IS THIS THE SORT OF TAX AUTHORITY YOU WANT - PART 14

 

BLOG 239

 

IS THIS THE SORT OF TAX AUTHORITY YOU WANT? – PART 14

 

 Mr Kensall “believed HMRC absolutely” and had “unwavering trust” in them.  This is the first finding of fact by the First-tier Tribunal.  “More fool him”, I suspect that you are thinking (as I did).  Mr Kensall “was not financially sophisticated and had no knowledge of the tax system as he has been a PAYE taxpayer for over 40 years, and throughout all that time his only interaction with HMRC had been about changes to his coding notice”.

 

Actually, Mr Kensall is not a fool.  He rarely had a need to contact HMRC (and I suspect when he did was able to go into a local HMRC office to get his position sorted out).  Sadly such customer service disappeared some years ago; HMRC appear to think it unnecessary as they believe that every PAYE taxpayer wakes up in the morning eager to discover what new information HMRC have posted on their website – actually I don’t really believe that but a number of the reasons HMRC puts forward to Tribunals as to why such a taxpayer has not taken reasonable care point firmly to such a belief.

 

But I digress.  And I’m about to digress further.  I wonder whether I should have put the blame on my and your MP, not on HMRC.  Because Mr Kensall’s problem was that Parliament amended the law with retrospective effect in the Finance Act 2022.  Parliament used to be strongly opposed to retrospective legislation.  It was a fundamental principle that a citizen should know what the law was at the time he did (or didn’t) do something.  It was thought fundamentally unfair for the law to change so as to affect something the taxpayer had already done. However, today’s MPs seem far less concerned about fairness in tax matters than their predecessors – or perhaps their concept o f fairness is very different to that of their predecessors.

 

The government was very open to Parliament about the retrospection.  The Minister told Parliament (or to be precise the Standing Committee to which it had delegated consideration of the bulk of the Finance Bill), “The legislation introduced under clause 95 will apply retrospectively … and will ensure that previously issued discovery assessments remain valid.  The Government do not introduce retrospective legislation lightly; we do so only in exceptional circumstances, and will do so, on occasion, when a Court ruling upsets a widely accepted way in which the law I s understood to work.  In this instance retrospection is necessary for two reasons: first, to protect public services by ensuring that tax that has been charged and paid through discovery assessments over a number of years remains undisturbed and secondly to provide fairness to the general body of taxpayer who have declared their liability, submitted their returns and paid their tax.  The retrospective element applies only … where taxpayers … have neither notified HMRC of their liability nor submitted a tax return …  It would be unfair for it to apply to those taxpayers … who submitted appeals to HMRC on the same basis before the judgement [the Upper Tribunal decision in Wilkes] was handed down” (my underlining).

 

In response, Abena Oppong-Asare, for Labour, commented, “The amendment to the 1970 Act has to be understood in the context of the legal challenge in HMRC v Wilkes …  Although there has clearly been historic doubt and an unsuccessful legal defence mounted by HMRC, and while this is being applied retrospectively, there is an exception for those who have appealed …  However, as the Minister probably knows the Low Income Tax Reform Group has raised that point that the application in the clause could be unfair and uneven … those who did not make the necessary appeal will face retrospective charges … despite the Upper Tribunal’s finding that HMRC’s use of discovery assessments in this way was … not legal …  I would be grateful if the Minister could make an assessment of the fairness of this uneven, retrospective application” (My underlining).

 

Alison Thewliss, for the SNP, also commented “While we support its broad principle, this type of clause brings me out in a cold sweat …  What kind of mitigation, if any, may be put in place should people in future be held liable for something they were not aware of for entirely legitimate reasons? …” (My underlining).

 

The Minister responded to these two comments, “This is retrospective legislation but not retrospective taxation.  The tax was due, has been due and is due, but it has not been paid.  What was in question was the process by which it was recovered …  In terms of fairness, it is right that everyone pays the right amount of tax and does not manage to escape paying that tax because they do not declare it to HMRC …  This legislative measure is fair because it ensures that people who have to pay tax do so and that everyone pays it equally” (My underlining).

 

No one voted against the provision.  So what actually was the law before it was amended?  “If [HMRC] discover … that any income which ought to have been assessed to income tax … has not been assessed … [HMRC] may … make an assessment”.  The issue in Wilkes was that the HICBC is not assessable income at all.  It is an adjustment to the tax payable by a taxpayer.  Only Parliament knows why Parliament chose to deal with it in such a way that it fell outside the discovery rules.  My guess is that the tax system is now so complex that no MP is going to question how new legislation interacts with the old.  I accept that may be unfair to some MPs.  After all, their job is to represent our interests, not to rubber-stamp whatever the State wants to do, which surely implies an obligation to understand the impact of the laws they enact.

