Monday, April 26, 2010



Both “The Times” and the “Daily Telegraph” have commented on the case of the Kent tradesman who claimed a tax refund of £3,000 when he was only due a £1,000 refund and was charged a penalty of £1,400, which represents 70% of the difference. Writing on one of the accounting websites, McGrigors, the solicitors who are currently advising the taxpayer on a pro-bona basis, have given further information. The taxpayer completed his tax return for 2007/08 himself. It was the first self-assessment return he had ever completed. He misunderstood the tax return instructions and believed that he did not need to give details of his income or expenditure if he earned less than £30,000. He put on the return his deductions under the construction industry scheme (CIS), so HMRC were aware that he had income from which tax had been deducted at source. Indeed when HMRC got the return they wrote to him to ask if he had made a mistake. McGrigors point out that if the taxpayer had been more computer literate and had filed his tax return online, he would not have been able to file it as the self-assessment computer checks for obvious errors and demands a correction before the return is submitted.

The new penalty regime operates from 6 April 2009 and this penalty was apparently raised in April 2009, so it must have been one of the first under the new penalty regime. “Teething” problems occur under any new regime. It looks as if an HMRC Officer has made a mistake on the level of penalties. McGrigors have taken the matter up at a high level on the taxpayer’s behalf and I imagine that HMRC will accept that something has gone wrong and either waive or reduce the penalty. So why am I so concerned about this case?

Well firstly a “key element” of the new approach to premises is, “a “stepped” approach to penalties depending on behaviour along the “compliance spectrum” from failing to take reasonable care to deliberate understatement with concealment”. (HMRC Consultation document, December 2006).

HMRC went on to say in that document that responses to the consultation broadly favoured this overall approach and that “no penalties for mistakes or misinterpretations, suspended penalties and greater emphasis on disclosure were all welcomed”. It is not possible to get a 70% penalty for error. The 70% applies only to “deliberate understatement”, and deliberate understatement is a euphemism for fraud. So we have here a set of facts that McGrigors categorise as a mistake – or as a misinterpretation, it does not matter which, as HMRC say themselves that neither attracts a penalty – and that HMRC categorise as fraud. Howe can this happen if both parties are looking at a spectrum of behaviour where mistake merges into carelessness and carelessness merges into fraud? A feature of a spectrum is that whilst the borderline between different segments is blurred, outside the borders the situation ought to be clear-cut. Thus it would be understandable if McGrigors thought that the behaviour was a mistake and HMRC thought it carelessness, or if McGrigors thought it carelessness and HMRC thought it fraud. But that is not the case. Neither thinks it carelessness. This suggests that there may be something fundamentally wrong with the model. Conscientiously trying to get something right and not managing to achieve it, is so remote from deliberately doing something knowing that it is wrong, that the two are wholly incompatible. How can anyone mistake one for the other? Yet that is what either McGrigors or the HMRC Officer (or possibly both as the behaviour could be carelessness) seem to have done. This case seems to me potentially to discredit the entire new penalty system.

Secondly, when the website took the matter up with HMRC they said that confidentiality prevented it from commenting on individual cases “but emphasised that it took a more lenient approach to those who take all reasonable care to get things right and who co-operate with the department’s investigations”. Who can question that?

Confidentiality is the cornerstone of tax compliance. It is vital that HMRC maintain confidentiality. Fair enough, although HMRC seem happy to pay lip service to confidentiality when it suits them. For example when they threaten to issue a third party notice to get information rather than allow the taxpayer to obtain it himself they tend to say, “Of course we will not say that your client is under investigation but we cannot stop a third party from drawing what conclusion he chooses”, knowing full well that the most likely conclusion is that the client is under investigation by HMRC and HMRC do not trust him.

