Arguments are inevitable between taxpayers and HMRC over interpretations of key phrases in the legislation. These often revolve around penalties, appeals and what constitutes ‘reasonable’. In a recent case, the Revenue lost on the grounds that the taxpayer would have suffered ‘hardship’ if required to pay a VAT assessment before appealing it (as according to VATA 1994, s.84 one of the conditions for appealing is that the tax must be paid).
The taxpayer had won the case at the First-Tier Tribunal, and the Upper Tribunal noted that it could only overturn the finding in that case if they had made an error in law.
The Upper Tribunal noted that the test had to consider not just the ability to pay, but “the capacity to pay without financial hardship”. It was felt the possibility of obtaining new finance should be ignored in the circumstances (which seems to go against standard HMRC practice in cases regarding difficulty paying). It was only if other sources were likely to become available they should be considered. The judge agreed with the First-Tier Tribunal that approaching their bankers would not have been suitable as it could have caused further financial difficulties through the bank becoming concerned.
Overall, the judge agreed with the conclusions of the First-Tier Tribunal, even though the decision could perhaps have been worded better. The case highlights that it can be worth challenging HMRC interpretation. They are Civil Servants, not the judiciary, so there are independent arbiters of the rules!
Please contact us if you have any concerns about HMRC practices. We have extensive experience in such matters. Often HMRC are right, but not always. They will only be kept to high standards by rigorous, independent review. This is in the best interests of everyone, including HMRC.
Eaves and Co have submitted a response to the HMRC consultation document of 20 March 2017 in relation to sanctions for late submission and late payment as part of Making Tax Digital. We have reproduced our response below.
Please feel free to comment.
Response to Making Tax Digital – Sanctions for late submission and late payment. Consultation document – 20 March 2017
This is a very difficult document to respond to, because it is so wrong headed. When Chancellor Osbourne announced it, it was alleged to be a liberating move. He has since been relieved of his position. The legacy of ‘Making Tax Digital’ remains. My concern is that, as currently drafted, it runs a high risk of ‘Making Tax Dysfunctional’.
- Fundamentally, if it is such a good idea, and is going to work well, so that ‘businesses flock to it’, there is absolutely no reason to make it compulsory.
- In a free society, businesses should have the discretion to run their own affairs as they see fit. The proposals extend the historic system of annual filing to filing 5 income tax returns per year. This is not ‘liberating’, it is adding extra commercial pressure and cost.
- The Federation of Small Business puts the costs at 10 times the HMRC estimate. For bigger businesses the extra costs may be more. As one provider put it, even the cost of a training seminar may well exceed FSB estimate.
- These costs would just be a burden if the system was compulsory with ‘sanctions’, as proposed. If there was a benefit, which added to efficiency businesses would (and should) pay for appropriate software at market price. No need for Government interference.
- On this theme, which bit of the equation:-
Government + Big Computer Idea = Cost Effective Happiness
has even been proven true?
- HMRC say that the Making Tax Digital programme will not save them material costs. If the benefits therefore ensue to business, should they not be given the choice?
- There should be no sanctions if they decide their current systems are adequate, or perhaps even better than the HMRC ‘private licensing’ proposals?
- Everyone should be equal before the law. Self-employed tax payers already suffer extra burdens in that they are more often called upon to file annual tax returns. To make it 5 returns per annum is unfair and oppressive, especially if the stress of potential sanctions is imposed.
- Businesses are already obliged to maintain and produce adequate records to prepare relevant annual returns. Understandably most view it as an unprofitable burden, accepted as part of the benefit of being a citizen of a democracy such as the UK. Politicians should recognise though that the equation and relationship are each fragile and based on mutual trust. To multiply by 5 the burden risks suggesting a taxpayer is untrustworthy and (with sanctions) ought to be punished for errors in compliance. This is not a route to encourage the levels of voluntary compliance that the UK has been fortunate enough to experience historically.
- Recent case law on ‘reasonable excuse’ highlights the lack of HMRC sympathy and understanding on the pressures imposed by tax compliance, so would not seem to be adequate protection.
