HMRC Fail in Toothless Attack

HMRC use Eric Morecombe tactics according to judge. “Playing all the notes but not necessarily in the right order”

HMRC use Eric Morecombe tactics according to judge.
“Playing all the notes but not necessarily in the right order”

Readers of our blogs will know we are always interested in cases analysing the extent of HMRC powers and how they should be used. The recent case of Raymond Tooth and the Commissioners for Her Majesty’s Revenue and Customs demonstrates (again) that HMRC powers are not infinite. It also brings out some highly topical points:

1) In Raymond Tooth the taxpayer filed a tax claim which HMRC later decided to challenge. They had though missed their normal time limit on raising an enquiry, so had to raise a ‘discovery assessment’.

2) The definition of a ‘discovery’ made by HMRC is confirmed to be very wide in scope and may include “a change of opinion or correction of an oversight” by the Inspector of Taxes raising the discovery assessment.

3) The general points in Cotter are good law and emphasise the requirements for good disclosure by taxpayers and a clear explanation of how they have computed their self-assessment.

4) The burden is on HMRC to demonstrate that their extended time limits for assessments under ‘discovery’ may be used only where they are saying that the loss of tax was brought about ‘deliberately’. Deliberately means intentionally or knowingly (Duckitt v Farrand).

5) All praise to John Brookes (Tribunal Judge in this case). He basically eviscerated the HMRC case. He said with regard to the issue of extended time limits,

“In my judgment this [assessment] cannot be right. The deliberate (or indeed careless) conduct necessary to enable the issue of a discovery assessment and extend the time limits for doing so must involve more than the completion of a tax return which, in itself, is a deliberate act. As a person completing a return must do so intentionally or knowingly, and can hardly do so accidentally, HMRC’s argument effectively eliminates any distinction between ‘careless’ and ‘deliberate’…[their] attempt to argue otherwise, saying that if the wrong figures were entered in the right boxes it might be careless but if the right figures were entered in the wrong boxes it would be deliberate, was somewhat reminiscent of, and about as convincing as, Eric Morecambe’s riposte to Andre Previn about “playing all the notes, but not necessarily in the right order.”

6) The case can also be linked to current concerns about ‘Making Tax Digital’ (MTD).

Evidence was presented about the problems created by a computer glitch on how the alleged loss claim should be shown. The computer system adopted was a respectable one, approved by HMRC. However, apparently it would not cope with the proposed claim. The advice given to the taxpayer – to fit in with electronic filing, was thus to use a computer ‘work around’. As most people with appreciate, this is quite a common suggested solution, because computer programming is never perfect. The work around meant the loss claim went in the ‘wrong’ data input box, but the taxpayer described this in the ‘white space’ on the Return and the final answer came to what he believed was the correct net tax liability. Despite this, HMRC when they wished to dispute the loss claim, accused him of ‘deliberately’ causing an underpayment of tax. Whilst HMRC lost in this case, it is easy to imagine the dangers of accidental non-compliance caused by seeking to meet tight computer deadlines for making tax digital. Then it appears from cases such as this that such computer errors may be seen as something more sinister by HMRC. I believe this emphasises the risks of making such a system compulsory, before it is thoroughly field tested and people are familiar with it.

I am pleased to see that most commentary from the profession seems to agree with this line.

There is an interesting contrast in the apparent view of HMRC on a balanced system, in that the proposals suggest taxpayers are to be given a compulsory deadline for compliance every three months, whereas if they get it wrong HMRC should be entitled to a time limit of 20 years to challenge it.

Compliance is a delicate flower, worth preserving. If the proposals are brought in, how many businesses will simply drop off the radar if they get behind for a couple of returns and then fear they have neither the time nor resources to catch up again?

Do people believe the MTD and new penalty proposals are fair? If not please lobby to try to get them amended. If computer filing is going to be so popular, as claimed by HMRC, there should be no need for compulsion. Penalties should be levied on people committing deliberate wrongdoing, not mere bystanders.

HMRC Wins Cotter Appeal on Tax Collection – But Still Hope For Some Taxpayers

The verdict of HMRC’s appeal to the Supreme Court in Cotter v HMRC has now been released.  The case concerned procedural matters as to whether a claim for loss relief was included on a return and therefore under which regime HMRC could raise an enquiry.  Whilst this sounds dull, HMRC publicity is announcing at as a victory over “tax avoidance” enabling it to collect an extra £500m.

