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.

Law, Interpretation and Common Sense

Here is a conundrum.

A long, long time ago … in a galaxy far, far away (a.k.a. York, England 1981) I was a newly created Inspector of Taxes.

I was taught that the tax rules were strict and should be followed to the letter. However, that should not mean artificial impositions and ridiculous decisions. In those days (what is now HMRC) had ‘care and management’ of the Tax System.

Hence, my training was that, if during a Tax Investigation (of which I did quite a few!) I ‘discovered’ (see S29 TMA 1970) that some profits from one year, really ought to have been taxed in a different year, I should adjust it accordingly – but on both sides. So, in adding the profit to one year (per the correct accounting) I should then deduct the profit from the year I have moved it from. I should not seek to tax it twice, because that would be blatantly unfair!

A recent case [Ignatius Fessal v HMRC] reached the same conclusion, albeit using complex legal arguments concerning the European Human Rights Act. In this case the question was one of interpretation. In analysing it the Tribunal have resorted to the Human Rights Act to get to a fair conclusion. In other (older) leading cases, Justice Rowlatt, said that there was no ‘Equity’ in tax, you just read the words stated by Parliament and interpreted them strictly. However, the fact that there was no ‘Equity’, did not mean there should be no fairness. It was simply a method of how best to analyse the statute, bearing in mind the underlying fundamental principle that no Government would wish to impose double taxation.

So the answer should be – No Double Tax.

That truly should be the end of the story.

BUT NO!

In the Fessal case (which as Andrew Hubbard rightly says is complex in the 19 May issue of the leading professional magazine, Taxation) the First Tribunal spent 36 rather closely argued and difficult pages, including analysing a key issue as to whether the ‘European Human Rights Act’ should apply?

To be fair to the Tribunal, they gave detailed legal analysis, which is impressive in scope and response. However, should it have been necessary to invoke such complexity on what surely should have been determined as a simple question of fairness? As certain Old-Fashioned English Common Law Chaps might have concluded – You cannot tax a person twice on the same profits!

To use the current jargon “End of …”

Would the Revenue in the days of their duties for ‘care and management of the tax system’ objected to this ‘as a matter of law?’ It would be hoped not.

In present times though – they did. As the Court pointed out, the way HMRC handled the matter put the taxpayer in a worse position than if they had not made a Tax Return at all! Surely, this could not be just and would (fairly quickly) lead the tax system into disrepute? This would cost HMRC far more in lost goodwill and compliance.

In addition, the Fessal case does raise rather interesting issues as to the impact of Double Tax Treaties, where maybe they do not work as well as anticipated. Could the Human Rights principle established against Double Taxation assist in cases where there is effective Double Taxation not strictly protected by a Double Tax Treaty? (See the Anson case?)

Moving on, business needs certainty. If the system is to be strictly on a ‘rules basis’ then surely that should be the same for both sides – taxpayer and HMRC. This brings us on to the latest Finance Bill proposals for penalties under GAAR. Are these well thought out and balanced?

Taxpayers who have indulged in tax avoidance have obeyed the law, by definition. Otherwise they would be guilty of tax evasion – a criminal offence.

I hold no brief for artificial tax schemes. In my experience, many of them fail either because they do not meet the underlying commercial requirements, or in truth they depend upon a sham. Some are correct under the law though. Surely they should not be punished severely because the opinion of a bureaucrat finds them objectionable? The Finance Bill proposal for a tax geared penalty of up to 60% may seem disproportionate? Could this be challenged as a breach of ‘Human Rights’?

My opinion is that to protect Government Revenue, HMRC do not need greater powers, nor heavier penalties. They need more, better trained personnel, so that cases can be dealt with and if necessary investigated properly.

I believe the issue is an administrative one – not one for even more legislation.

Opinions please?

HMRC Use Incorrect Procedure – A Revell v HMRC

We recently highlighted the importance of ensuring HMRC have taken the right steps in terms of the use of their powers – see Make Sure HMRC Notices are Valid! – Technicalities and Human Rights Law. This has been confirmed by a further recent case which again shows the importance of checking the facts.

