Have the joint arrangements between the Revenue and Customs produced results? What effect will this have on business in the longer term? Are we approaching an era when an inspector will go to a client’s premises and be multi-skilled, checking pay as you earn (PAYE), value added tax (VAT) and corporation tax returns all at the same time? Article by Neil Warren, Senior VAT Consultant at Keens Shay Keens, Luton. He worked for Customs & Excise, both as a VAT visiting officer and classroom trainer for 12 years. He is a part-time tax and accounting lecturer at Barnfield College, Luton. Published in the February 2002 issue of Tax Adviser.
The opening scene of the famous Ray Cooney play, ‘Run For Your Wife’, sees two women married to the same man report him as missing to the local police:
‘Good morning, my name is Mary Smith. I want to report my husband as missing – he is a taxi driver called John Smith’
‘Good morning, my name is Barbara Smith. I want to report my husband as missing – he is a taxi driver called John Smith.’
Until the last few years, a local business could have been in the same situation as the police in this play, but receiving simultaneous calls from Customs & Excise and the Inland Revenue:
‘Good morning, I am a VAT man – I would like to come and examine your books and records.’
‘Good morning, I am a PAYE inspector from the Inland Revenue. I would like to come and examine your books and records.’
But that situation is becoming increasingly less likely, as the two departments get closer to each other, with a clear strategy of sharing ideas, working together and passing information of mutual interest around.
Closer working relationships between government departments is a key theme in the Modernising Government White Paper, with the idea of ‘joined up’ services being a priority target.
The main idea is that if government departments work together on a more efficient basis, then government as a whole will be able to provide a better service to the public or, the ‘customer’ – a word the public sector is becoming increasingly familiar with.
Have the joint arrangements between the Revenue and Customs produced results? What effect will this have on business in the longer term? Are we approaching an era when an inspector will go to a client’s premises and be multi-skilled, checking pay as you earn (PAYE), value added tax (VAT) and corporation tax returns all at the same time?
Joint Shadow Economy Teams
One of the main features of the working together process is the creation of Joint Shadow Economy Teams (JoSET teams). The black economy has long been a source of frustration for our prudent Chancellor, Gordon Brown, and both the Revenue and Customs are under pressure to achieve results in this area.
For example, recent newspaper reports of Customs officers being heavy-handed dealing with the general public returning from France with cheap cigarettes is a direct result of their desire to improve statistics in preventing ‘bootlegging’.
A check of cigarette ends after a Premier Division football match revealed that about 25 per cent came from abroad, and this represents a massive loss of revenue to the Chancellor if acquired illegally.
Twenty joint shadow economy teams have been established to investigate the black economy, involving about 180 people from the two departments. Some of the teams also have pensions investigators working with them, to look for possible benefit frauds.
Although the public relations teams of both departments will trumpet JoSETs as a major success, and be able to quote examples of revenue saved, there is no doubt that there is a massive cultural difference between officers from the Revenue and Customs.
For example, a new VAT recruit coming into Customs receives a very practical based training programme, with emphasis on communication skills, looking at the overall credibility of VAT returns and always considering the bigger picture of the business being examined.
The Revenue emphasis has always been on possessing a much more detailed knowledge of accountancy and legislation, with a strong emphasis on note taking in massive detail.
In short, ask a Revenue man to explain about accruals and suspense accounts, and you will get a sensible answer. Ask a Customs man about a suspense account and he will probably say it is an account where you don’t know whodunit until the end!
For example, one of my clients experienced a routine Revenue enquiry last year and the letter from the inspector requested information about almost every possible area of the accounts – including: ‘Can you tell me the source of the £30 that appears as a credit on your bank statement in December 1999’.
The subsequent discussions went into great detail about private motoring and telephone costs, including details about which cars were used for taking dogs out for walks etc.
Contrast this with the current approach of many VAT visits, which is to identify a potential risk area where a large amount of VAT is at stake, and carry out a risk based visit to test this one area.
Customs officers tend to be much more relaxed about minor amounts of tax. However, if the Revenue get the sniff of a small undeclared banking, they will often charge in with as much excitement as a crowd at Wimbledon watching a Tim Henman victory!
So can these two different creatures really get in the same bed together?
The main positive point is that the two departments are now learning from each other by carrying out joint visits, interviews, observations and research work. Over a period of years, this should hopefully result in both departments learning the best of what each has to offer.
