Appeal Rights

Like any large organisation, HMRC sometimes acts in a way that can make individuals, who may be challenged by this monolith feel intimidated.  Fortunately, there are general rights of appeal.  Recent cases have shown that these rights are useful in ensuring HMRC do not overstep the mark and abuse their powers.

In M. Miron, it was held that the taxpayer’s accountants were at fault in not following a fairly simple procedure.  However, that did not excuse the ‘terrible muddle’ that the taxpayer ended up in.  The fact that HMRC was a large organisation could not justify a situation where one hand did not know what the other was doing.  “The whole purpose of maintaining a file was to ensure knowledge is disseminated across an organisation”.  Thus the taxpayer had a ‘reasonable excuse’ in not filing her appeal in a more timely manner.

Similarly, in M. Capuano the ‘staggeringly bad’ service provided by HMRC generally, contributed towards the taxpayer having a ‘reasonable excuse’ for late filing.

M. Beardwood was also held to have had reasonable excuse for late filing.  Indeed the First Tier Tribunal said it was ‘difficult to see what more the appellant could have done’.  They considered HMRC had wasted everyone’s time in bringing a case which had very little merit on the side.

This contrasted with R. Popat, where the taxpayer (who again won) was allowed an appeal where he wished to postpone payment of tax assessed on an assessment.  The taxpayer only had a low hurdle to overcome to get tax postponed, pending settlement of the relevant appeal.  The purpose of the postponement hearing was not to settle the appeal finally on its merits, but to allow tax collection to be postponed pending a full rehearsal of all the relevant facts.

For advice on HMRC powers and penalties please contact either Paul Eaves or David Stebbings.

Employment Related Securities – HMRC Withdraw Late Filing Penalty

We were recently successful in challenging HMRC penalties for late filing in relation to annual Employment Related Securities (ERS) reporting.  In the case in question, a company had submitted an online ERS return the previous year relating to a one-off share event, being an acquisition of shares by an employee.

Quite reasonably, the company did not appreciate that HMRC expected an ERS return to be submitted the following year, bearing in mind there was no share scheme and no events had taken place.  Without providing the company with a reminder that a return would be due, HMRC proceeded to raise late filing penalties when the return was not submitted.

HMRC argued that a nil return was due for all subsequent years regardless of whether there were any share events.  The manner of the penalty was concerning in that it provided no details of which legislative provisions it was based on, even after the penalty had been appealed.

According to HMRC, annual returns are to be submitted on or before 6th July each year and returns, including nil returns, “must be submitted for any and all schemes that have been registered on the Employment Related Securities online service.”

They argued that, “A return is required even if you have:

  • Had no transactions
  • Have made an appeal/Had an appeal allowed
  • Rely on a third party to submit the return
  • Ceased the scheme by entering a final event date
  • Registered the scheme in error
  • Registered a duplicate scheme
  • Did not receive a reminder
  • Have changed accountant/agent/staff

Once a scheme or arrangement has been registered on the service and remains live, you have a continuing annual obligation to submit an electronic end of year return by the deadline.”

The actual legislation states that a return is required for each tax year falling in the personʼs “reportable event period”.  A personʼs “reportable event period” is defined under s.421JA(3) as:

  • beginning when the first reportable event occurs in relation to which the person is a responsible person, and
  • ending when the person will no longer be a responsible person in relation to reportable events.

Clearly the legislation is somewhat unclear, however there was a strong argument that where no future reportable events were envisaged they would no longer be within a reportable event period.

We were able to get HMRC to withdraw the penalties on the basis that there was no employee share scheme, and therefore no ongoing obligation under the actual legislation to file returns.  One suspects HMRC will not be changing their policy in this regard, but it does highlight the importance of challenging them where they apply policies that go further than the actual law.

Open letter to ICAEW President – Subscriptions and Tax

Subject: Subscriptions and Tax

To the ICAEW President,

Imagine a world in which the Government suggested that a lawyer should be fined if their barrister lost a case. What would be the reaction of the Law Society?

Now, we have a Government proposal for something similar for the accountancy profession. It says (see 5 December – Sanctions and Tax Deterrents) that Government policy is to reduce the size of the tax advice ‘industry’, by threatening fines on ICAEW Members, even where they were acting legally and honestly, with a side effect of deliberately adding mayhem to Professional Indemnity Insurance quotes.

