Wednesday, June 24, 2009



“Organisation Values – a broader relationship with customers … Broad principles such as treating customers courteously, dealing with their issues promptly, being fair and professional are covered under this heading”.

“H M Revenue & Customs … aim to make the tax … system feel easy to use. You can expect HMRC to … provide you with accurate information”.

“Don’t mess with us. We can destroy you. Even if you don’t owe us a penny we have the power to destroy you. And be under no illusion. Even if you don’t owe us a penny, we will destroy you if you choose not to co-operate with us”.

The first of the above quotes is from the June 2008 Consultation, “HMRC and the Taxpayer: A new Charter for HMRC and its customers”. The second is from the February 2009 Consultation, “HMRC Charter”. The third is from my imagination; I imagine that it is what someone said to Mr Cassells. I will come back to Mr Cassells later. I’d like to start with a hypothetical scenario.

Mr X does not believe that he owes any tax. He is a bit uptight that he is asked to complete tax returns because he thinks that he has had tax deducted at source under the construction industry scheme that exceed his tax liability. His income is low. He and his wife jointly own their house, which is worth in the region of £80,000 but is subject to a substantial mortgage. Mr X’s equity in the house is in the region of £26,500. That is his only significant asset. Indeed he is so uptight that he cannot be bothered to complete the tax returns that he has been sent.

After a few years HMRC work out that Mr X owes them tax of £4,533. They send him a demand. Because he does not believe that he owes anything, Mr X ignores it. HMRC make Mr X bankrupt.

This wakes Mr X up. He writes to HMRC and asks how they arrive at the £4,533. After a few months they say, “What a surprise. You don’t owe us £4,533 after all. We owe you £6,113” (or words that that effect).

Mr X is so uptight and so convinced that he owes nothing to HMRC, that he refuses to co-operate with the trustee in bankruptcy too; he sees him as brought in to do HMRC’s dirty work and he is not going to help him.

When HMRC tell Mr X that, although they lodged the petition on the basis of which he was made bankrupt, they made a mistake he applies to have his bankruptcy annulled. (I assume that they made a mistake; I am sure that if Mr X believed that HMRC owed him £4,533 and it turned out that he owed them £6,113, HMRC would say that he had clearly failed to take reasonable care in dealing with his tax affairs, but I also believe that in HMRC eyes failure to take reasonable care is a one-way street; HMRC staff always take care but being human can occasionally make mistakes). A judge hears the story and annuls the bankruptcy. All’s well that ends well. I like stories with happy endings.

I said earlier that I’d get back to Mr Cassells. Actually the above story is not hypothetical at all. Mr Cassells is Mr X. So what about the happy ending? HMRC are contrite, apologise profusely and compensate Mr Cassells for the hassle that their mistake has caused him?

Not a bit. Even if he owed nothing, Mr Cassells didn’t complete his tax returns. If people can get away with not doing what they are told to do by HMRC, however unreasonably it may seem (or even may be to them), what would the world come to? Other people may even start to think that parliament has given them rights and might challenge what they are told by HMRC. That would undermine the whole concept of HMRC expecting people to do as they are told. So HMRC – or, perhaps you and me as it is our money that HMRC paid out in legal fees – applied to have the annulment of Mr Cassells’ bankruptcy set aside.

Eventually Mr Cassells swallowed his pride and completed his outstanding tax returns. As a result HMRC calculated that they were wrong in thinking that they owed him money; he actually owed them £3,890. Oops! Another HMRC error. By the time the case came to court they accepted that he did not owe them a penny.

So why did HMRC pursue their application? Personally, I suspect that it was to teach Mr Cassells (and anyone else who is tempted to cross HMRC) a lesson. But that is obviously not what they told the judge. What they seem to have told the judge is that Mr Cassells had been threatening throughout to take action to prove that he didn’t owe them anything and he had been “all mouth and no action”. Accordingly they had been right to serve the petition. Having done so in error they have a responsibility to his other creditors (of roughly £5,000) as it had taken HMRC so long to work out what Mr Cassells did or didn’t owe them (assuming, that is, that their fourth try is right) that their debts would now be statute barred if Mr Cassells were to decide not to pay them and his bankruptcy were annulled. Furthermore, although if Mr Cassells had paid those debts at the beginning he would still have net assets of £21,500 (plus whatever HMRC might owe him), those creditors are entitled to interest and the trustee in bankruptcy has obviously incurred both his own fees and legal costs, which by now had amounted to £64,524. Accordingly as a direct result of HMRC’s actions he is now well and truly bankrupt even if he was not before.