But taxpayer confidentiality surely does not prevent HMRC from defending itself. It would not have prevented HMRC’s Press Officer explaining to the Times and the Telegraph either that HMRC appeared to have made a mistake, which they were investigating and would correct if necessary, or that the facts as understood by the Times and the Telegraph did not reflect the facts that had been before the Officer when he or she made the decision on penalties. What is at stake here is the integrity of the new penalty regime. HMRC surely ought to defend it. It is a major area of public importance. If the new system is unworkable then something needs to be done about it; for HMRC to simply ignore the issue is an unreasonable response. HMRC could also explain the 70% figure. I am assuming that it is a penalty for fraud as that is the only way a 70% penalty can arise. But it may not be a 70% penalty. If the taxpayer had omitted the income from his return but claimed his expenses, 70% of the net profit might in fact be only 30% of the income. Confidentiality does not prevent HMRC pointing that out; they do not even need to refer to the specific case to do so.

My other concern is the comment that HMRC “took a more lenient approach to those who take all reasonable care to get things right”. So what? Fraud is clearly incompatible with trying to get things right. It is contemptuous of the taxpaying public to answer a question in relation to an apparent claim of fraud, by ignoring the question and commenting on something else entirely. Furthermore HMRC have no call to be lenient with those who take “all reasonable care”, as such a person has no liability to a penalty. Even the penalty for carelessness cannot, by definition, apply to someone who takes all reasonable care as such a person cannot have been careless. And if ever there was a case for suspending a penalty for carelessness (if that is the actual behaviour), this is surely it. And what about co-operation? The taxpayer in this case was actually thanked by HMRC for his help, yet 70% is the maximum penalty for fraud so, in spite of his co-operation, HMRC seem not to have been at all lenient with him.

I am also concerned if the penalty is indeed a maximum penalty, as it appears to be. I have specialised in tax since 1965. In that time I have never, ever, seen a maximum penalty for fraud. Back in the 1960s or 1970s I think I agreed a 55% penalty in one case with HMRC’s Enquiry Branch, but in recent years the largest penalty that I have agreed in the case of what HMRC describe as “serious fraud” is 30%. Accordingly even if HMRC have reason to suspect fraud, a maximum penalty seems completely unconscionable in circumstances where the tax involved is small, the taxpayer has co-operated, and suspended penalties have been introduced to give people the opportunity to eliminate the penalty by a change in behaviour.

This is yet another illustration that, as a citizen, suggests that HMRC is not the sort of tax authority that I want. One that is not prepared to explain its actions however unreasonable they may appear to the general public. One that talks of leniency but seems unwilling to actually show it. One that treats unrepresented taxpayers far more harshly than those who can afford to engage professional advisors to stand up for them. Is it the sort that you want?


Friday, April 23, 2010



I pose this question after reading the decision of the Court of Appeal in R (on the application of Valentines Homes & Construction Ltd) v HMRC.

Valentine has two directors, Mr & Mrs Brooke. On 28 May 2007 Mr Brooke sustained a serious head injury while in Spain. He needed brain surgery and was detained in hospital for several weeks. At the time Mrs Brooke, who was pregnant, was juggling between tending to her husband and looking after their three children. As a result of those personal problems the company failed to pay over its PAYE for the period May to August 2007.

Where an employer does not pay over PAYE by the due date HMRC have power to guess the amount due and serve a notice on the employer to pay that amount within 7 days. The amount so guessed is deemed to be PAYE due by the employer unless during the 7-day period the employer either tells HMRC the true amount due or demonstrates that nothing is due. HMRC guessed £83,697 in two stages, on 2 July and 10 September 2007. Mrs Brooke, for understandable reasons, did not supply the correct figure by 9 July and she never received the September guess. The amount of £83,697 was accordingly technically payable.

On 9 October 2007 HMRC instituted County Court proceedings to recover it. The company served a defence admitting that it owed £60,613 and explaining that Mr Brooke was “injured, hospitalised and not fully functioning for a period of months”.

HMRC responded that the company had had seven days to give it the correct figure and “as you did not, my estimate is legally due and payable”. It added that “Mr Brooke’s period of incapacity is not relevant to my claim”. Finally it said that if the company paid the tax it believed to be due it would be accepted without prejudice and HMRC would still go to the County Court for the difference of £23,000 odd between their guess and the tax actually deductible under PAYE.