I fear this would affect all members in practice. Some may say, “I do not advise on tax avoidance,” but the trouble is that tax avoidance is not properly defined in the proposed legislation. The scope is wide, with the Government proposing that the State should have the power to fine professionals for ‘enabling advice to be given’ [not just advising] on what amounts to any commercial transaction which involves tax. Advisors would not necessarily know for some years whether their conduct was “incorrect”, because it would apply if the State subsequently won relevant litigation. Then, suddenly, advice given in good faith may become a punishable offence. Work out the justice in that.

Why should ICAEW Members, taught to act ethically and responsibly, be fined and punished, for example, for simply referring a client to advice from a QC?

This brings us to a key question. Are the ICAEW going to protect members from penalties, which are unjust? I feel the initial response from the ICAEW is disappointing. Yes, the new HMRC document is better than the original consultative work, but they are still far too broad and wrong in principle. HMRC admit this particular policy is not targeted at the true purveyors of ‘tax avoidance’, but to impose sanctions on “enablers”. Why should bystanders be punished, because HMRC find it difficult to administer the tax system?

The Institute document also notes that HMRC has announced that they “Do not expect that members acting ‘wholly within the spirit’ of the standards contained within the recently-updated Professional Conduct in Relation to Taxation” would normally be affected by the enabler provisions. Well super! So you can hope [not guarantee, note] you may not get punished, if you act under Ethical Guidelines. I would hope that all Members would act under ethical guidelines. However, if I acted under such guidelines to give independent advice, I would “hope” that I would be backed by ICAEW in saying I had acted in a proper professional manner. I would not expect it to be second guessed by some State Official most likely without similar professional training to determine if they agreed I was in the “spirit” of such guidelines.

I totally agree HMRC should be properly resourced to review the system they have to work with, with an efficient, trained and motivated staff, but then it must have a parallel, independent appeals system. It is the way of Dictators to “improve” an appeals system by persecuting appellants and their advisors. It should not be a route a UK Government aspires to, however “efficient” it seems to have no-one disagree with the State. Maybe the policy is designed to help in “Making Tax Digital”? If “enablers” of independent advice have been eliminated and if incorrectly arguing with an official means a fine, then surely 99.9% of the population will agree their tax assessment is correct, probably even if the Government computer “proves” it was 117.5% of them.

I worked hard to get my qualifications as an FCA. It has been something I have been proud of. Thanks to Government propaganda, it now feels like I am one step down from a shoplifter.

I believe such propaganda is lazy, because it suggests the problems in the tax system are down to ‘Accountants – and other such slimy creatures’. I could suggest other causes? HMRC staff and administrative cuts, poor policy co-ordination, vast systems and culture changes at HMRC which do not seem to have worked? Perhaps even a level of competence at Government level which drafts a referendum bill which then needs to go to the Supreme Court to determine whether Parliament meant “Yes or No”, or were only joshing? The Institute should point this out to the Press, rather than kow-towing to Press oversimplification because accountants seem ‘easy meat’.

ICAEW, please stand up for your Members. You want our subs. You should protect all of us, even if that means telling the Government they are wrong.

Manuel alive and well and working in Whitehall – Tax Avoidance Deterrents

After the recent tragic death of Andrew Sachs, there are rumours that his spirit for competence lives on in our legislation.

 TAX AVOIDANCE DETERRENTS

An open question for the above.  How do the current proposals (published on 5 December 2016 as Sanctions and Deterrents) fit with The Rule of Law?

I believe in the vital importance of the Rule of Law.

I believe it can only work with;

a) Clarity

b) Independent Judgement

c) Consent

Naively; having been trained as an Inspector of Taxes, I believe that the intention of Parliament was as set out in the words they enacted.  There is a lot of case law which supports this.

With 17,000+ pages of legislation the situation is complex.  There may be a dispute as to interpretation.  That arises, almost certainly, through lack of clarity (see (a) above).  The disputing parties are then dependent upon ‘independent judgement’ which hopefully they can both trust – effectively the Rule of Law (cf Tom Bingham).

If they do not trust the independent judgement then (c) Consent is lost.  That is dangerous.

