Friday, August 19, 2011

BLOG 111


Ms AZ is a self-employed qualified massage therapist. In February 2003 she was the victim of a vicious robbery that left her with both physical and psychological injuries. Her bank cards were stolen and the contents of her bank accounts were systematically emptied – even going into substantial unauthorised overdraft. It took the bank two years to sort out the account. Part of the money stolen was funds she had set aside to pay her tax. Ms AZ became homeless, relying on the kindness of acquaintances or sleeping on the floor of the clinic where she worked. She was told that she was not eligible for state benefits.

In December 2006 Ms AZ had a 2¼ hour meeting with HMRC officers, which she felt unhelpful and unsympathetic to her position.

In March 2009 a psychiatrist diagnosed Post Traumatic Stress Disorder (PTSD) and gave a prognosis that PTSD drags on chronically. He commented in his report, “Ms AZ has continued to work out of necessity, despite PTSD, since the attack. Many patients with her degree of symptoms would have discontinued working”.

You have probably guessed by now that HMRC – on behalf of you and all of the rest of us taxpayers – felt that neither the robbery nor the PTSD provided Ms AZ with a reasonable excuse for filing her 2002/03 or 2007/08 tax returns late or for not paying her tax for 2002/03 – 2008/09 on time. You may be as staggered as me to learn that after all that she had been through the State (you and me through our agents HMRC) demanded not a pound but a pound and a quarter of flesh. She may have been mugged, she may have become homeless, but that was no excuse for paying her tax late. Accordingly the State was entitled to exact a penalty for such unreasonable behaviour. And what does a psychiatrist know about PTSD? Whatever the quack may say, in HMRC’s view it cannot possibly be a good reason for not filing one’s tax return and paying one’s tax on time.

Sadly, the First-tier Tribunal agreed with HMRC (apart from accepting that Ms AZ had a reasonable excuse for her late filing for her 2002/03 tax return). Fortunately her accountant was so horrified that he took her case to the Upper Tribunal. The Upper Tribunal has replaced the jurisdiction of the High Court in tax appeals from 2008. Accountants have a right to appear before the Upper Tribunal, which they do not have in the High Court. The Tribunal is largely composed of High Court judges. I have not myself taken a case before the Upper Tribunal and would think very, very hard before doing so. I would have to feel very strongly about the issue. I accordingly admire Ms AZ’s accountant, Peter Torino of AIMS Accountants. I admire him even more for winning. The Tribunal threw out all of the penalties. As a taxpayer, I find it very satisfying that, even though the State was dismissive of Mr AZ’s predicament, the law is there to bring fairness into play.

And here’s another case of an accountant being so incensed about HMRC treatment of a taxpayer that he fought for justice. In this case the accountant is Michael Stubbs of Ingenhaag LLP. HMRC had raised a “discovery” (i.e. out of time) assessment on the estate of Mr Atkins. Mr Atkins had been a Lloyds underwriter. It is well known that some years ago members of Lloyds made some injudicious contracts that lost a lot of money. They now adopt a cautious basis of accounting (approved by HMRC). Mr Atkins completed his tax returns in accordance with HMRC guidelines. HMRC’s manuals tell their staff that they need to open a protective enquiry before the “enquiry window” closes, as money is often received late that then needs to be related back to an earlier year. Before the enquiry window for 2007/08 closed, Mr Stubbs noticed that a protective enquiry had not been opened on Mr Atkins. He wrote to HMRC pointing this out. HMRC did not open an enquiry. In March 2010 the executors received a large amount of money that related back to 2007/08. They told HMRC. HMRC then purported to “discover” that tax for 2007/08 had been under-assessed. Unfortunately they can only make a discovery if the return was incorrect. Mr Atkins return was not incorrect. Undeterred, HMRC nevertheless geared up to take the executors to the Tribunal. Just before the appeal was heard they withdrew their assessment.

If I were cynical, I would have thought that they were seeking to bully the executors; that they knew they did not have an arguable case and hoped that the executors would pay up because they would be too scared to go to the Tribunal. However I am not cynical. I also know that HMRC have a published Litigation and Settlement Strategy that says that they will not normally take a case to the Tribunal unless they believe they have a more than 50% chance of winning. I therefore accept that HMRC sincerely believed that they had an arguable case even though the Tribunal said, “The only defence that I can see … is the quite extraordinary point … The under-assessment was entirely due to HMRC’s error in not following their own guidelines … I consider that the respect in which the sub-section (2) defence might technically be said to have been applicable is so ridiculous and unjustified …”

So why did this case catch my eye? Because Mr Stubbs did not simply walk away when HMRC withdrew the assessment. He asked the Tribunal to award costs against HMRC for all the time that he had wasted preparing for the Tribunal hearing.

The Tribunal had power to award costs only if HMRC had “acted unreasonably in bringing, defending or conducting” the appeal. The Tribunal gave Mr Stubbs his costs.

But even that is not what caught my eye. What caught my eye is that the State – you and me through our representative HMRC – could not even be bothered to send someone along to the Tribunal to defend our/their actions. They wrote to the Tribunal and apologised for withdrawing the assessment very late. When I took my first ever appeal before a Tribunal many years ago, we settled the case in the middle of the hearing. The Inland Revenue’s lawyer told me that we would need to go back to the Tribunal and ask it to settle the appeal on the terms I had agreed. He would do all the talking but I needed to be there as it would be disrespectful to the Tribunal for me not to turn up.

I think that was very sensible advice. The Inland Revenue has now been absorbed into HMRC. It still seems to me good advice. Indeed not to turn up when one knows that the other side is going to be there and argue its case seems to me to verge on contemptuous of the Tribunal. But perhaps I’m just old-fashioned!



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