For example, there is no doubt that the Customs skills in surveillance, observing cash based traders and carrying out fraud investigations is far superior to that of the Revenue.
After all, can you imagine three series of a top television programme screened about the Revenue as happened with Customs and The Knock.
The key objective must be for the two parties to deal with each other on a face-to-face basis as much as possible.
Results to date
So what success has the joint working programme achieved? Some examples are:
- Cash detections – information about Customs cash detections at some airports and ports has been passed on. Results have been good – at one airport, 65 per cent of 1206 notifications were subsequently used in Revenue enquiry cases.
- District valuer and stamp duty information – local liaison on sales of land and property in three regions resulted in the identification of additional VAT liabilities or adjustments of nearly £1.25m from Revenue data
- Construction Industry Scheme (CIS) – CIS information from the Inland Revenue is being used locally to help identify unregistered traders above the VAT threshold. One region has found more than 100 such traders with a projected yield of £750,000
- VAT assessments and returns – examination of VAT assessments, and comparison of VAT returns with income tax self-assessment information, has identified a wide range of Revenue ghosts. In a similar fashion, they also help identify cases of understated VAT liability and sales suppression. Examples range from a clothing business with a £1.3m turnover to a Chartered Accountant owing over £100,000 VAT and tax.
- Import data – local exchanges of Customs information on imports in a number of regions are proving valuable in helping to identify Revenue ghosts and moonlighters.
- Business support – this includes exchange of leaflets, contacts, fact sheets and Customs staff attending late night openings of Inland Revenue Enquiry Centres from time to time. A joint presence at business exhibitions, education seminars such as the business open days, and other local events is also widespread, and is very helpful for local businesses.
So how will the scheme develop in future?
My personal view is that for the compliant trader, very little will change. Queries about VAT and returns will be directed to Customs & Excise; the Revenue will handle PAYE, self-assessment and corporation tax matters.
I cannot see the situation developing where a Revenue inspector becomes highly skilled in VAT, and a Customs man becomes an expert in schedule D1. There would be big objections from the staff, almost certainly a mass exodus to the private sector, and a costly training programme would be involved that would almost become unmanageable. But, equally important, such a move would turn officers into ‘all-rounders’ rather than ‘specialist batsmen and bowlers’, and there is a strong argument against this approach.
After all, both departments have enough trouble keeping ahead of the game as far as tax avoidance schemes and complicated legislation are concerned. Imagine the problems if they suddenly had to absorb changes and new measures for four different taxes!
In honesty, I cannot see the day when the telephone rings and a voice says: ‘Good morning, I am from the tax compliance office, I would like to come along and review your VAT, PAYE, Corporation Tax and self-assessment returns. Oh, and while I’m there, can I have a look at any invoices that show Insurance Premium Tax.’
Emphasis on tax yield and fraud
In reality, therefore, I feel that it will be the ‘bad boys’ in the business community who feel the impact of the joint working initiative.
For example, the days when a publican received an assessment for VAT on undeclared takings, without getting a Revenue enquiry for undeclared profits, are probably long gone.
Equally, if a business is involved with any complicated property transactions, it is almost certain that the Revenue will tip off Customs about any possible partial exemption or option to tax issues. And if a restaurant trader gets the dreaded 11pm visit from Customs where he has to open his till and show his takings for the night, there will probably be a Revenue man only a few yards behind him.
Again, if suspected fraud is part of the equation, then joint enquiries are highly likely, and if a client suffers a VAT or tax enquiry that produces a big underpayment, then a follow-up from the other side will again be on the cards.
However, that said, there are still a few bottlenecks that need to be ironed out. I recently became involved with a case of belated VAT registration. The client in question had shown £60,000 turnover for the previous two years on his self-assessment return, but it had never been picked up by Customs that he did not have a VAT registration number. In an age of sophisticated technology, it would be expected that an interrogation programme would immediately highlight any anomalies of this nature.
Overall, therefore, what are the main conclusions to be drawn about the joint working project:
- Both departments have achieved good early results from the scheme that will encourage the development of other initiatives.
- Joint working will play a key part in helping to yield tax from the black economy – (Gordon will be delighted!)
- If a business gets in trouble with Customs or the Revenue, then there is a strong likelihood that the other department will be following closely behind looking for their share of the cake
- But don’t worry…….it still seems highly unlikely that a multi-skilled officer will come along and check all business tax returns in one go!
020 7235 9381
February 2002 by