I am fairly familiar with the tax legislation. I cannot find anything that says that HMRC are not allowed to be compassionate or, indeed, that they cannot use commonsense. Personally I do not want the sort of tax authority that in effect says, “While you were seriously ill we initiated a procedure that results in the company owing £83,697. It is our good luck that at the time you were too ill to respond to it. You now owe us £23,000 more than parliament intended you to pay. We don’t care how ill you were at the time. Mrs Brooke wasn’t ill; she was simply nursing you, looking after your three children and coping with the stress of pregnancy. The children would not have died if she had abandoned them for a couple of days to work out the tax due. She chose to put the welfare of her family before her duty to ensure that the company pays its PAYE. No reasonable person would do that”.

Is that the sort of tax authority you want?

The case got to the Court of Appeal because on 13 May 2008 the company sought judicial review of HMRC’s decision to go to the County Court. In the interim the company’s accountants had worked out that the tax actually due was £64,888 and had told HMRC this on 11 December 2007. HMRC ignored that letter. In March 2008 they obtained a County Court hearing date and on 21 April 2008 wrote explaining that they were disinterested in the accountants’ figures, i.e. the facts, as by law the amount due was the amount HMRC had guessed. On 2 May 2008 the accountants expressed concern about HMRC’s “zealous desire to pursue an incorrect debt in court rather than attempt to accept evidence”. On 9 May the company paid the tax and interest that it believed to be due. On 13 May the company made its application for judicial review, together with an application for a stay of proceedings in the County Court. At the County Court hearing on 14 May, HMRC’s claim was adjourned to 16 June when the application for the stay would also be heard. A few days before that hearing, on 10 June 2008, HMRC agreed to accept that £64,888 plus interest that the company had paid on condition that the company withdraw its judicial review application, pay the costs of HMRC’s original claim of £630 and pay its own costs. HMRC confirmed that “any additional costs claim by HMRC will be met by us”. The company agreed to pay the £630 and wrote to the County Court withdrawing its application for a stay.

Is that the sort of tax authority you want? One that gleefully puts a pregnant woman under the stress of believing that they intend to collect tax in excess of that decreed by parliament and then at the latest possible date, just before the Court hearing, say that they don’t intend to do so after all. It is not the sort that I want.

The company did not withdraw or agree to withdraw its judicial review application. Indeed it asked HMRC to pay the costs of £10,549 that it had incurred in relation to the judicial review. The High Court granted the judicial review application. However HMRC then pointed out to the Court that while notice had been served on a senior official within HMRC the Court rules required it to be served on the Solicitor to HMRC (a different senior HMRC official). The Court thereupon set aside the permission. HMRC also used that as an excuse to soundly reject the company’s claim for the costs of the judicial review. “Please note that as the original application was not properly served on this office we will not entertain your request for costs”.

Is that the sort of tax authority that you want? One that seeks to avoid payment of a reasonable claim by taking technical legal points rather than approaching the claim on its merits – and in order to do so seems happy to wash in public what seems to be very dirty linen indeed. As both a citizen and a taxpayer, it is not the sort of tax authority that I want.

On 10 February 2009 the High Court refused permission for judicial review on the grounds that the matter had become academic following the settlement of the County Court proceedings. It ordered the company to pay HMRC £500 in respect of costs as it was not justified in pursuing the application. The appeal to the Court of Appeal was against the decision on costs. Happily the Court of Appeal set aside the order for the company to pay the £500 and instead ordered HMRC to pay the company £6,000. Ironically, the court arrived at that figure by guesswork! It felt that the company had not provided it with sufficient details of the costs to enable it to assess what sum was actually appropriate.


