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HMRC internal manual

Compliance Handbook

From
HM Revenue & Customs
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How to do a compliance check: using inspection powers: covert activity: examples of what is reasonable and proportionate

The following examples will help you decide whether your planned covert activity will be reasonable and proportionate. The activity could be:

  • covert observation or surveillance where you monitor activities over a period of time and record the information
  • a drive by or walk past where you observe premises as you go past but do not remain outside the premises.

Each individual case must be considered on its merits and must have the agreement of an authorised officer, see CH257400.

Covert observation

Example 1

A caseworker receives a cross tax compliance case from RIS. She starts a routine VAT compliance check but finds indications that double invoicing has been used to suppress purchases. A check with the suppliers confirms this. In order to find out whether sales are being suppressed, the caseworker makes test purchases at the takeaway, followed by an unannounced visit to observe the business cashing up.

In these circumstances it would be reasonable and proportionate to carry out a test purchase as part of the compliance check because there is evidence that the purchases are being suppressed and the information could not be obtained using Schedule 36 powers.

Example 2

A Fast Food Taskforce in London receives cases from RIS where businesses have declared unexpectedly high amounts of zero rated VAT sales. Fast food businesses are in a high risk sector where there is evidence of tax evasion. In order to check whether sales have been correctly zero rated, caseworkers carry out test eats at the fast food businesses before they contact the business to arrange an inspection of the records and business premises.

In these circumstances it would be reasonable and proportionate to carry out a test purchase as part of the compliance check because there is a high risk that the information in the records is not correct and that sales are being incorrectly declared as zero rated and the information could not be obtained using Schedule 36 powers.

Example 3

A Hidden Economy Team does a ‘street sweep’ in areas where they have identified there is a risk that the businesses are not registered for VAT. They record details of each business from outside the business premises without identifying themselves as from HMRC. They then check the details against the VAT register.

In these circumstances it would be reasonable and proportionate to do this because the information could not be obtained easily in any other way.

The following example shows where it would not be reasonable and proportionate to carry out covert observations or surveillance.

Example 4

A Hidden Economy Team receives information that someone is running a business from a residential address selling second hand cars. The caseworker checks the details against the VAT register and cannot find a VAT registration. He considers carrying out covert observation of the premises remaining outside the premises for some time monitoring and recording details of any vehicles and activities to confirm that a business is being operated from the private address.

For covert activity to be necessary you must have identified a significant risk in relation to a business’s tax position. In this example the team have insufficient information to quantify the risk. Also it would not be reasonable and proportionate to monitor the business activities from outside the residential address because of the degree to which it would intrude upon the person’s right to privacy, see CH21360. You should obtain the information in a less intrusive manner by using Schedule 36 information powers.

Covert drive-bys

Examples where you drive or walk past premises to obtain information but you do not intend to remain outside the premises for any length of time:

Example 1

A Task Force has information that a restaurant is not registered for VAT and has both cash and credit accounts with suppliers. They decide to carry out an unannounced visit near closing time using Schedule 36 powers. As the business is located in a busy town they carry out a drive by one evening to see what time the business closes, whether there is suitable car parking nearby and whether it would be safe to visit. The information is required to make sure that it is safe to carry out the unannounced visit and confirm the closing time of the business.

It would be reasonable and proportionate to drive by and gather information to ensure the health and safety of the caseworkers carrying out the unannounced visit. You would not require the agreement from an authorised officer because you are not looking at the business activities and you are not using the information to check the tax position.

Example 2

A Hidden Economy Team has reliable information that a business is being carried out at an address in a residential area but they are unable to find a VAT registration or record of tax being declared on the business income. From the information they have identified a significant tax risk and have decided to open a compliance check. They decide to drive past the premises to find out whether the business is being carried out at a person’s home before deciding whether to carry out an unannounced visit using Schedule 36 powers.

In these circumstances it would be reasonable and proportionate to drive or walk past before deciding whether to carry out an unannounced visit because there is a high risk that the premises might be a person’s home and an unannounced inspection may not be allowed, see CH254530 because of the degree to which it would intrude upon the person’s right to privacy, see CH21360. The purpose is to obtain one piece of information about the location of the premises in order to protect the customer’s right to privacy and it is unlikely that you would obtain private information. You would not require the agreement from an authorised officer because you are not using the information to check the tax position.

Example 3

A Hidden Economy Team has information from an informant that a person is selling puppies from a residential address but they can find no VAT registration or record of tax being declared on the income. They can find no other information to confirm the accuracy of the informant’s information and they want to drive past to see if they can gather any more information to help them decide whether there is a business being carried out.

For covert activity to be necessary you must have identified a significant risk in relation to a business’s tax position. In these circumstances the team have insufficient information to quantify the risk. Driving past may confirm whether or not puppies are being advertised for sale but it will not give enough information to determine whether there is a business being carried out and therefore it would not be necessary. You know that the premises are a private address, the purpose of the drive by is to gather information and there is therefore a risk that you obtain private information. It is not a reasonable and proportionate response to the identified risk.

The team should gather more information before opening a compliance check and use less intrusive methods of obtaining information such as writing to the person advertising the puppies.

Summary

In Example 2 there is reliable information that there is a significant tax risk and the purpose of the visit is to obtain information in order to protect the person’s right to privacy.

In Example 3 there is no reliable information of a significant tax risk. You already know that the premises are a private address and the purpose of the drive by is to gather information to check the tax position.