questions in a major investigation but have not issued a Code of Practice. Should I allow this?
If it is clear that your client is the target of the investigation, or may become one in future, you should not allow the client to be interviewed unless SCO have issued either Code of Practice 8 or 9. If no Code of Practice has been issued by SCO and they are investigating your client, a prosecution may be under consideration and we strongly recommend that you seek specialist advice as soon as possible. Care is also needed if SCO are approaching you or your clients as third parties in an investigation into someone else's tax affairs, whether or not they are seeking a witness statement. Many SCO investigations start as spin off cases and third party enquiries sometimes lead inspectors to believe that there may be tax irregularities in the third parties own tax affairs.
Do the Inland Revenue ever prosecute accountants and other professionals?
Yes. There have been a number of high profile prosecutions of professionals in recent years. The Inland Revenue takes a very serious view of any professional person who assists their clients to evade tax. If evidence can be found of conspiracy to defraud, the Inland Revenue will prosecute the professional, and probably one or more clients, even if the amounts of tax are not that large. It is obviously imperative that you immediately seek legal and specialist advice if there is any suggestion that the Inland Revenue are considering a prosecution.
What is the Inland Revenue's new prosecution power which came into force on 1st January 2001?
The new prosecution power, which is the first criminal offence specifically related to income tax fraud, is as follows:
Offence of fraudulent evasion of income tax
- A person commits an offence if he is knowingly concerned in the fraudulent evasion of income tax by him or any other person.
- A person guilty of an offence under this section is liable-
- on summary conviction, to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum, or both
- on conviction on indictment, to imprisonment for a term not exceeding seven years or a fine, or both.
- This section applies to things done or omitted on or after 1st January 2001.
Whilst this is currently limited to income tax evasion, the government indicated that it might be extended to other taxes. It seems likely that this new power will lead to an increase in the number of Inland Revenue prosecutions. It is obviously imperative that legal and specialist advice is sought immediately, if there is any suggestion that the Inland Revenue are considering a prosecution.
What powers do Inland Revenue officials have to obtain information from third parties?
The Inland Revenue has a specific power (Section 20(3), Taxes Management Act 1970) to oblige third parties to produce documents which are in their possession or power and which, “in the inspector’s reasonable opinion”, may contain information relevant to the tax liabilities under investigation. Normally this is used by tax inspectors to obtain information about a specific person under investigation, but Section 20(8A) extends this to investigations into several people, who do not have to be named them, eg all the clients of an accountancy practice. There are limits on these powers where the documents are legally privileged and in the case of certain medical records and other documents (see next question regarding your working papers). S20BA TMA1970 is intended for use in obtaining information and records from professionals such as accountants and solicitors, in respect of third parties. Failure to comply with this notice, which is intended to replace, and be a less invasive alternative to, the raid, is contempt of court and can lead to a fine and or custodial sentence for the advisor.
Should I agree to allow the inspector access to my working papers?
Except in limited circumstances (see next question), there are restrictions on the working papers which inspectors have the power to see. A detailed Statement of Practice (5/90) was issued by the Inland Revenue setting out their views on what inspectors may and may not ask to see. If an inspector asks you to see your working papers, without specifying exactly what he or she wants to look at, politely decline and carefully read SP5/90 before deciding what you will allow access to. Allowing unfettered access could compromise your duty of confidentiality to your client. If in doubt, we recommend that you take specialist advice.
Do tax inspectors ever have unlimited rights of access to all of an accountant’s working papers?
Only in the following circumstances:
- the practitioner has knowingly assisted clients to prepare incorrect Tax Returns and a penalty has been imposed under Section 99, Taxes Management Act 1970;
- the practitioner has been convicted of a tax offence; or
- the inspector has a valid search warrant.
In any such circumstances, we strongly recommend that you take specialist advice.
Special Compliance Office (SCO) inspectors, who are investigating my client, are asking detailed questions about my working practices. Should I be concerned?
It would be wise to be cautious about this, and to try and ascertain why. If they are simply trying to establish the link between the client’s books and records and the figures in the accounts or Tax Return, there may be nothing to be concerned about. However, they may, rightly or wrongly, have more general concerns about your practice. This could lead to a broader investigation into both your practice and more of your clients. One of SCO’s duties is to “police” the professions in connection with tax irregularities. We strongly recommend that you take specialist advice, to protect yourself and your clients, if you are not happy about the approach being taken by SCO.
Can information be obtained by the Inland Revenue from overseas?
Yes. Substantial amounts of information regularly pass between the UK and overseas tax authorities, particularly those in Europe and North America. During the year ended 31 March 1999, for example, 330,000 items of information (nearly twice the amount in the previous year) were exchanged in this way. Often such information is exchanged spontaneously but specific requests can and are made. Information obtained from overseas tax authorities plays an important part in some major investigations and leads to substantial additional liabilities.
Can the Inland Revenue search my offices?
Yes, but only where they have obtained a search warrant in a serious fraud case. Search operations must be authorised by the Board of Inland Revenue, and warrants can only be issued by the appropriate judicial authority (a Circuit judge in England and Wales, a sheriff in Scotland, or a county court judge in Northern Ireland). Before seeking a warrant SCO must have considered the use of s20BA TMA 1970 first and can only proceed with a warrant if they consider the use of s20BA might prejudice their investigations. If tax officials arrive at your offices (or home) with a valid search warrant, they have a legal right to enter the premises, and seize and remove anything which may be needed as evidence in criminal proceedings, including all of your working papers for the clients under investigation. They can also search people on the premises, but searches must be conducted by persons of the same sex. They must not be obstructed in their duties. It is strongly recommended that legal and specialist advice is immediately sought in such circumstances.
Do we need office procedures to cope with a possible Revenue search operation?
The Inland Revenue is undertaking more prosecutions which involve search operations - “dawn raids”. Typically, the offices of the client’s professional advisers would be visited, usually with a search warrant, during such an operation. Although you would be unlucky if this happened to your practice, there would be little or no time to react if and when it did. It is therefore sensible to have procedures in place to minimise any damage or disruption to your practice if the unthinkable happened. We are able to advise you on this, in conjunction with experienced lawyers. If you would like more information, please contact us.