 

But if it is too complex for MPs to understand, what about the man in the street?  It is surely not reasonable for the Minister to blame citizens for not completing a tax return. There is no obligation on a taxpayer to submit a tax return unless required by HMRC to do so.  There is an obligation to notify HMRC if you “are chargeable to income tax” but there is an exception where all of your income is taxable under PAYE.  Unfortunately, the law was amended some years ago to make an exception to this exception where a person is liable to the HICBC.  So what is fairness?  If it is not fair to expect MPs to ensure when enacting legislation that it interacts properly with existing legislation because the system is so complex, why is it fair to expect a PAYE taxpayer who has no interaction with the tax system to know, in spite of that complexity, that he may have a tax obligation when not he, but his wife, receives child benefit – but only if his income is greater than his wife’s (which she may well not wish to disclose to him)?

 

The other factor that the Minister glossed over is, of course, who administers Child Benefit?  It is HMRC.  So, in that context how reasonable is it to expect a PAYE taxpayer to know that he has to tell HMRC if he is liable for the HICBC even though HMRC themselves administer Child Benefit and so might be expected to already know that he is so liable?

 

It is also relevant that HMRC do not need to make a discovery if they collect the tax due within 4 years of the end of the tax year concerned.  It is only if they did not act within this timescale that the problem exists.  The four-year period was introduced because when self-assessment was introduced Parliament felt that a taxpayer was entitled to regard his tax position as finally settled after four years (except where HMRC were unaware of the tax liability through the fault of the taxpayer or his agent).  Is it really unfair to expect HMRC to work out within four years from the information they already have whether someone owes tax?

 

And did, as the Minister claimed, the Upper Tribunal upset “a widely accepted way in which the law is understood to work”.  As a tax specialist, I had little idea that HMRC needed discovery powers in relation to HICBC and suspect that not many other people did either.  Mr Wilkes’ legal team in the Upper Tribunal acted pro bono, which would have been an odd thing to do if they thought that HMRC were right.  I believe there were around 200 cases “stayed” behind Wilkes – who will all have won because the Court of Appeal subsequently upheld the High Court decision.  Accordingly, I suspect that “widely accepted” actually means accepted by the small number of people within HMRC dealing with HICBC”.

 

I wonder whether, when Ms Oppong-Asare decided to approve the retrospective change subject only to asking the Minister to consider the “fairness of this uneven, retrospective application”, she realised that it would catch those who had not appealed because HMRC had told them that they had no right to do so along with those who did not appeal because they did not understand that they had a right to do so?  Or whether Ms Thewliss’ broad support was given on the understanding that she was voting to retrospectively tax those who had been misled by HMRC into believing, wrongly, that they had to pay the tax.  All I know is that neither thought it necessary to demand a vote on the provision.

 

Back to Mr Kensall’s unwavering trust in HMRC.  On 19 November 2019, HMRC sent him a letter headed “Final reminder: important information about the High Income Child Benefit Charge”.  Mr Kensall received this on 21 November 2019 and immediately rang HMRC’s helpline .  His description of the call (which was not challenged by HMRC before the FTT) was:

 

“In my first interaction with HMRC, which was immediately on receipt of my first letter from them on this subject, the person I spoke to was very cagey as to whether I did or did not owe any money.  I was confused, as I was expecting this interaction to be exactly as all my others with HMRC, i.e. they tell me how much I have over or under paid and my tax code is adjusted accordingly …  But, instead I was given a list of websites and contacts and told to go away and work out if I owed them anything”.  HMRC’s version is “Mr Kensall [who, you may recollect, “was not financially sophisticated and had no knowledge of the tax system”] contacted the helpline on 21 November 2019 where general advice was given and he said he was going to collate P60 and Child Benefit information, he was also given the PAYE helpline number so that he could request this information”.

 

The FTT notes “Mr Kensall did as he was instructed.  He looked at the websites, checked his P60 and child benefit information and entered his and his partner’s details into HMRC’s online HICBC calculator.  This required Mr Kensall to identify and understand the various elements of what is included in DNI [I don’t know what that stands for either].  He completed the calculation to the best of his knowledge and abilities and received the outcome that he had no liability to the HICBC”.  Unfortunately, that outcome was incorrect.  “Mr Kensall said that he was not surprised that he had made one or more mistakes, because he was wholly unfamiliar with financial and tax matters”.  The FTT found as a fact that Mr Kensall had done his very best to ascertain if he did or didn’t need to pay anything back.