In A Revell v HMRC the First-Tier Tribunal was asked to consider whether HMRC had acted correctly within the legislative framework for their powers. The taxpayer in the case had voluntarily submitted a tax return for 2008/09. HMRC had sent the request to deliver a return to the wrong address, despite having received the updated address for the taxpayer.

HMRC attempted to enquire into the return and determined that further tax should have been due. The taxpayer, however, appealed on the basis that the enquiry was invalid because he had not received a notice requesting a return under TMA 1970, s8.

The First-tier Tribunal agreed that no request to deliver a return had been made due to it being sent to the wrong address. They found that the taxpayer had not waived the requirement for the issue of a notice to file under TMA 1970, s8 by submitting a voluntary return. As such, they determined that his return should be treated as a notice of liability to income tax under s.7 and not a self-assessment return.

The appeal was therefore allowed. In addition, as the time limit to request a return had expired HMRC’s only further option would be to issue a discovery assessment. This would appear to then bring further technical considerations into play, as to whether such a discovery assessment itself would be valid based on case law (see our blog post on some of the case law in this area for further information).

This case again shows the importance of ensuring HMRC are acting within their powers as a first step. It also appears to raise some interesting questions as to the implications for making a voluntary tax return, as the Tribunal found that these should not be treated as a self-assessment return.

Taxpayers Hunted and Lynched

The Blog this week could be described as dark tales from the Brothers Grimm entitled “What happens to those who ignore HM Revenue and Customs…”

Do not be too scared!  Whilst the Brothers Grimm tales tend to have awful endings – as do the stories of the poor souls in the cases described in the Blog – they are the ones who have ignored the warnings and neglected dealing with HMRC with due and proper respect.  For years many seem to get away with it.  However, the final conclusion seems inevitable to Observers.  Neglect means ignoring that invariably the Mills of God (and HMRC) may grind slowly, but they grind exceedingly fine.  It is prudent to take professional advice before the sack of corn representing your life is thrown down the hopper into the grinding wheel.

Looking at likely outcomes those who take advice from their properly qualified professional advisors generally come out far better.  Prior neglect will cost – often significantly – but making disclosure and then negotiating a fair deal makes personal and economic sense.  Just compare getting matters settled to being sent to jail or having your assets seized under the Proceeds of Crime Act, let alone the miserable anticipation of waiting for it to happen.

3 recently reported cases exemplify the lesson.  Stephen Douce only declared a low household income, where in fact he was earning far more.  The under-declarations resulted in a loss to HMRC of VAT, income tax, NIC and tax credits.  He was sent to jail.

Mr Lynch was discovered to have failed to declare a particular source of income.  The Courts held that the degree of suspicion was sufficient for there to be ‘discovery’ under S29 TMA 1970 and for procedures to be taken under the Proceeds of Crime Act, reflecting gains obtained illicitly over the preceding 20 year period.  Unexplained deposits and credit card payments from unexplained sources amounted to sufficient evidence of undeclared income.  The tax assessments stood.

The Hunt case shows financial irregularities can have other long term consequences.  Again, taking proper advice regarding prompt disclosure may well have helped Mr Hunt, a Financial Advisor, avoid having his new business tainted because he was deemed not to be a ‘fit and proper person’ under FSMA regulations.  He lost in court, even though he argued his original criminal conviction ought to be ‘spent’ because it took place in 1993 so was over 20 years ago.

The advice to clients is take proper advice and then act promptly.  Ignore HM Revenue and Customs at your peril!  The alternative consequences are likely to be costly and last most of a lifetime.

If you need further advice call us; 01704 548698 or 0113 2443502.

