Wednesday, May 18, 2011

Should HMRC's right to make random inspections be abolished?

The legitimacy of HMRC's powers were called into question last night during the annual CTA Address, given by the Rt Hon Sir Paul Kennedy, Interception of Communications Commissioner.

Speaking on the subject of 'Powers...Between Citizen and State' he suggested that the professional bodies campaign for the abolition of HMRC's right to make random inspections. He indicated that he thought that this right is neither reasonable nor propotionate.

Sir Paul considers that the risk of random checks by HMRC is unlikely to act as an effective deterrent. He likened the concept to breathalysers and said that the risk of being breathalysed seems to have little effect on those who continue to drink and drive.

I'm not sure I agree on either point. Many people have clearly moderated their drinking or choose not to 'drink and drive' due to the risk of getting caught. (NB: I think the risk of causing accidents should be the primary motivation, but I'm not sure this is always the case).

As the public become aware of the full extent of these powers I think the threat of random checks could be a powerful motivator. BUT I'm not sure that the worst offenders will operate any differently - other than perhaps to make it even more difficult for HMRC to find their ill-gotten gains in the event of a random search!

On the question of the reasonableness of their powers I have long accepted that HMRC need onerous powers to prevent deliberate defaulters from exploiting the system. Senior officials always assert that HMRC will only use extreme powers in extreme situations. The worry, evidenced by some of the questions last night, is that some of these powers are capable of exploitation and that not everyone in HMRC can be trusted to exercise the necessary restraint.

Of course all HMRC powers should be reasonable and propotionate. Before the newest powers were given statutory force there was much debate over their extent. HMRC powers were subject to more discussion documents and meetings between HMRC and the profession than on any other matter I can remember for some time. I suspect that some of the professionals closely involved felt that their concerns were not given an adequate hearing or reflected in the new laws.

The legislation introducing HMRC’s new powers to make 'compliance checks' powers was contained in the Finance Act 2008. Most of the new powers came into force just two years ago on 1 April 2009. There's a useful summary in HMRC's FAQs re 'New compliance checks'.

NB: A quick internet search for 'HMRC powers' reveals that HMRC's website on this broad subject still contains guidance that dates back to the merger of the Inland Revenue and HM Customs & Excise in 2005.

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