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?