“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.