Probably with good intentions (I am told they pave the Road to Hell) HMRC are saying that certain professionals need their behaviour modifying.  To quote the ‘Strengthening Tax Avoidance Sanctions and Deterrents in their paragraph 5.4:-

The government noted the views and responses provided. It recognises that the avoidance market is not static but is constantly evolving. HMRC will further develop the options set out in Chapter 5 of the discussion document to supplement the important work undertaken in this area to date, whilst looking at new and emerging threats in the avoidance market. Alongside this, HMRC will continue to explore ways to further discourage tax avoidance by:

  • working collaboratively with businesses, individuals, industry and representative bodies to identify opportunities to further shrink the avoidance market
  • exploring how behavioural change techniques can positively affect decisions and choices for enablers and users
  • tailoring communications and engagement with users to support them to make the right choices and decisions including outlining the risks and consequences of entering into these kinds of arrangements
  • meeting the challenges and opportunities that current and proposed legislation, HMRC’s Making Tax Digital Programme and other cross-sector initiatives may present

In paragraph 5.5 they go on to say:

The government will continue to take decisive and necessary steps to ensure that those who seek an unfair tax advantage, or provide services that enable it, should bear the real risks and consequences for their actions.

So that is clear now?

Quite apart from their appalling grammar, and resulting lack of clarity, the proposed result of this appears to be:

i) An advisor may introduce a client to (say) a Queens Counsel who suggests a course of action he believes to be legal.

ii) Sometime – [likelihood, at least 10 years from final date of action bearing in mind current complex litigation process] – advice and action may be proven correct.  End of story.

iii) Alternatively, in the litigation lottery of the Courts (talk to lawyers!) the advice may prove to be incorrect.  In this case penalties would be sought against the person who introduced the QC, in all good faith!  Is asking for professional advice to be subject to a penalty?

iv) The proposed legislation encompasses virtually all commercial arrangements, not just ‘artificial’ ones.  ‘Tax Avoidance’ is not properly defined.  It rests on ‘losing’ under untested legislation.  There is no safe harbour.

v) The level of penalties (see time line) may be after the advisor retired.  If the professional involved advised clients wealthier than him, which I am sure the majority do, then they could result in severe financial embarrassment, perhaps even bankruptcy, of said pensioner.

The tone of the HMRC document of 5 December 2005 suggests that would be [perhaps in Chairman Mao’s words?] a good behavioural adjustment.

vi) Maybe?  In contrast, if the advisor had introduced his client say to a robber or a drug dealer, rather than a (presumably respectable) Queens Counsel, then these sanctions would not apply.  In considering this, what is ‘the Clear Intention of Parliament’ to quote a phrase.

I would be grateful if any of the parties to whom this is addressed could explain to me how it fits in with the idea of any penalty fitting in with the criteria proposed in HMRC’s 2015 penalties discussion document:

  • The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance.  Penalties are not to be applied with the objective of raising revenues.
  • Penalties should be proportionate to the failure and may take into account past behaviour.
  • Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  • Penalties must provide a credible threat.  If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  • Customers should see a consistent and standardised approach.  Variations will be those necessary to take into account customer behaviours and particular taxes.

From an initial review, the proposed penalties fail all counts.  Specifically, they do not seem

1)     Fair

2)     Proportionate, nor even remotely consistent.

They are potentially an invite for state bullying.

An easy way around the problem is the one which worked for many years historically.  It was for independent, disinterested advice with proper, well-resourced HMRC review.  In such a case ‘reasonable care’ all round could be provided by someone, properly qualified, who was not rewarded as to outcome and gave independent advice as to the law, with subsequent full disclosure of any relevant arrangements.

Bayliss – HMRC Seek Extra Penalties From Failed Avoidance Scheme

Another week and another case involving a failed tax avoidance scheme.

This time, perhaps more worryingly, HMRC were arguing that the return was submitted fraudulently or negligently by the taxpayer and therefore sought the extra penalties that would be due in such circumstances. This shows a new aspect of the targeting of anti-avoidance schemes and suggests users of schemes could expect the costs of failure to rise higher, whether in penalties or fees for defending them.

Ultimately, the taxpayer won in this case. Of particular interest was the fact that the Tribunal found that relying on the advice of a trusted accountant was helpful in suggesting that he had not acted negligently. It appears the courts confirm that obtaining suitable professional advice is worth paying for in the long run!

