BLOG 127
IS THIS THE SORT OF TAX AUTHORITY YOU WANT? – PART 7
In his budget speech, George Osborne said, of small businesses, “the first goal is a far simpler tax system, …where ordinary taxpayers understand what they are being asked to pay. So we will radically change the administration of tax for our smallest firms”. I wonder what Mr Hung On Chan thought when he heard that!
On budget day HMRC issued a largely self-congratulatory paper, “Making tax easier, a quicker and simpler for small businesses”. In the forward David Gauke, the Minister responsible for HMRC, said, “for small businesses … the way the tax system works day-to-day really matters too; that’s why HMRC is committed to making it easier, quicker and simpler for SMEs to get their tax right!” I wonder if Mr Chan read that and, if he did, what he thought.
In that document HMRC said, “HMRC is committed to making it easier, quicker and simpler for small businesses to get their tax right, and we want to remove the anxiety still felt by many of those who … genuinely try to do so”. I wonder what Mr Chan thought of that if he read it.
By now I hope your wondering who is Mr Chan. Mr Chan is a small businessman who was anxious to get his tax right. Indeed he was so anxious that he decided that he would rather pay too much than get a penalty for paying too little. You might call him a model citizen.
But not if you were HMRC!
I don’t know Mr Chan. I know of him only because HMRC took the view that if a taxpayer deliberately pays too much, he is not entitled to the excess money back unless he follows the correct HMRC procedures. Indeed they seem to have forced him to the appeals tribunal to teach him how contemptuous they are of people who deliberately overpay their tax rather than lean over backwards to get it right.
In a way it is hard to criticise this. Mr Osborne has just produced a Finance Bill that runs to almost 700 pages. The law expects all small businessman, like Mr Chan, to assimilate and understand this by the time it is enacted in July. And that 700 pages is only this year’s legislation. The law also expects Mr Chan to understand the thousands of pages of legislation published in earlier years that is still extant. If every small businessman decided to overpay his tax rather than risk penalties for underpaying it, where would the country be? Mr Osborne might suddenly find himself with enough money to repay the national debt! But he wouldn’t know how much he might have to pay back later when the real tax liabilities were agreed. Although the country would get a massive cash flow benefit, it would make life difficult for the civil service, so clearly someone needed to put a stop to such generous but anti-social behaviour! And that is exactly what HMRC did with Mr Chan.
I now need to get a bit technical. If you are not a tax specialist I need to tell you two things. VAT overpaid can be refunded only if a claim is made within 4 years of the overpayment (it was three years when Mr Chan overpaid). Where VAT is overpaid in error, the overpayment can be corrected on the next VAT return after the overpayment is discovered.
So back to Mr Chan. At the end of each year Mr Chan’s accountant calculated the tax that he actually ought to have paid. Mr Chan duly corrected the overpayment on his next VAT return. So what was the problem? He paid too much on account and corrected the position within 18-24 months when the correct figure was ascertained. That seems very reasonable to me, albeit that I think that Mr Chan’s fear of penalties was unjustified.
So why did HMRC take Mr Chan to the appeals tribunal? Silly question! Times are hard! To force him to pay £4,268 of extra VAT that he did not owe! You may be thinking, “but of course HMRC lost such a ridiculous claim”. Sadly no, the tribunal said, “Sorry, Mr Chan, however much of a model citizen you may be, the VAT law comes down hard on those who deliberately pay too much tax”. (They didn’t actually say that in so many words but that is the gist of the decision).
To get technical again, what HMRC said was that they agreed that if Mr Chan had overpaid his tax in error he could correct the position on the next VAT return after he discovered the error, as he had done. However he had not overpaid in error; he had deliberately overpaid. In such circumstances the only way to correct the position was to tell them about the overpayment. They would then have allowed him relief. Unfortunately they could not now do so because there was a three-year time limit for such a claim and, although Mr Chan had made his claims on his VAT return within that period, because those were invalid as he had used the incorrect procedure, they had to be ignored. The tribunal had to agree with this technical analysis.
Tough luck for Mr Hung On Chan, who I imagine is either Chinese or of Chinese origin. It has cost him £4,268 (plus the costs of his accountant who argued the appeal for him) to learn how inscrutable are the ways of English tax law. It should certainly teach him not to overpay his tax, however scared of penalties he may feel. The State will simply find another way to penalise him!
I don’t know, dear reader, if you are thinking, “Three cheers for HMRC; they have contributed to the reduction of the national deficit by extracting from Mr Chan more money than parliament could possibly have intended. Well done!!”. I’m not. As a taxpayer I feel ashamed that this has been done on my behalf.
ROBERT MAAS
