IS THIS THE SORT OF TAX AUTHORITY YOU WANT? - PART 10

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IS THIS THE SORT OF TAX AUTHORITY YOU WANT? – PART 10

In my last blog, I wrote about fairness.  One of the least fair parts of the tax system is the penalty regime.  Many accountants think that penalties are designed as a second way to raise tax revenue.  I don’t.  In general, the penalty regime tries to be fair.  But fairness relies on HMRC discretion.  Some years ago I started a petition on the No 10 website to allow HMRC not to collect tax when it would be unfair to do.  It was a flop.  A lot of tax specialists told me that they could not sign it because they did not trust HMRC with such a discretion.

Most penalties contain a let-out.  No penalty can be charged if the taxpayer had a “reasonable excuse” for doing (or, more likely, not doing) the thing that gave rise to the penalty.  There is no definition of a reasonable excuse.  These are two ordinary English words.  Everyone has his own perception of what is a reasonable excuse.  Here are two cases where I believe that HMRC’s perception is completely incompatible with what most people think.  They are cases where HMRC chose to spend our, i.e. taxpayers’, money to pursue a taxpayer in what I feel are wholly unreasonable circumstances.  Do you agree, or do you think it money well spent and that the two Tribunals were unduly lenient in not enforcing the penalty?

The first is Pokorowski.  Mr Pokorowski was a self-employed electrician formerly living in a house share in London E17.  In April 2014 he went to Poland.  When he returned he could not find work, he exhausted all his savings, was evicted from his house, and all of his belongings were thrown into the street and lost or stolen.  He lived on the street until, happily, in January 2017 he found hostel accommodation and later that year found a job and was able to move to permanent accommodation.  What has that to do with tax, you are probably thinking?  Well in April 2015, HMRC sent a notice to Mr Pokorowski at the E17 address asking him to file a tax return for the year to 5 April 2015.  It does not take a genius to realise that he never received the notice and, even if he had done so, would have had other things on his mind than filing a tax return.  On 8 July 2017, Mr Pokorowski very conscientiously filed his 2014/15 tax return.

HMRC promptly issued him with penalty notices for £1,600 because he had not filed the return by 31 October 2015.  Mr Pokorowski claimed that being homeless throughout the period April 2015 to October 2017 gave him a reasonable excuse for not having filed his tax return.  I think that receiving the notice to file was probably a reasonable excuse too.  Not in HMRC’s eyes though.  They are entitled by law to send the notice to the taxpayer’s last known address.  They had done so.  They (on behalf of you and me) were therefore entitled to their pound of flesh, (sorry I meant £1,600 of penalties).  In their eyes, Mr Pokorowski had not acted reasonably.  Between April 2014 and April 2015, he should have begged for enough money to make a telephone call, gone to a local library and looked up HMRC’s phone number and called them and told them he was no longer in E17 and given them the location of the doorstep or park bench he was currently sleeping on.  Instead he worried about eating and finding somewhere to sleep, when he obviously ought to have prioritised his tax obligations.  Actually had he called HMRC, it would not have helped.  E17 would still have been his last known address but as the next night he would probably have slept somewhere else, so the notice to file would then still have gone to the wrong doorstep.  He would have had to find that night’s doorstep first and then given HMRC its address.  Of course he earned nothing during the tax year 2014/15, but in 2009, Mr Osborne convinced Parliament that having no income should not absolve a taxpayer from penalties for not having filed a tax return.

The Tribunal fortunately held that Mr Pokorowski had a reasonable excuse.  The judge commented “HMRC’s decision to pursue Mr Pokorowski for penalties in the circumstances of this appeal is a scandal.  For HMRC to expect a homeless person to keep HMRC up-to-date with their address is ridiculous – and just needs to be stated to show its absurdity”.

Is this just one HMRC Officer being wholly unreasonable?  I think not.  The HMRC Officer who argued the case was not the one who issued the penalty.  There were probably others involved in escalating the case from the original Officer to HMRC’s Appeals Unit, yet no one within HMRC seems to have thought it absurd.

The second case is Corrado.  Mr Corrado entered into a tax avoidance scheme.  HMRC challenged it and Mr Corrado accepted it did not work and agreed to pay the tax.  Indeed, he actually paid it.  He had claimed a tax refund of £128,986, but HMRC did not repay it.  As a result, after having foregone the refund, the tax he owed HMRC was £16,580 and that is what he paid - in agreement with HMRC, it should be added.

The snag is that HMRC had issued a follower notice.  This is a special procedure in relation to tax avoidance schemes.  When HMRC win a tax case, they can write to taxpayers who have used a similar scheme requiring them to correct their tax return to give effect to the HMRC victory.  To correct his tax return, Mr Corrado had to sign two HMRC forms, one of which was to confirm that he owed tax of £191,803.  Mr Corrado objected to signing a form saying that he owed £191,803, when all that he actually owed was £16,580.  Being unwilling to make such a false declaration landed him with a penalty notice for a £58,326 penalty.  The Tribunal held that Mr Corrado was theoretically liable for the penalty as he had not corrected his tax return in accordance with the statutory procedure.  However, unlike HMRC, it thought that he had a reasonable excuse for not having done so.

As a taxpayer, I think that HMRC acted unreasonably in raising penalties in both of these cases.  The law does not require them to seek a penalty.  It authorises them to do so but they have a discretion not to do so.  They cannot do so if they believe that the taxpayer had a reasonable excuse.  I cannot myself see how any reasonable person could have thought that both of these taxpayers did not have a reasonable excuse.

I do not know how much taxpayers’ money was expended by HMRC in pursuing these two cases.  Thankfully, they were both argued by HMRC staff; they did not pay for outside barristers.  Whatever the figure may have been, it was too much.  As a taxpayer I did not want HMRC to spend my taxes on pursuing either of these cases.  How about you?  Are you happy how they are spending our money?

ROBERT MAAS