- The Single Compliance Process (SCP) is a new framework HM Revenue & Customs (HMRC) has designed to handle small and medium enquiry work for both tax and VAT. The process is risk and behaviour driven, with HMRC enquiry officers devoting more time and effort, or ‘intensity’, to highest risk cases.
- HMRC is keen to develop and adopt a more collaborative and transparent approach to enquiry work with Small & Medium Enterprises (SMEs) and their tax advisers. It wants to increase the efficiency and effectiveness of its diminishing workforce, reduce unnecessary delays, focus on perceived areas of ‘risk’ and turn enquiries around faster.
- Up until recently, HMRC has pursued a two-pronged strategy, undertaking ‘Full’ and ‘Aspect’ enquiries. Full enquiries typically involved a detailed review of all of the entries on a Self Assessment or Company tax return, whereas Aspect enquiries centred on one or a few specific entries. Under the SCP, HMRC is moving away from this strategy and recategorising enquiries into four levels of risk.
- Prior to launching an enquiry, HMRC conducts a wide-ranging background evaluation of the individual or SME it intends to enquire into. HMRC calls this work a risk assessment. The risk assessment involves a detailed business analysis of the income and expenditure claimed by the SME over recent years and a check on the outcome of any previous VAT visits. A detailed private analysis is also carried out, where HMRC attempts to draw up a lifestyle picture based on known bank/building society accounts held, house purchases and disposals identified by the Land Registry and more general pointers from social media sites like Facebook.
- Once the risk assessment has been completed and HMRC has decided upon the level of intensity required, the compliance check is then allocated to one of four levels. Level 1 is the lowest category of risk, where the check may be settled over the telephone and/or by correspondence only, similar to an old style aspect enquiry. Level 2 is a step up where a face to face meeting may be required. Level 3 checks will typically involve a wider ranging review and be more detailed, with a greater level of intensity anticipated. Level 4 cases are the most complex and, based on the risk and behaviour assessment, indicate potential tax evasion characteristics.
- The SCP allows for compliance checks to move up and down the four levels once the HMRC officer has begun to receive information and started to address the risk assessment. The individual or SME under enquiry are not told which level of risk they are in. Say, for example, HMRC receives third party information from the Land Registry advising of an expensive property purchase. The property has been bought by a small business owner for in excess of £500,000 and a picture of the property on Google Earth suggests recent external renovation work has taken place. HMRC conducts a risk assessment which shows the business owner has taken drawings of no more than £25,000 over years prior to the purchase. The risk assessment also fails to produce any evidence of substantial bank/building society interest, or other investment income, which would suggest savings could have funded the purchase. HMRC decides the case has potential tax evasion characteristics because, seemingly, the property could only have been bought via undeclared income. The case is deemed to be a level 4. The business owner is placed under investigation and an opening enquiry letter is issued.
- Opening enquiry letters issued under the SCP involve the HMRC officer expressing their desire to ‘look’ or ‘check’ on the ‘following areas’. The areas are usually described as Business results, Business expenses and/or Means for example. In the scenario described at point 6, the opening letter might say ‘I only intend to look at the following areas: Means and Property transactions. However, when I look at these areas I may find I need to extend my check. If this happens I will let you know.’ The opening enquiry letters also explain the SCP process in more detail and may even encourage communication by e mail.
- Under the two-pronged strategy, enquiries could only be upgraded from ‘Aspect’ to ‘Full’, but not vice versa. The SCP allows for enquiries to move up and down the four levels once the HMRC investigating officer has begun to receive information and started to address the risk assessment. Again using the example at point 6, the business owner receives the opening enquiry letter and immediately provides evidence of how the purchase was funded, by submitting the solicitor’s completion statement, showing the property was paid for via a substantial inheritance. The HMRC officer refers back to the file to review the initial risk assessment. The check is downgraded from a level four to a level two because of the reduced risk of tax evasion and to ensure the level of intensity devoted to the check will remain proportionate, in line with one of the key principles of the SCP.
- The SCP was originally trialled from the following offices: Belfast, Cardiff, Dundee, Edinburgh, Euston Tower in London, Exeter, Ipswich, Lincoln, Newcastle, Reading, Slough, Southampton, Tolworth, Warrington, Worcester and York. However, the SCP is now being rolled out across HMRC.
- As the HMRC officer is finalising the concluding paperwork, such as issuing a closure notice or contract settlement, in another new development the HMRC officer is also considering whether any referrals need to be made, as a consequence of the check. Referrals are made to various bodies including the Deliberate Defaulters Unit, the Risk Intelligence Service, the National Minimum Wage Unit, the Tax Credit Office and the Construction Industry Scheme Functional Lead Team. Referrals may be necessary if anything has come to light during the course of the compliance check which impacts upon any of their spheres of work.
Our ReSource Tax and VAT Consultancy team specialise in enquiry work and compliance checks. If you require help or advice, please email firstname.lastname@example.org
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy team.