“Yes”, said the judge, “I’ll cancel the annulment”! So that’s all right then. Result: Mr and Mr Cassells thrown out on the street. No tax collected (as none due). But, most importantly, HMRC have clearly established that anyone else who dares to challenge them needs to realise the extent to which HMRC are prepared to go to punish them.

A puzzling aspect of this case is why HMRC should have spent taxpayers’ money to appeal a matter in which they clearly had no interest. Indeed someone cannot simply initiate a court case, or I would have thought an appeal, simply because they feel like it. They need to have some standing that the court will accept gives them an interest in the case. I doubt that being upset because someone declined to co-operate with you is sufficient.

The answer lies in what is called equitable liability. In law Mr Cassells does owe tax even though in terms of arithmetic his tax deductions fully cover his liability. He owes the £4,533 that HMRC originally claimed and later accepted was an error. He owes it because HMRC assessed it on him and he did not appeal against the assessment. The reason that HMRC accepted that he now owes them nothing is the concept of equitable liability under which, where information received after the statutory deadline has passed shows that tax assessed is too high, they are prepared to make an administrative decision not to pursue recovery of the full amount assessed.

I wonder whether it is a coincidence that on 22 May, HMRC issued a statement saying that they intend to withdraw the concept of equitable liability from 1 April 2010.

I know nothing about Mr Cassells’ circumstances other than that he was a building industry sub-contractor, had little assets and used to live in an £80,000 house subject to a substantial mortgage, which the case report tells me. For all I know he may be a university graduate with a deep knowledge of the tax statutes. He may have deliberately not made tax returns, deliberately not applied to have his bankruptcy set aside the minute he was informed of it and deliberately refused to co-operate with his trustee in bankruptcy. It is, though, equally possible that he was a frightened little man with no knowledge of tax or of bankruptcy law who did not know what to do when the State claimed from him money that he knew he did not owe, who did not know that he could appeal against the bankruptcy order and was deeply upset that the State could strip him of his livelihood and his assets for no obvious reason whatsoever. If he has read Kafka’s “The Trial”, he will undoubtedly have empathised with Joseph K, whose nightmarish world seems to resemble that of Mr Cassells.

As a taxpayer I feel as angry about HMRC’s proposal to withdraw equitable liability as I do about the State’s treatment of Mr Cassells. HMRC say that equitable liability was introduced to protect other creditors in insolvency cases. But that is not the circumstance in which most of us have used it. In my experience, and I suspect that of TaxAid and LITRG, it is mainly used to avoid penalising those who are too frightened to open brown envelopes, who do not see HMRC as the friendly, loveable folk that HMRC wish to be perceived as, and who freeze at the very mention of the word “tax”. It provides a safety net for the vulnerable. It brings a touch of humanity and fairness into the tax system.

The powers review seems to me to have tipped the balance between HMRC powers and taxpayer rights, which the Inland Revenue strove hard to achieve when self-assessment was introduced, firmly towards enhancing HMRC powers and largely replacing taxpayer rights with taxpayer obligations to be enforced with an iron fist. I also notice that the draft HMRC Charter does not use the word “fair” at all, whereas that came right at the beginning of the original Inland Revenue Charter. Accordingly for HMRC to decide that there is no longer room for humanity and fairness in the Brown/Darling new tax world is perhaps not surprising. It is nevertheless very sad.

HMRC say that as under self-assessment from 1 April 2010, a taxpayer will have three years both to file a tax return and to displace a legal determination based on an estimated amount so it is no longer necessary for them to operate equitable liability. So does this mean that it is an obsolete concept as since 1996 taxpayers have had almost six years; that it has never been used since 1996? Of course not. Most of us have had instances where vulnerable people have come along with issues several years old because they have been too frightened to react to the bits of paper and it is only when the writ had been received or the bailiff had knocked on the door that they have realised that they had to do something.

