1. Compliance Checks into Indirect Tax Matters

This Notice explains what happens during a check into Indirect Tax matters if we suspect conduct involving dishonesty.

1.1 Introduction

We make checksinto tax matters for a number of different reasons. This notice deals only with cases where we have reason to believe dishonest conduct has occurred. Our practice in relation to other enquiries is set out in a series of factsheets.These are available on our website (www.hmrc.gov.uk). This notice covers all indirect taxes other than Stamp Duties, Customs duties and import VAT.

2. How Does this Affect Me?

We will normally ask you and your professional adviser, if you have one, to attend a meeting with us. Please tell us in advance if you need an interpreter or have any special needs so that we can take these into account when we prepare for the meeting.

We will tell you:

• the check is not being conducted with a view to prosecution in relation to the matters that are the subject of our check
• the matters that are the subject of the check. This means the behaviour(s) and period(s) under enquiry, rather than the specific information we hold that gives rise to our suspicion of dishonesty.

You will have an opportunity to disclose any irregularities or matters in relation to your tax affairs. We will listen to any explanations that you or your professional advisers give and keep an open mind to the possibility that there may be an innocent explanation for the suspected irregularities. We make notes of all meetings and can give copies of the notes to you or your adviser if you ask for them.

If you wish to disclose irregularities or matters in relation to your tax affairsin areas that are not the subject of our check we may not be able to deal with these as part of the check. However we will consider any disclosures that you make, or additional matters that we may uncover during the check, to determine how they should be treated. Any irregularities outside of the matters being checked may be investigated with a view to prosecution if appropriate.

We expect you to be truthful, to tell us all relevant facts and to cooperate fully in putting your tax affairs in order. If you are unsure whether particular facts are relevant, you should tell us anyway.

It may be necessary to make further checks. If this happens, we will explain to you the compliance checks process and the steps that need to be taken to establish the relevant facts. It may be necessary to use our statutory information powers, including contacting third parties.

We will invite you to make payments on account towards any tax arrears, both at the initial meeting and throughout the check.This will reduce any interest charges.

If, as a result of the check, we believe that the tax arrears are due to conduct involving dishonesty or deliberate behaviour on your part we will consider whether you should pay a penalty. Depending upon the period of the tax arrears the penalty will be:

• A civil evasion penalty
• A penalty for deliberate inaccuracies, or
• A penalty for deliberate and concealed inaccuracies

2.1 Do I Have to Cooperate with Your Check?

The extent to which you cooperate with us and provide us with information is entirely a matter for you. In making your decision, you may wish to get help from a professional adviser. If you do, your adviser can accompany you to all meetings held with us. He or she may correspond with us on your behalf.

We would welcome your cooperation with the check and in establishing the correct amount of tax due. Such cooperation can significantly reduce the amount of any penalties due.

2.2 How Do You Work Penalties Out?

The law on penalties for irregularities has changed.

If we identify irregularities due to conduct involving dishonesty, a civil evasion penalty will normally be applied. If we identify irregularities due to deliberate behaviour we will normally charge a penalty for deliberate inaccuracies or a penalty for deliberate and concealed inaccuracies. The penalty applied depends upon the tax period in which theirregularities occur.

The penalty figure will be a percentage of the tax under declared or over claimed.

2.2.1 Civil Evasion Penalty Rules

For VAT irregularities involving dishonest conduct that relates to returns or documents due to be sent to us BEFORE 1 April 2009, a civil evasion penalty will normally be applied. This can be a 100% of the tax evaded.

For indirect tax irregularities other than VAT due to conduct involving dishonest conduct, that relates to returns or documents due to be sent to us BEFORE 1 April 2010, a civil evasion penalty will normally be applied. This can be 100% of the tax evaded.

2.2.2 Penalty for Inaccuracies Rules

The Penalty for Inaccuracy rules apply to VAT irregularities in returns and documents with a filing date on or after 1 April 2009 where the return covers a tax period beginning on or after 1 April 2008. For indirect tax irregularities other than VAT these rules apply to returns and documents for a tax period beginning on or after 1 April 2009 that are due to be sent to us on or after 1 April 2010.

Under the Penalty for Inaccuracy rules a person may be charged a penalty where they give us an inaccurate document that either amounts to or leads to

• an understatement of the person's liability to tax, or
• a false or inflated statement of a loss by the person, or
• a false or inflated claim to repayment of tax

and the inaccuracy was

• careless,
• deliberate,
• or deliberate and concealed.

If our suspicions of deliberate behaviour are justified, we will charge penalties for deliberate inaccuracies, or for deliberate and concealed inaccuracies, depending on the facts. Penalties for careless inaccuracies may also be charged where appropriate.

A penalty for a deliberate inaccuracy will normally apply where you deliberately

• understate the tax you owe
• choose to misrepresent yourliability or
• overstate a claim.

A penalty for a deliberate and concealed inaccuracy will normally apply where you take active steps to cover up a deliberate inaccuracy.

The maximum and minimum penalty for each inaccuracy depends on the behaviour that caused it:

• inaccuracy despite taking reasonable care: no penalty
• careless inaccuracy: between 15% and 30%
• deliberate inaccuracy: between 35% and 70%
• deliberate and concealed inaccuracy: between 50% and 100%

The figures are percentages of the tax lost.