Fishing for A Commercial Rationale – Avoidance Motive in A Fisher, S Fisher, P Fisher  v HMRC

A recent case was heard at the First-Tier Tribunal regarding the conflict between commercial decisions and tax avoidance motives (A Fisher, S Fisher, P Fisher  v HMRC).  It can clearly be seen that legally reducing a tax liability could be a commercially sensible decision, but it was previously assumed that this would not be enough to override the anti-avoidance provisions that apply where there is a tax avoidance motive.

The case in question involved a family bookmaking business, who took the decision to move the business to Gibraltar in the 1999/2000 take year, in order to obtain more favourable treatment regarding betting duties than applied in the UK.

HMRC took issue with this and challenged the, under the anti-avoidance provisions on the transfer of assets abroad.  They raised assessments charging income tax the years 2000/01 to 2007/08 under the rules in force during those years.

The taxpayers appealed claiming that there was no avoidance as they had moved the business to Gibraltar as a commercial decision in order to compete with other bookmakers.  Saving tax was therefore a side effect and not the reason for relocating.

The First-tier Tribunal did not agree, finding that the transfer would not have gone ahead if it were not for the lower betting duty in Gibraltar.  This did not conflict with the decision to move being made for sound commercial reasons, however this did not prevent there being a tax avoidance motive.

The taxpayers made a further argument regarding the EU rights of freedom of establishment and freedom of movement of capital applied, but the tribunal determined that the rules were not relevant for movements between the UK and Gibraltar.  They did, however, apply to one family member who was an Irish national.

The taxpayers also made a claim that HMRC’s assessments were not valid, under the discovery provisions in TMA 1970, s 29, as the tax officer should have been aware of the relevant information as a result of responses to their enquiries.  The tribunal agreed that the conditions for making a discovery assessment were not satisfied for 2005/06 and 2006/07.  The appeals for the remaining years were dismissed.

Whilst the Tribunal confirmed that a tax avoidance motive could also be part of a commercial decision, it is clear that the anti-avoidance provisions are drafted widely enough to catch such situations.  This is because the existence of commercial reasoning does not overrule the fact that there was a tax avoidance motive as well which was inextricably linked.

Discovery Allowed by Tribunal – N Pattullo v HMRC

The question of what constitutes a discovery remains an area of ambiguity, although recent cases tended to have sided with HMRC’s view that virtually anything can be considered a discovery.

A further recent case was heard on the subject in N Pattullo v HMRC (TC03958), although the decision in the case is unlikely to be too controversial or unexpected, especially considering the case involved an avoidance scheme.  In the current climate, the courts are tending to be reluctant to favour taxpayers in cases where they have used an avoidance scheme.

Mr Pattullo participated in a scheme which generated capital losses of around £2.6m which he reported on his 2003/04 tax return.  HMRC concluded that he had participated in an avoidance scheme and issued a notice under TMA 1970, s.20(1) requesting relevant documents.  The taxpayer did not comply with this request and instead sought a judicial review to revoke the notice, but this request was dismissed by the Court of Session in 2009.

In the meantime, the Court of Appeal had found in favour of HMRC in the case of J Drummond v CRC (2009) which involved a similar second-hand insurance policy scheme.  Therefore, HMRC raised a discovery assessment for £835.400 as they were now satisfied that his original return was incorrect.

The taxpayer appealed, arguing that there had been no discovery as no new information had come to light.  The Tribunal found that the decision in Drummond v CRC constituted a discovery as it converted a “suspicion” of an underpayment of tax into a “positive view”.  It was doubtful that a hypothetical officer would have been aware of these avoidance schemes before the Drummond case was heard.

The taxpayer made a final attempt to protect his position by arguing that the grounds of his appeal should be amended to argue that the original avoidance scheme actually worked.  This was again dismissed by the tribunal who felt that, bearing in mind there were a number of appeals on similar schemes to Drummond pending, he was trying to jump on a “bandwagon” allowing other taxpayers to argue his case for him.  They felt the amendment was too vague and dismissed the appeal.

The final decision will likely not be a surprise to many, but does highlight the current attitude of the courts to the use of such avoidance schemes, and the wide definition of “discovery” that HMRC are using.