 

On 19 April 2021, HMRC wrote to Mr Kensall stating that he was liable to HICBC for the years 2016/17 to 2018/19.  At the top of the letter was an HMRC telephone number.  Mr Kensall called this immediately he received the letter on 23 April 2021.  His account of the call was “I again called HMRC immediately and found the second person I spoke to to be much more helpful.  They took me through exactly what the charge was and explained that the figures I had calculated myself did not take into account the cash value of the benefits I received from my employer.  She calculated there and then exactly how much I owed…  She also explained that I could appeal any penalty but would need to pay the amount of HICBC I owed”.  At the Tribunal, he confirmed orally that in this call he had been told he could only appeal the penalties, but could not appeal the HICBC, because it was clear from the figures calculated that he was liable to that tax.  Curiously, the HMRC note of that phone call was simply that Mr Kensall “agrees the figures” and HMRC recorded that he would have to pay penalties because HMRC had sent him previous letters about HICBC.  It did not refer to Mr Kensall’s appeal rights in relation to either the assessments or the penalties.

 

HMRC issued assessment to Mr Kensall for the tax and penalties on 26 April 2021.  He paid the tax but not the penalties.  He appealed these on 10 May 2021, saying in his letter that he had been informed by HMRC that “he would need to pay back [child] benefit with interest”.

 

HMRC offered Mr Kensall a statutory review which upheld the penalties.

 

By now Mr Kensall’s “unwavering trust” in HMRC was beginning to waver.  He did his own research on the internet and discovered the case of Mr Wilkes and realised that, contrary to what HMRC had told him, it was possible to appeal the assessments.  On 5 September 2021, he sent a Notice of Appeal to the FTT in which he stated that he was appealing both the penalties and the assessments.

 

On 21 October 2021, the Tribunal directed that Mr Kensall’s appeal be stayed behind Wilkes (which HMRC were appealing to the Court of Appeal) unless HMRC objected within 14 days.  HMRC did not object.  Mr Kensall then received a series of contradictory and confusing letters and calls from HMRC’s Solicitor’s Office, including one sent on 9 February 2022 stating that if he didn’t settle ahead of his Tribunal appeal, he would have to pay the tax twice.  When Mr Kensall questioned whether this was legal, he received a further letter dated 15 March 2022 [probably this should be February] stating that he would be taxed twice if he didn’t contact them by 24 February 2022.  Mr Kensall immediately contacted HMRC but was told that the information on his file did not make sense and that someone would phone him back.  Someone duly did, telling Mr Kensall that the self-assessments were being issued to ensure HMRC got paid [remember he had already paid the tax HMRC were demanding in April 2021].  Mr Kensall asked for this to be explained in writing, but HMRC did not do so.

 

On 21 April 2022, Mr Kensall received an e-mail from HMRC saying, “Your appeal to the Tribunal has been deemed to be an appeal against the following six decisions [i.e. three penalty assessments and three tax assessments].  There is a legal requirement that any decision which is being appealed to the Tribunal must have first been appealed to HMRC … you must now make an appeal in writing to HMRC.  You can do this by return e-mail directly to myself, and this will get us over the administrative hurdle.  It does not need to be war and peace, and I am happy if you simply want to reiterate or copy what you have previously provided … to the Tribunal.  I appreciate that this may seem a strange scenario but can assure you this is a necessary step in order for your appeal to proceed correctly …”.

 

The next day Mr Kensall responded cutting and pasting from his appeal to the Tribunal but adding that following HMRC’s subsequent confusing and contradictory demands that he complete a self-assessment return as otherwise “he would have to pay the tax twice”, he was “no longer convinced that HMRC had calculated the taxation correctly, or the legality of how they have calculated the tax owed”.

 

On receipt of this e-mail, HMRC wrote to the Tribunal saying that the stay should be lilfted as Mr Kensall’s appeal to HMRC had been made after June 2021.

 

The Tribunal of course duly dismissed Mr Kensall’s appeal against the assessments because he had not given Notice of Appeal to HMRC before 30 June 2021.  It cancelled the penalties though as it was “objectively reasonable for a financially unsophisticated taxpayer in the position of Mr Kensall not to have realised that he had to add his benefit-in-kind to the figures shown on his P60”.