Mr Bayliss participated in a scheme marketed by Montpelier Tax Consultants (Montpelier). The scheme involved a Contract for Differences (CFD) and was sold as generating a £539,000 capital loss for Mr Baylis in 2006–07. It was agreed by all the parties that the scheme had failed and additional tax was due, however the taxpayer appealed against penalties raised by HMRC on the basis that ther return was submitted fraudulently or negligently.

The Tribunal determined that in accordance with established case law, in order to prove fraud HMRC had to prove that the appellant did not have an honest belief in the correctness of the return. The Tribunal was persuaded on the basis of the evidence and facts that Mr Bayliss did believe that his tax return was correct and so there was no fraudulent behaviour.

On the question of negligence, the Tribunal felt that the correct test was that set out in Blyth v Birmingham Waterworks Co (1856), that of ‘the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do’. They also considered the test in Anderson (decʼd) [2009], ‘to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done’.

HMRC used a number points to support their argument that Mr Baylis was negligent, including that:

  1. the transaction did not stand up to commercial scrutiny and the appellant failed to check the commercial reality;
  2. the appellant had not kept copies of the documentation, whereas a reasonable person would have done so;
  3. It was a complex financial transaction and the appellant should have obtained proper independent financial advice, but he relied on informal advice.

The Tribunal agreed with HMRC that some of the taxpayer’s behaviour could have been deemed to be careless, but on balance found that HMRC had not done enough to prove that the appellant was negligent in filing an incorrect return.

Interestingly, they felt that relying on his accountant was helpful in this respect, stating “We are persuaded that the appellant relied fully on Mr Mall, a chartered accountant on whom he had relied for a number of years, and on what he believed (based on Mr Mallʼs recommendation) to be Montpelierʼs expertise.”

The tribunal allowed the appeal on the basis that HMRC had not proven that Mr Bayliss acted fraudulently or negligently in submitting an incorrect return.

Employers Beware! – PAYE Penalties

Typically, PAYE has been described as an ‘approximate’ method of collecting tax due, which remained the ultimate liability of the employee.

Recent judgements, including the case of Paringdon Sports Club, suggest more of the risk may fall on the employer.

In addition the risk may be worse with the current HMRC penchant for penalties. Many advisors will be familiar with their tendency to seek around 15% extra tax for relatively minor ‘careless’ errors. This represents increased risk for business and their advisors.

There are methods related to potentially mitigating or suspending such penalties.

To avoid embarrassment and excessive cost a prudent review may seem sensible?

Whilst most businesses operate routine PAYE relatively easily with the backing of software, experience suggests that ‘unusual’ or one off events can cause problems.

These days such errors can lead to expensive penalties, so procedures should be put in place to check the correct treatment on one off matters and if necessary take advice.

On the penalty front the case of P Steady shows that it can be worth appealing against a penalty imposition. In that recent case the taxpayer managed to get a penalty suspended where, by oversight he had put down bank interest earned in incorrect years. The Tribunal said ‘The mere fact that this is an error in a tax return does not mean that a taxpayer has been careless’. They went on to say, ‘To levy a penalty on a taxpayer who hereto has had a good compliance record over many years and then refuse to consider suspension of those penalties does not reflect well on HMRC’.

As always thinking of the correct technical position makes sense.

VAT Penalty Reduced – J & W Brown

A recent case concerned penalties that arose on a taxpayer due to a technicality. The taxpayer had run a business as a VAT registered sole trader. He brought his son in as a business partner, which was therefore technically a transfer to a partnership and a transfer of a going concern (TOGC) for VAT purposes.

The taxpayer did not realise this and did not notify HMRC until around 2 years later. However, he continued to submit his sole trader VAT returns and pay the tax due through this period. Two of the returns in the period were submitted late.

HMRC therefore sought penalties for late registration by the new partnership of more than 12 months and charged an 18% penalty. They did, however mitigate this by 70% as the VAT returns and tax were submitted through the sole trader registration and there was therefore no loss of tax.

The First-tier Tribunal felt that as the error was a technicality and that there had been no loss or administrative inconvenience to HMRC, the penalty should be reduced by 90% instead and lowered the 18% penalty to 12.5%. They also noted that the taxpayer had made a voluntary disclosure and that HMRC’s protracted case management had been inappropriate, causing “significant inconvenience and expense’” to the taxpayer

Overall the penalty was reduced from £582 to £100 and so the taxpayer’s appeal was allowed in part.