- In any event, this is starting from the wrong perspective. Individuals and businesses should be free to act as they see fit to benefit the economy as a whole. They should not be restricted by regulation to act in accordance with Government dictat, unless the action they propose is harmful. There is already an obligation on business to keep adequate records. This should include the freedom to keep them in accordance with specific, tailored business requirements, suitably for the business concerned, rather than following a generic algorithm designed by someone with no knowledge/interest in the particular business. Surely it is patently obvious such freedom must be better for the UK economy as a whole.
- To suggest that a single ‘app’ can successfully organise management accounts from every business from baking creak cakes to running a portfolio of investment properties is too bizarre to be believable. Any accountant will tell you the key profit indicators are going to be different. The business software market can respond, as appropriate, but buying a government approved Trebant (historic reference) will only end in tears.
- Distorting the business software market by imposing ‘Government Requirements’ is providing anti free market protection for the software houses concerned. This must be unfair and an inappropriate use of Government power. Why? Would this not be illegal under EU rules whilst we are still a member, pending finalisation of Brexit?
- In a secular, capitalist society, why can there be an exemption for ‘religion’. Why not allow a simple commercial decision: ‘This adds cost, stress and burden for (no) business benefit. I choose (or choose not) not to do it’? That would allow those believing in Making Tax Digital to move ahead, without distorting the rest of the crucial, small business economy.
- The benefit claimed by HMRC is that small businesses would keep better records. Some small business have poor records, it is true, but they tend to be at the bottom end of the spectrum. As businesses grow, especially when they take on staff, record keeping becomes more important. To state the obvious, losing a cash receipt when it goes to a pilfering employee costs 100% of the receipt. This is undesirable for the business! Compare to saving 20% on income tax? Bigger business have controls. Bigger businesses tend (by definition) to make more profits, so the ‘tax saving’ by imposing MTD is I suspect mythical.
- In any event, to put it into context Tesco recently paid £108m to avoid being prosecuted for financial fraud, plus more again in compensation. How many window cleaners taking the odd tenner in cash would that amount to? Compulsory MTD looks like a sledgehammer to crack a nut, and so, in the way of many such initiatives has the appearance of overzealous behaviour by the State for little/no benefit.
- There may well be an argument to say that the idea is discriminatory in that it prejudices:-
a) Entrepreneurs who do not have English as their first language.
b) Those self-employed with learning difficulties etc., who may well earn a decent living with a ‘hands on’ a labouring job making them proud and independent, but would find quarterly reporting unfairly daunting. Should they be forced on to Government benefits? To what end?
c) Entrepreneurs who do not trust electronic intercourse for financial transactions.
- With regard to the latter HMRC have been somewhat patronising about ‘elderly’ taxpayers. It is age discrimination in itself? They have then pointed out that such people often use mobile telephones etc. True, but there is a huge difference between making a telephone call and engaging with third party electronic transactions which may not be totally secure.
- The internet is inherently insecure as has been proven by a series of hacks into various Government and Business computer systems. The NHS was recently severely disrupted by ‘relatively unsophisticated’ hackers. The CIA has been hacked – despite (presumably) top quality security and operating protocols. Why would any nation therefore risk putting much of its economic output on to a single system, which is also going to have the ability to demand money? Do you think the odd criminal or foreign Government might fancy the ability to have even just a day of receipts (I’ll take 31 January, please)?
- The underlying ethos is that ‘Digital’ is the best. It is new. It is the way forward for the future.
Fine; then let it compete in the Market Place. If it is good then there is absolutely no need to make it compulsory and penalise those who trundle along behind.
‘Digital’ is best [as a hypothesis]. Prove it by not requiring sanctions. Freedom for taxpayers to choose. Yes, comply with the law to submit annual returns but no to 5 times that obligation. (Choice for business to focus on their own key profit indicators – not arbitrary rules set by centralised dictat. If we were customers we would have gone elsewhere!]
- The proposed exemptions for MTD are noted.
There is a religious exemption. How do HMRC intend to ‘police’ claims under that heading. In this context I note the firm swearing by Elizabeth I on her Coronation, that the State should have ‘no desire to make windows into men’s souls’.
What is to happen if someone claims the exemption?