Thursday, January 27, 2022

HOW FAIR IS THAT?

BLOG 226

HOW FAIR IS THAT?

  

John works in a factory.  His income is all taxed under PAYE.  John’s hobby is stamp collecting.  In particular, he wants to own a perfect penny black.  He cannot afford to buy one but realises that if he buys stamp collections at auctions that contain a penny black, he can gradually improve the quality of what he wants. 

In 2006, John realised that, because of his expertise, he could identify other potentially valuable stamps in a collection and sell them separately at a profit.

In 2018, John at last found his perfect penny black.  However, he decided to continue to buy collections and identify valuable stamps for sale.

In 2021, HMRC saw an advert that John had put in his local newspaper saying that he was willing to buy stamp collections and decided to investigate John.  They then claimed that he had been a stamp dealer since 2006.  As he had neither filed tax returns (which he was not required to do) or notified HMRC that for the last 16 years, he had been a stamp dealer.  They want all the tax that they claim is due from 2006, plus interest and penalties for not having declared it.

Poor John!  Before 2008, HMRC could only go back 4 years but Labour Chancellor, Alistair Darling obviously felt that working class people like John who were unaware that they owed tax should be punished for their ignorance and allowed HMRC to go back 20 years.

Actually, it is not ignorance.  I have specialised in tax for over 50 years and do not myself think that John was a dealer prior to 2018.  If the date his business started is not apparent to someone like me, the ordinary working man with no tax knowledge has no chance of getting it right so was fair game for Alistair.

Happily, John can probably overturn the penalty because the penalty rules do not apply where the taxpayer had a reasonable excuse for not declaring the income.  If I do not think that John was in business before 2018, he can almost certainly establish a reasonable excuse.

What about the interest?  Of course, if when HMRC send John the tax bill he does not pay the tax within 30 days after the date of the bill, he should pay interest from that date.  That is not what HMRC want.  They want interest from 2006!  This amounts to almost 54% of the tax.  There is no right of appeal and no reasonable excuse provision.

Interest used to be payable only from the date the tax was assessed but that was changed in 1996 by Conservative Chancellor, Ken Clarke, to enable HMRC to go back and charge interest from the time that the tax would have been payable had John known at that time that he owed the money. 

Politicians of both main political parties are always going on about fairness in tax.  Has either party treated John fairly?  Or does fairness mean something different to politicians than it means to the rest of us? 

A further curious fact is that if John had been richer so had several sources of income and had been required to complete tax returns, HMRC could not have gone back to 2006.  They could only go back 4 years.  HMRC can only go back 20 years where a taxpayer is not required to complete tax returns.  That doesn’t look very fair to me either.

Actually, John is not a real person.  He is a figment of my imagination.  But the law is not!  That is how it works for real. 

I suspect that both Mr Darling and Mr Clarke were concerned that people who used tax avoidance schemes could delay paying their tax until the Courts confirmed that tax was due.  John is simply collateral damage.  Of course, it would have been perfectly possible to phrase the law in such a way as to catch tax avoiders but to let out innocent people like John.  For example, it might be reasonable for interest to run during a period where the taxpayer knows that he had done something that might well trigger a tax liability, but not where a person cannot reasonably envisage that he might owe tax.  There are a lot of Johns around.  Businesses are not always set up deliberately.  It is not unusual for a business to grow out of a hobby or out of doing casual favours to friends or acquaintances, and it is very difficult to pinpoint the stage at which such activities develop into businesses. 

But is it fair to expect politicians to care about the Johns of this world?

 

ROBERT MAAS