This case shows the continued firm approach that HMRC appear to be taking with penalties for minor mistakes. However, the Tribunals continue to provide a safety net to taxpayers and the comments of the Tribunal showed the importance of taking the first steps and making voluntary disclosure before HMRC find the error. If you would like assistance with making a disclosure or have any concerns about past transactions, please get in touch with us as we would be delighted to assist.

Make Sure HMRC Notices are Valid! – Technicalities and Human Rights Law

Recent cases have emphasised the importance of that European Human rights laws have on the UK tax system; however the cases and our own recent experiences suggest that HMRC do not take these implications seriously.

The recent Tribunal case of PML Accounting Ltd v HMRC [2015] considered a number of issues, including one relating to Human Rights.  The case involved an HMRC Notice requiring information from PML Accounting and the firm’s appeal against a penalty for failing to provide the information on time.

The Tribunal found that the information notice had not been complied with and that the taxpayer did not have a reasonable excuse for the failure.  However, they also determined that the Notice was invalid as it had been issued under the wrong piece of legislation.

The notice was issued under FA 2008 Sch 36, para 1 as part of a review of the company’s position under the Managed Service Company Legislation.

The Tribunal determined that there had been suggestion that any investigation under the MSC legislation would lead to a charge on PML.  As a result, the information notice should have been issued under paragraph 2 (third-party notices) instead of paragraph 1.

The Tribunal also concluded that the Notice breached the human rights of PML’s clients as it had been issued under the wrong paragraph.  A paragraph 2 notice relating to third-parties provides a level of protection for the taxpayers involved as they may not be issued without either the taxpayer’s prior consent or the tribunal’s approval.

There have also been a number of other cases highlighting the inadequacy of HMRC’s approach to human rights law.  For example, in Bluu Solutions Ltd v RCC [2015], the Tribunal confirmed that a tax penalty, which is meant to be punitive and to deter, is “criminal” for the purposes of Article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms.  This provides taxpayers subject to HMRC penalties with additional protection stating that taxpayers have the right to a fair trial and requires that the taxpayer is presumed innocent, with the burden of proof on HMRC.  Also proceedings have to be brought within a reasonable time, and the taxpayer must have enough resources and time to defend against the penalty.

Further protection is provided by Article 7 which requires that any penalty should have a clear basis in law and therefore where there is genuine uncertainty as to the underlying tax law, it could potentially be a breach of Article 7 to impose penalties based on non-payment.

These points all provide extra protection that advisors should bear in mind when assisting clients faced with HMRC investigations.  If you have any concerns over HMRC’s approach then please contact us and we will be delighted to assist.

Reasonable Excuse – Further Successes for Taxpayers in the Courts

Two recent tax cases heard by the First-Tier Tribunal show that the courts continue to interpret the phrase “reasonable excuse” more generously that HMRC internal guidance allows for.

In S Taylor, a taxpayer was somewhat surprisingly found to have a reasonable excuse as he had appointed an agent and relied upon them to deal with the self-assessment form.  HMRC guidance is explicit that relying on a third-party is not a reasonable excuse, however, the Tribunal felt this to be incorrect in these specific circumstances.

The taxpayer delivered his papers to the agent in sufficient time but the agent had been busier than usual and had missed the taxpayer’s return.  The agent had not told the taxpayer this, and the Tribunal therefore felt that he had taken reasonable steps to file on time.

Another case showed a partial success for the taxpayer in Perfect Permit Ltd t/a Lofthouse Hill Gold Club.  HMRC had levied penalties in relation to late employer annual returns for 2008/09 and 2009/10.  The 2008/09 return was submitted more than a year late, whilst the 2009/10 return was filed 47 days late by the taxpayer’s new agent.

The Tribunal found that the failure of the previous agent to submit their returns did not constitute a reasonable excuse and it was up to the company to seek redress from the previous agent.  However, the new agents had encountered difficulty registered with HMRC.  The tribunal agreed that, had HMRC registered the new agents promptly, the return for 2009/10 would have been submitted on time.  As such, the delays caused by HMRC did constitute a reasonable excuse.

We would suggest that taxpayers seek advice where they feel that HMRC are being unreasonable with regard to reasonable excuse claims.  Eaves and Co would be delighted to help and would love to hear from you.