I realise that the government is short of money and is probably pressuring HMRC to collect what is owed to it. However as a taxpayer I do not want the country’s financial problems to be alleviated by oppressing the most vulnerable members of society; by collecting money that is technically due from them but which to my mind it is morally offensive to society as a whole to exact; or by punishing for their inability to cope those who are bewildered by the tax system. I hope that I am not alone. I hope that someone in parliament can persuade Mr Darling either to keep equitable liability as a safety net for the vulnerable or, if he really believes that the House of Lords in Wilkinson meant him to withdraw such discretion from HMRC, to enact an equivalent power to enable them to continue to act fairly towards the vulnerable.

Robert Maas

Monday, June 01, 2009



HMRC, the caring department of government: caring about you (or, perhaps, rather your assets and income) from the cradle to the grave. Actually, apparently, even from before the cradle!

I have been reading a press release on “Information for mums-to-be”. This tells me that from April 2009 a “mum-to-be who’s at least 25 weeks pregnant” (and who’s due date is after 5 April 2009) can claim a “one-off, tax-free payment of £190” from HMRC. Oh, but not if she is too independent minded. She must have been given health advice from a midwife or doctor on matters relating to maternal health if she is to qualify for this handout.

I do not know what the technical definition of a “mum-to-be” might be. The 25 week period seems to have been determined on the basis that abortion is legal in this country under 24 weeks of pregnancy (if two doctors agree that it is necessary for specified reasons). This 25 weeks therefore looks like a tax (or rather relief) avoidance provision. It prevents a woman from claiming the relief, getting the money, and then aborting the foetus.

So how come that HMRC have suddenly become so generous? I suspect that it is a ploy to get people onto their books as early as possible! Or it may be that the government couldn’t persuade anyone else to administer this grant. Actually I’m not sure that HMRC want to either. They have made claiming the £190 as hard as possible. You obviously have to fill in a claim form. But you can’t download it from the internet. You can’t even get it from HMRC. You need to get it from your midwife or doctor, who must confirm on it that advice has been given to you on matters relating to your pregnancy and sign and date it before they give it to you. You then need to complete it and send it to HMRC within 31 days of the midwife or doctor dating it. This is apparently a strictly enforced time limit. HMRC helpfully say that if your midwife or doctor doesn’t have any claim forms you should call their Health in Pregnancy Grant Helpline and they will send a form – but not to you; to your doctor or midwife. If the expectant mum-to-be is ill or disabled and cannot manage her own affairs, the prospective dad-to-be (or anyone else) can make the claim, but this needs another form, which is not obtainable either from HMRC or the doctor or midwife; you have to go to a Jobcentre Plus office to pick it up.

I was so intrigued with this new role for HMRC (who I thought did not even have sufficient resources to do their basic tax collection role properly) that I wondered where the legislation is. It is in ss 140 – 140A of the Social Security Contributions and Benefits Act 2002 inserted by s 131 of the Health and Social Care Act 2008 – and supplemented by the Health in Pregnancy Grant (Entitlement and Amount) Regulations 2008 and the Health in Pregnancy Grant (Administration) Regulations 2008.

There is still no definition of a mum-to-be though. This is apparently an HMRC version of baby talk. The law refers to a woman (which in turn is defined as a female of any age – presumably because we know that in today’s Britain pregnancy starts in the gym-slip). The Regulations impose the further conditions that she must be pregnant and have reached the 25th week of the pregnancy. A woman is not entitled to the grant unless she is in Great Britain (or Northern Ireland) at the time she makes the claim. Unless she is under 16 she also has to have a National Insurance number and information or evidence establishing that that number has been issued to her (or she must evidence that she has applied for one).

The Regulations define a health professional as a practicing midwife who is registered with the Nursing and Midwifery Council or an obstetrician or General Practitioner who is registered with the General Medical Council. They also say that a woman must be treated as not being in Great Britain if she is not ordinarily resident here or does not have a right to reside here (but a woman deported to the UK from another country is treated as being ordinarily resident here; and so is a Crown servant posted overseas, a partner accompanying such a person or the daughter of such a person if child benefit is being paid in respect of her). A partner is defined as one of a couple and a couple embraces a man and woman who are married to each other (or living together as husband and wife) and two people of the same sex who are civil partners of each other (or living together as if they were).

If a woman is not yet 25 weeks pregnant HMRC say that they will send her a “free reminder” when she becomes 25 weeks pregnant. Anyone who wants this free reminder can register for it online or send HMRC a text message (text DUE followed by the date – e.g. DUE 060909 if you are due to give birth on 6 September 2009 – to 83377). Can the provider of such a friendly, helpful service really be HMRC?