The Supreme Court found in favour of HMRC in the case of Cotter. However, it was on a very narrow point and  hope remains, following the verdict, for taxpayers who calculated their own tax liabilities.

Background

The taxpayer, Mr Cotter, filed his tax return for the 2007/08 tax year on 31 October 2008.  He did not make a claim for loss relief and left HMRC to calculate the tax.

In January 2009, Mr Cotter’s accountants wrote to HMRC enclosing a “provisional 2007/08 loss relief claim” with amendments to his 2007/08 tax return.  They stated that no further tax would be due for 2007/08 but did not provide a tax calculation.

HMRC amended the return and opened an enquiry into the return but refused to give effect to any credit arising from the loss relief claim.  They held that the claim had not been made in a return and as such were not required to give effect to the claim until the enquiry was closed.

HMRC eventually issued legal proceedings for collection of the tax at the County Court, and a series of cases ensued.  In February 2012, the Court of Appeal found in favour of Mr Cotter, finding that HMRC would have to raise an enquiry under Section 9A of TMA 1970, thus giving Mr Cotter the right to appeal and postpone the tax until resolution.

Supreme Court Decision

The Supreme Court found that where the taxpayer had included information in his tax return that did not feed into the year’s calculation, it did not mean that HMRC were obliged to give effect to it. The tax return form includes other requests for information which do not impact on the income tax chargeable for the year, and as such the word “return” should refer to “information in the tax return which is submitted ‘for the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax’ for the relevant year”.

As Mr Cotter had not calculated the tax due, HMRC were not required to include a claim for 2008/09 loss relief in the 2007/08 assessment.

However, Lord Hodge noted that “matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by…completing the tax calculation summary pages of the tax return”.  By including a calculation with the tax return, the calculation then becomes part of the self-assessment and must be enquired into under section 9A.  “The Revenue could not go behind the taxpayer’s self-assessment without either amending the return or instituting an enquiry under Section 9A of TMA”; with either option providing the taxpayer with an opportunity to appeal.

It is also worth noting that Lord Hodge suggests that HMRC could remove uncertainty in the tax return by highlighting which boxes are not deemed relevant to that tax year’s calculation.

Conclusion

We now have an interesting situation whereby HMRC have won their appeal on Cotter, but the verdict may not have the level of impact that HMRC were hoping for, as taxpayers who calculated their own tax liabilities ought, from reading the case, to be able to use the decision to their advantage.

It remains to be seen how HMRC will seek to apply the decision to such cases, and whether they will update their tax return forms as suggested by Lord Hodge.

Taxpayers who may be affected by the decision should take further advice before surrendering to a new HMRC demand which may not be valid.

Cotter, Discoveries and Reasonable Excuse

Further to previous posts, we are now aware that the Supreme Court heard HMRC’s appeal against the Court of Appeal verdict in HMRC v Cotter on 3 October 2013.  Whilst we await judgement, it seems a good time to review recent developments in terms of HMRC policy.

A recent First-Tier tribunal case on reasonable excuse found against the taxpayer, raising some interesting points on what constitutes ‘reasonable’.

The case, Rennie Smith & Co v HMRC, concerned filing of P35s and whether a reasonable excuse existed for the failure to file.

The appellants are a firm of Chartered Accountants in Scotland, but they failed to file their own P35 by the due date.  They appealed the penalty on the basis that they had logged on to the online filing system but had not filed due to an HMRC system ‘error’.  They argued that HMRC had acted unreasonably by delaying issuing a warning notice and penalty until 4 months after the deadline in addition to their confusion over whether the P35 had actually been filed.

The tribunal agreed with HMRC that the return was not submitted and that in the absence of records showing any technical faults, the error therefore lay with the taxpayer.

It is interesting that this was not found to be a reasonable excuse, however in other recent cases, it has been inferred that HMRC not monitoring their post is reasonable!  In the case of Smith v HMRC, HMRC were entitled to raise a discovery assessment outside of the enquiry window, despite the fact that the enquiry was only not opened in time due to the extended sick leave of the inspector, with no one apparently dealing with his post.

In light of Cotter and Smith, it is interesting to note the disparity between reasonable HMRC practice and the expectations placed on taxpayers.  We await the judgment on the Cotter appeal with interest and will provide an update once published.