Liability for penalties under Civil Evasion Penalty rules and Penalties for Inaccuracies rules:

You may be liable for penalties under the Civil Evasion Penalty rules for some tax periods and under the Penalties for Inaccuracies rules for other tax periods. If this is the case, the different penalties will be calculated separately, under the different rules.

2.3 How Can Penalties be Reduced?

It is for you decide whether or not to cooperate with our check, but if you do you should be truthful as making a statement to us you know to be false may render you liable to prosecution.

If you choose to cooperate and disclose details of your true liability then you can significantly reduce the amount of any penalties due.

You should tell us about anything you think is relevant when we are working out the level of the penalty. At the end of the check we will take into account the extent of your cooperation.

2.3.1 Reductions under Civil Evasion Penalty Rules

The maximum penalty of 100% tax evaded will normally be reduced as follows:

• up to 40% – early and truthful explanation as to why the arrears arose and the true extent of them
• up to 40% – fully embracing and meeting responsibilities under this procedure by, for example, supplying information promptly, quantification of irregularities, attending meetings and answering questions.

In most cases, therefore, the maximum reduction obtainable will be 80% of the tax on which penalties are chargeable. In exceptional circumstances however, consideration will be given to a further reduction, for example, where you have made a full and unprompted voluntary disclosure.

2. 3.2 Reductions Under Penalties for Inaccuracies Rules

The minimum penalty for deliberate error will normally be 35% and the maximum penalty 70%.

The minimum penalty for deliberate and concealed error will normally be 50% and the maximum penalty 100%.

The penalty may be set at any level between the maximum and the minimum and in calculating this we will normally give the following reductions:

• up to 30% for “telling”: the extent to which you admit the inaccuracy, tell us promptly about its full extent and explain how it arose
• up to 40% for “helping”: the extent to which you help us to quantify the inaccuracy, give positive assistance, actively engage and volunteer information
• up to 30% for “giving access”: the extent to which you respond positively to requests for information and documents, give us access to business and other records and explain their function and significance.

If you have made an unprompted disclosure of the inaccuracy the minimum penalty may be set at 20% for deliberate error and at 30% for deliberate and concealed error. An unprompted disclosure is one where you have told us about the irregularity before you had any reason to believe that we have discovered or are about to discover it.

2.4 What Happens After Your Check?

Having considered all the facts and evidence gathered during the course of the check we will make a decision on whether or not any penalties are due and, if so, how much they will be. The penalty assessment will be in addition to any tax that may also be due.

In appropriate cases, we will issue a penalty assessment for:

• a civil evasion penalty and/or
• a deliberate inaccuracy penalty, and/or
• a deliberate and concealed inaccuracy penalty.

2.5 What If I Cannot Pay?

If you agree the amounts of assessment and penalty to be paid, but cannot pay the full amounts straight away, it may be possible to arrange payment by instalments. You will need to contact our Debt Management and Banking section. We will give you the address.

2.6 Can I Appeal Against Your Decision?

You can ask for a local reconsideration of, and/or appeal to the independent First tier Tribunal against, the amount of any tax assessment and other related assessment issues. You can also appealin the same way against the imposition, and amount of, any penalty.

3. Your Rights Under Our Service Commitment to You

3.1 During Our Checks

We will always be courteous, fair and professional. If you or your professional adviser writes to us we will aim to respond to the questions or issues you raise within our published service standards. This includes matters such as your legal rights and obligations under the law.

We will undertake any further enquiries promptly and keep you informed as to what we expect from you.

3.2 Your Costs

You have to pay for any costs that you incur in dealing with our check, including the fees of an accountant or other professional adviser. We know that dealing with our checks can cost you time and money, so we will make sure that our checks are reasonable and necessary to your case. We will close our checks as soon as we are satisfied that your tax affairs in relation to the matters under investigation are in order or settled.

4. Glossary

Term	Description
Returns	All Indirect Tax declarations, statements, disclosures, tax returns or claims etc, are referred to as ‘returns’
Indirect Taxes	VAT, all Customs Duties and Excise Duties including those applicable to Alcohol, Tobacco, Gambling and Oils, Air Passenger Duty, Insurance Premium Tax, Landfill Tax, Climate Change Levy and Aggregates Levy, and any other Indirect Taxes matters for which responsibility is laid to HMRC.
Tax Assessment	A legal method of establishing a debt due to the Crown by a trader who has made an error, an understatement or an over claim of tax.

5. Do You Have Any Comments?

We would be pleased to receive any comments or suggestions you may have about this notice. Please write to:

• HM Revenue and Customs
• Criminal and Enforcement Policy
• 4th Floor, 100 Parliament Street
• LONDON SW1A 2BQ

Please note this address is not for general enquiries.

For your general enquiries please phone our Helpline on 0845 010 9000.

If You Have a Complaint

For further information about our complaints procedures go to http://www.hmrc.gov.uk and under ‘quick links’ select ‘Complaints’.

Source – http://www.hmrc.gov.uk. HMRC Copyright is acknowledged