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Last April, HMRC introduced new powers to demand entry and production of records without a search warrant for companies thought to be cheating the taxman. Since then, a number of dramatic dawn raids have hit the press and it has become apparent to many that cracking down on fraudsters or those with incorrect tax records is becoming a priority in today’s strained economic times.

These legislative changes allow the Inland Revenue half of HM Revenue and Customs’ access to business premises and trading records without prior notice. Raids are not an everyday occurrence, but one thing all tax and legal professionals with experience of such raids do agree on is that they can be devastating and frightening when they do happen. Many business people feel the effects long after the officials have departed. It is not just office and business premises that may be ransacked by the taxman. They are called dawn raids because they often take place in the early hours where the targets of the raids are most easily located – their homes.

The new powers of entry and inspection allow HMRC to inspect business premises, demand copy documents and even require information to be given from third parties. They now also cover the smaller taxes like Insurance Premium Tax. The new rules also now mean that HMRC can go back a full four years to recover arrears of tax, even where there is a genuine misunderstanding. The only good news here is that businesses can at least recover overpaid tax for a similar period.

Dealing with raids

These changes have now been in effect for over a year, and so have led to more and more companies wishing to review their tax raid strategies. But how exactly can companies do this, and what are the measures they can put in place to protect themselves whilst also complying with HMRC’s demands?

Investigations can be generated from several quarters: tax officials referring suspicions to fraud investigation functions, internal whistle-blowing, disgruntled ex-employees or competition tip-offs and complaints.

Intrusive and aggressive unannounced visits by HMRC and a whole alphabet of regulatory bodies that don’t need search warrants or advance notice such as the Serious Organised Crime Agency (SOCA) or the Office of Fair Trading, pose a sufficiently real risk for many businesses to already have detailed plans for how to cope with such occurrences.

Recent experience however, has shown that some of these plans do not reflect changes in the law or fail to address precise risk areas. Others are too general and some actually give advice that is contrary to the law.

Solution

One way of looking at the steps needed to deal with this kind of event is to divide the phases of an investigation into preparation, containment and resolution.

In terms of preparation, boilerplate solutions may not be the most effective. Companies need to work with business-specific priorities and circumstances in mind. For instance, it is no use making the company secretary responsible for dealing with a raid if he is going to retire six months later.

Companies need to analyse and evaluate the company’s risk profile and prepare up-to-date, focused and company-specific guidelines and checklists which cover premises, document retention, location and personnel. These need to be reviewed periodically for accuracy, changes in the law and relevance.

It is also crucial that businesses devise and deliver training so that staff can understand the regulatory powers surrounding raids and can deal with the practical events tailored to the company’s risk profile. Within this training, role play exercises can be used to prepare company personnel likely to be affected whilst the appointment of an experienced external adviser could also help the firm be fully prepared for a raid.

When considering containment issues, businesses should agree who will deal with the investigation at an operational level and keep them updated with personnel and premises changes. If internal, such personnel will need to understand the company policy in dealing with investigations, what officials can and cannot do and which areas of the business premises can be examined under statutory powers. They should be kept informed as to what kind of documentation is subject to legal privilege and if that documentation has already been protected as well as the identification of all documents, electronic and hard-copy, that were inspected and/or removed.

To resolve the problem successfully, a business should ensure that it can properly and effectively defend any allegations arising from an investigation. This will particularly affect senior members of management who will need to know if they are likely to be arrested following the raids, if that has not already happened, how much money is involved and what the penalties might be. A solicitor will be able to help the company regarding these points but can also explain whether the business is required to notify any auditors and what the members of management can do to minimise an adverse market reaction and PR fallout if the results of the raid are publicised.

Company directors and managers should be prepared that following a raid, investigations will take a long time to resolve. During this time, other issues will have to be handled, such as the identity of employees involved in the investigation and how they will be dealt with. If the problems have arisen from the gross misconduct of certain individuals, employment procedures surrounding their dismissal will have to be carried out in the proper manner to avoid unfair dismissal claims being brought by disgruntled employees.

Summary

Raids by the Revenue can devastate businesses and it would appear as though they are becoming increasingly frequent. Any business needs to consider what is right for them, from the multinational to the SME. Whatever the size, forewarned is forearmed.