 

It also invited HMRC to consider using their care and management power to refund the tax Mr Kensall had paid, although acknowledging, “That is however a matter for HMRC.  I do not know if they did.  I doubt it!  When the Daily Telegraph asked them to comment on Mr Kensall’s case, they responded, “The vast majority of customers meet their obligations and comply with the HICBC.  This judgement does not affect any taxpayer’s liability for the charge”.

 

The HMRC Charter states, “HMRC is committed to improving its customer experience”.  It looks as if it has a long way to go!  The Charter also says, “Making things easy: We’ll provide services that are designed around what you need to do, are accessible, easy and quick to use, minimising the cost to you”.  I wonder if Mr Kensall believes that HMRC “made things easy for him”.  I certainly don’t.  Nor do I think that their dealings with him can legitimately be described as “accessible, easy and quick to use”.  I also doubt that he still believes HMRC absolutely.

ROBERT MAAS

SOME HMRC-SPEAK

 

BLOG 238

 

SOME HMRC-SPEAK

 

 HMRC periodically issue something they call Agent Update.  This is aimed at accountants and tax practitioners and summarises things that have happened or are due to happen that HMRC feel that agents need to be aware of.  I find a lot of the content fairly amusing.  Here is a sample from Agent Update 102 that was issued in November.

 

“HMRC has identified 3900 customers [that is the term they use for taxpayers] who deferred filing their 2020/21 self-assessment return until after 31 January 2022 and paid voluntary Class 2 NIC.  If a return is filed after 31 January, the calculation will not accept voluntary contributions and a message is shown saying it is too late to pay.  We will be writing to all 3900 customers in December 2022 explaining how to resolve this issue”.

 

Well done HMRC?  They have identified a problem, put a lot of scarce resources into identifying the extent of the problem, and are writing to those people even though they are all taxpayers who deliberately filed their returns late, and have lost out by doing so.

 

Or perhaps not so well done?  Because why did those people file their returns late?  Probably because on 6 January 2022, HMRC issued a press release waiving penalties for late filed returns provided they were filed online by 28 February.

 

So it looks as if what HMRC really meant to say is something along the lines of “When we gave taxpayers an extra month to file their tax returns we could not be bothered to check that this would not cause problems with our computer.  Nor did we revisit this matter since January to see if a fix to the program was needed.  As a result, a number of taxpayers have lost out.  We have now diverted scarce resources that could otherwise have been used to track down tax fraudsters to sort out this problem that we caused”.

 

Or how about, “If you are completing a Self-Assessment tax return on behalf of a client with an outstanding student or post-graduate loan, it is important that the PAYE income for each employment is included on your client’s tax return prior to submission to HMRC”.

 

Actually, isn’t it important that the PAYE income from each employment is included on everyone’s tax return?  After all, the taxpayer is certifying that his return is correct and complete, and he cannot do this if some of the PAYE income is omitted.  Indeed, if you omit income HMRC will claim penalties for an incorrect return – and may well contend that it was deliberately completed incorrectly so as to claim very high penalties.  So why single out students?  Because, of course, student loan payments are based on total earnings so if some are omitted and the return is later corrected, it will cause extra work for HMRC.  I have nothing against saving work for HMRC, but I would prefer that HMRC explain that is why they are so concerned about students and not about the general body of taxpayers.

 

Or how about HMRC new “service” that enables companies and their agents to complete and submit applications and all supporting documents online directly to HMRC’s Venture Capital Reliefs team when seeking advance assurance for EIS and SEIS reliefs.  Good news, except that “Agents should note that a copy of the authorisation to act on behalf of the company signed and dated within the last 3 months, will need to be provided with every application”.  The authorisation is, I assume, HMRC’s form 64-8.  Normally this only has to be submitted when the agent starts to act for a company, so if that was more than 3 months ago, extra work is needed to access this “service”.  I wonder what the HMRC definition of “service” is.  It is clearly different to mine.

 

Or this one:  “We want to alert you to planned changes to the Income Tax relief for employment expenses form, known as a P87.  New additional information requirements for P87 forms will include … We will reject any forms that do not include the required information …”.

