Do you want to access the full text of articles?

Please see our digital edition archive for the full text of articles.

Alternatively:

If you are a Chartered Accountants Ireland member, please visit the RIS service where Accountancy Ireland is available free of charge via the EBSCO databases.

If you are an Accountancy Ireland subscriber (i.e. you pay each year to receive your copy of Accountancy Ireland) please contact our Subscriptions Department quoting your subscription number and include details of the article you want.

All other users should enquire from their local public or college library about accessing full text Accountancy Ireland articles.

Home / ... / Dealing with Special Compliance Office Investigations

The principal topic of conversation amongst tax practitioners over the past two years in Northern Ireland has not been the Good Friday Agreement, decommissioning, nor Westminster or local elections, but instead the decision in the case of R v Special Commissioner of Income Tax, exparte Inland Revenue Commissioners; R v Inland Revenue Commissioners, ex-parte Ulster Bank Ltd [2000] BTC 215 and the implications for taxpayers in Northern Ireland! Harry Carvill, FCA, ATII, explains.

Some two years ago the Inland Revenue won a landmark case against the Ulster Bank whereby the Court ordered the bank to comply with a S.20(3)TMA 1970 notice requiring provision of information to the Inland Revenue in relation to "Sundry Parties" accounts held at each branch of the Ulster Bank in Northern Ireland. The Inland Revenue was particularly interested in these "Sundry Parties" accounts as it believed they contained details of transactions to/from non-resident accounts in respect of Northern Ireland resident taxpayers. Subsequent to the Court decision the Inland Revenue's elite investigation unit Special Compliance Office (SCO) has begun to "get its teeth" into the cases concerned. SCO is, as we understand it, carrying out its investigations on a staged basis - i.e. it is requesting information from a set number of branches (around six at a time) and then making follow up enquiries based on the information received from the relevant branch. On examining the "Sundry Parties" account SCO will seek to identify specific taxpayers with transactions on the account. It will then normally undertake a review of the affairs of the taxpayer concerned to establish whether a non-resident account has been previously disclosed and whether the sums involved can be satisfactorily explained from information on previously submitted tax returns and accounts. If SCO perceives any irregularity or inconsistency it will then decide whether the case merits further investigation at SCO or local district level. Whilst the majority of chartered accountants in general practice will be all too familiar with local district investigations, most will have little or no experience of an SCO investigation. The purpose of this article therefore is, in the light of the Ulster Bank decision and the additional resources being utilised by the Inland Revenue in investigating these cases, to describe in some detail the progression of an SCO case.

Special Compliance Office The SCO is in effect the Inland Revenue's serious fraud office. It is staffed by officers of Inspector grade and by qualified accountants. SCO inspectors are specially selected from the local office network after showing particular talent for investigative work. These officers are probably the best body of financial investigators in the UK. Their ability to uncover and deal with serious fraud should never be underestimated. In the year to 31 March 1999 the office yielded £338.5million from its investigations as well as prosecuting some 44 individuals for offences such as false accounts and returns, 24 of whom were found guilty. Each SCO office is split into three groups: -

The Prosecution Group This unit seeks out and conducts investigation cases with a view to criminal prosecution. The unit will take an interest in cases referred to SCO that justify working to criminal prosecution standards.

The Hansard Group This group deals with cases where prosecution is not envisaged and work them with the intention of securing a monetary settlement to include tax, interest and penalties. The group works within the Revenue's Code of Practice 9, more commonly known as "Hansard".

The Avoidance Group This group examines cases where prima facie there does not appear to be serious fraud but where something appears wrong with a taxpayer's affairs,due perhaps to involvement in some scheme to avoid tax. This group works under the Revenue's Code of Practice 8. I will not examine these types of cases in this article but will do so in a future article.

Prosecutions Advising a client faced with prosecution is not something within the remit of most general practitioners. An experienced tax specialist and solicitor should be engaged immediately where risk of prosecution is present. Some of the signals which might indicate a prosecution intent by SCO are: -

- your client is arrested - your client's premises are searched - you are served with a statutory order to produce documents under the new Finance Act 2000 procedures - your client is interviewed under caution - SCO officers wish to interview your client but are not willing to issue Code of Practice 8 or Code of Practice 9.

Early engagement of an experienced tax specialist/solicitor team may allow them to persuade the Revenue to change its mind on a possible prosecution and have the case worked under Hansard with a monetary settlement in mind. The Revenue has a selective prosecution policy but the following are seen as the main areas for prosecution: -

- deliberate false accounting - false claims for allowances/reliefs - documents which have been falsified or altered - an accountant/solicitor is directly involved - there is conspiracy with a third party to commit fraud - serious long term PAYE/sub-contractor fraud - a previous certificate of disclosure/statement of assets is false

Hansard Group The first indication of SCO's intention to investigate under Hansard will be a letter or phone call to either the taxpayer or his accountant or both. The officer will seek to arrange a meeting and will confirm that they intend to issue Code of Practice 9 (Hansard) to the taxpayer.

The Meeting The Hansard meeting will normally be attended by the taxpayer, any business partners, fellow directors, professional advisors and normally two SCO representatives. The taxpayer can choose to be interviewed separately from his/her business partners and/or co-directors is he/she so desires. Indeed he/she is under no obligation to attend the Hansard meeting if he/she so chooses, although to refuse to do so can result in the Hansard protection being withdrawn by SCO. Therefore, a taxpayer as advised by his/her professional team needs to consider very carefully whether to adopt such an approach. We will however assume for the purposes of this article that the taxpayer is willing to attend a Hansard meeting. SCO will uses the Hansard meeting to: -

- enable the Revenue's Hansard policy to be brought to the taxpayers attention and ensure he fully understands it - put certain "formal questions" to the taxpayer about his tax affairs (see later) - add to or clarify, the Revenue's background information about the taxpayer's affairs - seek confirmation from the taxpayer that he is willing to have a detailed report, containing all irregularities, prepared by an experienced professional advisor.