Wednesday, April 21, 2010



“No taxation without representation” is reputed to have been the slogan of the Boston radicals that opposed payment by Massachusetts of the tea duty imposed by the UK parliament. The refusal of the UK government to allow the colonist’s voice to be heard in parliament led, of course, to the American War of Independence that lasted from 1775 – 1783.

This long and bloody war was a consequence of an unfair concept of “democracy” under which England sought to impose its will on America.

Democracy comes from the Greek meaning “rule of the people”. Of course in a society of over 60 million people such rule is impractical. Instead the people elect representatives to determine the rules. However the populace is surely entitled to expect that such representatives will indeed represent its needs and concerns. Would it be a democracy if the populace were to elect a parliament of representatives and that parliament were to say to the government, “Do what you like, we’re not interested in approving, improving or even bothering to read the laws that you wish to introduce. We’ve got better things to do. Who cares about the citizenry? Who cares whether we have a fair tax system that reflects the needs and the intellectual abilities of the citizenry? We don’t”. I would answer that question, “Of course not it; that would be to hold democracy in contempt”. But what would our actual representatives say? I do not know. What I do know is that before rushing off to ask us to re-elect them, our MP’s enacted a 156 page long Finance Act 2010.

Introducing the second reading of the Bill (the first stage in its debate) the Minister said, “We have published a much shorter Finance Bill than usual and it is focused on the Key Budget measures … We are proceeding today on the basis of consent, and to be helpful to Opposition Members, I will not be moving the landline duty in clause 23 …, clause 58 requiring financial securities from employers at serious risk of pay-as-you-earn or National Insurance contributions not being paid, or clause 65 … on furnished holiday lettings. These will all be in the second Finance Bill at the start of the new Parliament. I have also tabled amendments to clause 9 that will limit the increase in cider duty to 2% above inflation …”.

What are we to make of, “we are proceeding today on the basis of consent”? I think that it means that the Finance Act 2010 is a cross-party measure. In particular the vicious and unfair penalties where careless mistakes involve offshore income – and as such are most likely to be made by the poorer immigrant members of society, such as the nurses that I hypothesised in Blog 79, is not a Labour party imposition. It’s unfairness also reflects the views of the Conservative and Liberal Democratic parties who were happy to add it to the statute book without debate, without any government assurances on its operation and without asking the government to explain the reasoning for treating immigrants so harshly.

Of course there was some debate. Last year’s Finance Bill ran to 450 pages. There was some debate then too, although admittedly nothing like as much as the Bill deserved or as was traditional pre Gordon Brown’s penchant for marathon bills. Here is a comparison of the two (to the nearest quarter hour)

2009 2010
Second reading 9 2¾
Committee stage 61½ ¼
Report stage 11¾ 0
Third reading ½ 0
______ ______
82¾ 3

For those not familiar with parliamentary proceedings, the Second Reading is political bantering based on the budget proposals. The Committee stage is when parliament actually starts to consider the Finance Bill. Report stage is where the government responds to points made at the previous stage and Third Reading is another round of political speeches.

Obviously this year the Bill was savagely guillotined by the government? Not at all. The three main parties agreed that three hours was the appropriate time to consider 156 pages of legislation that would have a lasting impact on the lives of the citizenry.

I am aware that some bits of the Finance Bill, in particular tax rates for the coming year, have to be passed by 5 August as the Provisional Collection of Taxes Act allows tax to be collected on the basis of the budget resolutions only until that date. However there was no urgency in most of the Finance Bill. It could have been introduced later in the year with the anti-avoidance bits still applying from budget day, but with proper debate so that people could have a degree of confidence that what reached the statute book had been properly considered by parliament. I am also aware that a full Finance Bill was rubber-stamped by the Conservatives and Liberal Democrats when we had an election on 5 May 2005, although on that occasion a lot of proposed measures were dropped from the Bill and reintroduced in a second Bill after the election. However that did not happen for earlier May elections, such as the 1 May 1997 election, where the government started the Finance Bill process in January so that the Bill could be passed in March or the 3 May 1979 election. On that occasion, as traditionally happened, a very short Act confined to the tax rates and the other bits of the Bill that had been debated in Committee before parliament was prorogued was passed.

