Wednesday, March 25, 2009



The new system of penalties that applies from 1 April 2009 differentiates between prompted and unprompted disclosure. An unprompted disclosure attracts half of the maximum penalty of a prompted one. This is to encourage taxpayers to notify HMRC promptly if they make a mistake. A disclosure is “unprompted” if it is made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the error.

The legislation does not specify how to make an unprompted disclosure. That may sound odd. Surely you only need to write a letter to HMRC. Yes, of course! But which bit of HMRC? Ten years ago I knew who was dealing with a client’s tax affairs. Nowadays I rarely do. Responsibility is split between different offices for different aspects of his affairs and one aspect can be dealt with by several different people in the same office.

Surely, you will be thinking, HMRC is HMRC. If you send the letter to the wrong person it will be forwarded to the right one. Well that is what I thought until I read the decision of the VAT and Duties tribunal in Richard Sadler trading as Warnfield Group.

Mr Sadler made an error on his VAT return. When his accountant came to do Mr Sadler’s accounts he picked up the error and advised Mr Sadler to notify it to HMRC. Mr Sadler did so. Such an error can be notified in one of two ways. You can simply write a letter to HMRC or you can fill in HMRC form 642. Mr Sadler took the latter option. He filled in the form and sent it to HMRC with his next VAT return.

Oh no, said HMRC. The legislation enables us to make regulations (an awful lot of the time actually, much more of the VAT law has been made by HMRC than by parliament) and we provided in the VAT Regulations 1995 that a person must correct an error “in such manner and within such time as the Commissioners [of HMRC] may require”. We say on the form 652, “You can use this form to disclose directly to your local VAT office (not VAT Central Unit) the details of any errors”. Mr Sadler disobeyed us! Admittedly he sent it to us but, as far as we are concerned, sending it to us at our VAT Central Unit instead of to us at his local VAT office is not notification of the error at all. Mr Sadler is not entitled to make the ridiculous assumption that we are here to help taxpayers and, like other organisations, will redirect a form to the correct place in our internal post. Parliament has not required us to be reasonable so we won’t be. (I expect that they did not use those precise words but that seems to be the gist of the reason why they pursued Mr Sadler before the VAT and Duties tribunal for a penalty of £11,044 that would not have had to be paid had he sent the form 652 to his local VAT office).

I doubt that many people actually know where their local VAT office is. They deal only with the VAT Central Unit. The address of the local office is on your VAT certificate, but HMRC seem always to be closing down or amalgamating offices, so even if you can find your VAT certificate (which they sent you when you registered for VAT, perhaps 35 years ago) the address on it may not be right.

I also wonder what would have happened if Mr Sadler had not filled in the form but simply written a letter to HMRC. I suspect they would have said that the VAT Regulations flag up “in such manner as … as the Commissioners may require” and that it was incumbent on Mr Sadler to read the Regulations and find out what they required.

I never fail to be puzzled at how often HMRC seem to say that they are anxious to have a good relationship with taxpayers and to help taxpayers to get things right and yet when it comes to the crunch, they seem gleefully to pounce on mistakes made by people like Mr Sadler and insist on strictly enforcing the rules that they have created.


Tuesday, March 24, 2009



I find the approach of both the Press and Gordon Brown to the Tony McNulty affair intriguing. What he has done in claiming £60,000 of tax-free expenses from the taxpayer in relation to his (or perhaps his parents’) house in Harrow is precisely the same behaviour as that adopted by a tax avoider. He has used a rule introduced by parliament in a situation that no reasonable person could have thought that the rule was intended to cover, in order to extract money from the taxpaying public.

As I understand it, the parliamentary relief for second homes was introduced in the early 1970s to recognise that where an MP had a constituency outside London it was impractical for him to live in his constituency and at the same time perform his parliamentary duties. At that time parliament frequently sat into the early hours of the morning, by which time most public transport had ceased.

Transport for London’s Journey Planner tells me that it takes 30 minutes to travel from Westminster Station to Harrow-on-the-Hill Station. Furthermore the last train (which, to be fair, takes two extra minutes) leaves Westminster at 31 minutes past midnight, well after parliament has ceased sitting. On the rare occasion where there are late night sittings even the night buses take only a little over an hour. Virtually everyone who works in London has an hour’s commute to get to work and to get home again.

Clearly the rule on second homes was not intended to cover a situation where an MP can readily travel back and forward to his home without impacting on his need to service both his constituency and parliament. Mr McNulty does not need to live in upmarket Hammersmith to fulfil either his parliamentary or his constituency work. He lives there out of choice. Parliament could hardly have intended that the taxpayer should be expected to provide a second home for an MP whose first home is within ready travelling distance of Westminster.

Exploiting the letter of the law contrary to its clear intention is what most of us would understand by avoidance, whether it is a tax law or any other sort of law.

I do not know what Mr McNulty’s views on tax avoidance might be. I assume that he has no moral objections to others adopting the same behaviour towards the law as he does. The English abhor hypocricy in their politicians. My own attitude to tax avoidance is that I have no right to seek to impose my moral principles on those who believe that compliance with the letter of the law is sufficient without needing to go behind the letter of the law and limit one’s use of it to the purpose for which it was intended. Equally I have no criticism of Mr McNulty adopting the same view.

However Gordon Brown has frequently made clear that he believes that sticking to the letter of the law without regard to the intention for which it was enacted is both immoral and unfair to the general body of taxpayers. In these circumstances how can he endorse such behaviour by awarding the perpetrator with a post in his government? “Do as I say, not as I do” is not an attractive proposition. It is blatant hypocricy!

And how about the Press? A leader in today’s Times (24 March) homes in on the efficacy of the parliamentary rules and seeks to make no moral judgement, yet on a later page the paper gleefully later berates Lord Myers for having been the Chairman of an offshore fund, describing the mere existence of that job as a “blow to the peer’s credibility”. It is hard to understand how simply being involved with an offshore fund – which I suspect has no particular tax benefits to UK resident and domiciled individuals – is a blow to a person’s credibility, whereas exploiting a badly drafted parliamentary rule to extract a substantial unintended benefit from the taxpayer does not even attract opprobrium but merely a call for the rule to be reviewed?