This is an important meeting which may, depending on the complexity of the case (and the approach adopted by the taxpayer!) last from 2 hours to 2 days! Handled badly it can give rise to all manner of issues which may lead to complications later in the investigation for the taxpayer concerned. The SCO officers will have undertaken many months of research before the Hansard meeting. The officers will be very well prepared! It is quite common for them to be more familiar with the taxpayer's lifestyle, tax history and current/past business affairs than the taxpayer himself! This allows them to rebut at the earliest opportunity any spurious responses by an ill-advised taxpayer. It is thus vitally important that the taxpayer receives sound specialist advice at this difficult time. The taxpayer and his advisor must prepare for the meeting at least as thoroughly as the SCO officers have. At the outset of the meeting the officers will advise the taxpayer of the Board's policy under Hansard. The taxpayer will be given an extract which summarises this in the form of a response to a Parliamentary question on 18 October 1990. To paraphrase the extract, in cases of tax fraud the Revenue will accept a monetary settlement instead of instituting criminal proceedings if the taxpayer "comes clean" and co-operates fully. However, the extract does add the proviso that, even where there is a full disclosure and full co-operation, the Board does not guarantee that criminal proceedings will not be instituted. That said, I am not aware of any cases where a prosecution has been mounted after full disclosure. If the Revenue was ever to do so the whole spirit of Hansard would collapse and presumably few if any taxpayers would seek the "protection" of Hansard thereafter. After the Hansard extract is given to the taxpayer and it is confirmed that he/she understands it, five formal questions will be put to him/her. These are: -

1. Have any transactions been omitted from or incorrectly recorded in the books and records of any company or business with which you are or have been connected?

2. Are the accounts of each company or business with which you are or have been connected correct and complete to the best of your knowledge and belief?

3. Are the tax returns of each company or business with which you are or have been connected correct and complete to the best of your knowledge and belief?

4. Are your personal returns correct and complete to the best of your knowledge and belief?

5. Are you prepared to permit an examination of the records for any company or business with which you are or have been connected together with your personal financial records in order that the Revenue may be satisfied that your answers to the first four questions are correct?

It is important that these questions are carefully considered by the taxpayer before responding. SCO will require a written response from the taxpayer to the questions posed. Only in the most exceptional of circumstances and after exhaustive discussions with your client should he or she submit a written denial of irregularities. The taxpayer must clearly understand that such a denial will almost certainly mean the Revenue will work the case with a view to prosecution.

The Disclosure Report The taxpayer's full disclosure will be in the form of a Report normally prepared by a tax specialist. It is a most important document since it will require to be formally adopted by the taxpayer and will constitute his full disclosure under Hansard. Any shortcomings in the Report will lead to the Revenue considering criminal proceedings. The Report is likely to cover the following areas: -

- a detailed review of accounts/records of all businesses he has been involved with over the period concerned - a review of the accounts working papers from which accounts have been prepared - a complete financial history of the taxpayer (and on occasions his close family) - a review of the taxpayer's lifestyle compared with his apparent financial resources - a detailed reconciliation of purchases/sale of capital assets - a full quantification of understated income/profits over the period concerned - a certificate of full disclosure, a certified statement of assets/liabilities and a certificate of bank accounts operated during the investigation period.

Post-Report Submission After the Report is submitted the Inspector will make his/her own enquiries to establish the accuracy and completeness of the report. If the officer is satisfied a monetary settlement will be negotiated. If he feels it is incomplete again criminal proceedings will be considered. In negotiating the monetary settlement the tax advisor will be seeking to maximise the inevitable "grey areas" in the Report with a view to minimising the quantum of omitted profits/income. The settlement itself will be in the form of an offer to the Board to include tax lost, interest thereon and an appropriate penalty loading. Again, effective and skilful negotiation at this stage can minimise the penalty loading, sometimes the interest element and maximise the amount of time available to pay the settlement figure.

Conclusion Given the gravity of the situation a taxpayer is faced with in an SCO enquiry it is incumbent upon all practitioners to ensure their clients are given the best possible advice and support. Damage limitation tax style! SCO is a highly trained and extremely experienced unit and the spectre of prosecution is never far away when it becomes involved. It is wise counsel to deal with such cases with utmost sensitivity and caution. Clients should always be encouraged to be tax compliant and practitioners who are members of the Institute of Chartered Accountants in Ireland must have regard to their responsibilities under Statement P5 of the Miscellaneous Legal, Ethical and Practical Guidance section of their Members’ Handbook which deals with unlawful acts or defaults by clients and also SAS 120, Consideration of Law and Regulations. Bad though as the UK system is, it could be worse! Whilst the UK Revenue takes a dim view of tax offences and imposes stiff penalties, most are concluded by way of a monetary settlement, with no publicity. In the Republic, for example, the names of such offenders are published, whilst in other countries such as China, tax dodgers are executed! n

Harry CARVILL F.C.A., A.T.I.I has run his own tax consultancy practice for over 10 years specialising in tax planning and tax investigations work. He lectures regularly for the ICAI and other bodies on taxation issues .

This is the first in a series of four articles by Harry Carvill. The other titles are: “Employer Compliance Investigations”, “VAT Visits and Investigations” and “Enquiries under Self-Assessment”. Accountancy Ireland Vol 33 No 4 August 2001

Dear Mr Carvill, I am looking for A Mr Harry Carvill who knew a Carol Maiden in 1965 in Melbourne Australia. I am very sorry if you are not he. If not, please disregard this and I'm sorry for the imposition.