History accordingly suggests that the current Conservative and Liberal Democrat parties are very weak in standing up for citizens’ rights. I can understand Labour MPs wanting to get as much legislation as possible on the statute book in case they are not re-elected. However there is no logical reason why Opposition MPs should want to put on the statute book legislation that they are unhappy with, so that if they are elected they would need to find time to remove or amend it. The inference must be that they are not unhappy with a single word of it.

If I spend only about 3.5% of my normal time in voting this year I won’t even reach the end of my street, let alone the polling station. If that is the level of commitment that the politicians show towards democracy they cannot reasonably expect me to do more. Walking part way down the road is a bit pointless, so I think I’ll just not bother to vote at all this year. Hold on, I see that I have a Green Party candidate. Perhaps I should find out what his taxation policies are before boycotting the process in the same way as the politicians seem to me to have boycotted democracy.


Wednesday, April 07, 2010



Sometimes a Court or Tribunal decision raises the question, “Why did HMRC pursue this case”? I have said many times before that the government’s pleas of “fairness” when condemning tax avoidance schemes would carry a lot more weight if they were to recognise that fairness (and its companion reasonableness) is a two-way street. I do not think that it was fair or reasonable for HMRC to pursue the Executors of W M Atkinson before the Tax Tribunal. As a taxpayer I do not want them to take such points. Do you?

Mr Atkinson was a farmer. In 1957 he acquired and farmed Abbotsons Farm. Later he took his son into partnership in the farming business. In 1966 he built a bungalow on the farm land and moved into the bungalow so that his son and daughter-in-law could occupy the farmhouse. In 1980 his daughter-in-law became a partner. In 1994 so did his grandson. Sadly Mr Atkinson’s son died a couple of years later. Throughout Mr Atkinson retained ownership of the land but it was occupied by the partnership under an agricultural tenancy.

In 2002 Mr Atkinson became ill. He later went into hospital and when discharged had to go into a care home, where he died in 2006. During his illness the bungalow remained ready for the eventuality of Mr Atkinson’s return. His daughter-in-law and grandson kept an eye on it and picked up the post two or three times a week. They visited Mr Atkinson in the care home and discussed the farm business with him at least once a week.

“Ah”, said HMRC, on behalf of you and me, “While Mr Atkinson was in the care home he was not occupying the property. Accordingly on his death it cannot qualify for agricultural property relief for IHT as that requires the property to be occupied for the purposes of agriculture”.

I do not know the purpose of agricultural property relief. I suspect that it is to avoid farms having to be broken up on a death. There is a clear public interest in viable agricultural units. If that is the case, parliament cannot possibly have thought that if a farmer dies while living on the farm the relief should apply but if he is taken ill his illness should require the farm to be broken up.

To be fair to HMRC, it is not clear to what extent HMRC are forced to take cases such as this and to what extent they choose to do so in order to try to maximise the tax take, however unfair or unreasonable it may be to do so. In R (on the application of Wilkinson) v HMRC the House of Lords said that HMRC’s power of care and management gives them a wide managerial discretion which “enables the Commissioners to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margin or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of parliamentary time … It does not justify construing the power so widely as to enable the Commissioners to concede … an allowance which Parliament could have granted but did not grant, and on grounds not of pragmatism in the collection of tax but of general equity”.

HMRC’s power of care and management has since transmogrified into a power to “do anything which they think necessary or expedient in connection with the exercise of their functions”, which may give them a wider discretion. I think it probably does give them a discretion to act fairly, but they do not think so and I cannot say the position is clear. Accordingly the law may force them to pursue cases like Atkinson, whether they want to do so or not.

Do you think that they should have a discretion not to pursue cases where it would be unfair to do so? I do. I have put a petition on the 10 Downing Street website asking that they be given such discretion (the easiest way to find it is, and search “HMRC discretion”). If you agree with me please sign it.