HM Revenue & Customs’ (HMRC’s) Public Notice 160, September 2007, is a statement of practice about the way in which it conducts investigations into indirect tax matters.

You, as a business, are obviously encouraged to co-operate.

Fully co-operating with the authority can lead to a reduction in the civil evasion penalty equivalent to 80 per cent of the tax on which penalties are chargeable.

Be warned, though, they will not pay your costs for dealing with the investigation.

Although they do helpfully point out that you can apply for a reconsideration or appeal against a decision to impose a civil evasion penalty, what they do not explain is that you must appeal within 30 days of the decision (although time may in certain circumstances be extended by the Tribunal).

If you are successful in your appeal, the Tribunal may award costs in your favour. However, that is only from the date you commenced your appeal.

New weapon
In January 2009, HMRC introduced a new weapon in its long fight against
MTIC fraud. Building on the procedures outlined above, Public Notice 161 introduces the interview with HMRC for cases of suspected Missing Trader Intra-Community (MTIC) ­ or carousel ­ fraud.

Carousel fraud refers to the practice of obtaining VAT registration to acquire goods ­ such as hardware or software ­ VAT-free from other EU nations which could then
be sold on. All transactions in the chain of supply may be investigated. It does not apply in other cases of suspected dishonesty.

It is not a legal requirement to engage in the interview process, but refusal to become involved is likely to lead to a higher civil evasion penalty if HMRC believes dishonest conduct has been involved. Discounts of up to 80 per cent may still be possible for full and prompt co-operation.

Advance notice
HMRC will send you details on the following ahead of the investigation:
*That it is not contemplating prosecution (there is a different regime
for those cases)

*The period or periods which it is investigating

*The nature of its suspicions

*The grounds for its belief that you are involved in dishonest conduct

*That false statements can lead to a criminal enquiry with a view to prosecution.

Being a new procedure, experience of this process is limited.

However, there are similar regimes in connection with investigations into the conduct of directors which may lead to disqualification: the so-called Hansard meetings used by the Special Compliance Office of HM Revenue (allegedly unpaid income tax) and interviews about breaches of solicitors’ professional rules by the Solicitors Regulation Authority.

In such interviews the authorities often appear friendly. However, it is vital to remember that they are not your friends.

Keep informed
Always be accompanied by a lawyer or accountant familiar with these issues. Thorough preparation is vital, using the information provided by HMRC to
challenge its approach.

If at all possible, make no admissions as these may be used against you in subsequent
interviews or before the appeal Tribunal.

Interviews will concentrate on matters that are complex and (from next year) the matters investigated can be up to four years old.

Most people have difficulty remembering points of detail, particularly in an environment where their livelihood is at risk ­ let alone when the detail requested is about events that happened four years ago.

Do remember to ask for more time to check your records and investigate the issue yourself. Another interview can always be arranged to deal with outstanding issues. Do not be rushed into giving an answer you may later regret.

Interviews may be digitally recorded, although you may insist on a handwritten note being taken.

An investigation can take up to two years to complete, during which time no decision will be reached but VAT may be withheld.

Remember, as a result of recent court decisions about MTIC and contra-trading, HMRC may not be entitled to withhold VAT, let alone impose any penalty. If in doubt, seek advice.

Tony N Guise is partner at specialist law firm Guise Solicitors