 

I have never completed a form P87.  I didn’t know it existed.  It appears to be a non-statutory form, i.e. the legislation says, “A deduction from earnings is allowed for an amount if (a) the employee is obliged to incur and pay it as holder of the employment, and (b) the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment”.  It does not give HMRC power to prescribe the form of a claim to make the deduction.  Nor does it say that a claim has to be made in any particular way.  I rarely allow clients to complete non-statutory forms because they invariably include a declaration along the lines of, “The information I have given on this form is true and complete to the best of my knowledge and belief”, and I can see no reason to volunteer such assurances.

 

I have had a look at the form P87. It is aimed at employees not within the scope of self-assessment, but even they cannot use it if their deductible expenses exceed £2,500.  If they do, they are told to ask for a Self-Assessment return.

 

I cannot see any basis for HMRC to reject a non-statutory form that does not include the new information – apart that is from the fact that the new information required is the employer’s PAYE reference number, so if HMRC have to look this up it requires extra work for HMRC.  It is surely better to penalise the taxpayer who does not look it up than for an HMRC Officer to have to look it up.  After all, they explain that the employee “can get this from their personal tax account” (to which the agent does not have access but to which I imagine an HMRC Officer does).

 

And, finally, “Under current legislation those advance payments [of salary] are treated as a payment on account of earnings.  This means that employers must submit additional RTI reports … HMRC recognises that the statutory position imposes extra administrative burdens for both employers and HMRC …  To address these issues, HMRC will amend secondary legislation …”.

 

Secondary legislation is not made by Parliament.  It is made by either HMRC or the Treasury under delegated powers.  The offending legislation in this case dates from 2012, so it has taken HMRC 10 years of coping with this additional administrative burden before they worked out that they had created it!

 

What I particularly like is the next bit.  “Employers who are currently reporting salary advances on or before the contractual pay date may continue to do so until legislation is in place”, i.e. if you insist on complying with the law even though we would prefer you to ignore it, we cannot stop you doing so.

 

All the best for 2023.

 

ROBERT MAAS

ROUGH JUSTICE!

 

BLOG 237

ROUGH JUSTICE!

 

I have been reading the decision of the First-tier Tribunal in MPTL Limited which strikes me as a very harsh decision.

 

MPTL had been in dispute with HMRC in relation to assessments raised on the company in relation to IR35.  The company asked for a review.  They received a 19-page decision on 20 December 2021.  At the end of that long missive was the standard statement that “if you want to notify the appeal to the Tribunal, you must write to the Tribunal within 30 days of the date of this letter.  20 December was the Tuesday of the week before Christmas, so I doubt that the letter was received before Christmas and read before 4 January 2022, the first working day after the New Year holiday. 

 

On 21 January 2022 (31 days after the date of the letter) the accountants wrote to HMRC saying “we will therefore take this opportunity to request that this be further heard by a First-tier Tribunal.  We look forward to your confirmation that this is acceptable and look forward to receiving confirmation of the Tribunal case date in due course”.  The decision does not name the accountants but does say that it is a firm of Chartered Accountants.  Like many (sadly, too many) small firms, the accountants do not seem to have realised that an appeal to the Tribunal has to be made to the FTT direct, unlike virtually all other direct tax appeals which have to be made via HMRC. 

 

In early March 2022, MPTL instructed Solicitors who e-mailed HMRC on 9 March asking about the state of the appeal.  HMRC responded on 16 March saying that the tax had been postponed, but that HMRC had not been informed by the Court Service of any appeal having been made.  The Solicitors immediately lodged a Notice of Appeal and asked for a late appeal to be accepted.  

 

The FTT has become very tough in recent months about late appeals.  This follows an Upper Tribunal decision that says:

 

a)      The starting point is that permission for a late appeal should not be granted unless the FTT is satisfied on balance that it should be, and

 

b)      In considering the matter, the FTT should take account of the length of the delay, the reasons for the delay and, all the circumstances of the case.

 

The Tribunal categorised the length of the delay as 59 days, i.e. they ignored the letter from the accountants of 21 January 2022, commenting that “a professional firm of Chartered Accountants ought to be aware of the procedure for filing tax appeals”.  It said that HMRC are under no duty to tell a taxpayer that it needs to file the appeal with the Tribunal and, in any case, they had done so at the end of their 19-page letter of 20 December 2021.

 

On the reasons for delay, they said that there was no evidence to explain why the accountants did not file a Notice of Appeal with the Tribunal.  They accepted that this was a mistake but commented that “a mistake for which no explanation has been given is not a good reason for the delay in filing the Notice of Appeal with the Tribunal”.  On the circumstances of the case, the Tribunal commented that the company could not distance themselves from the actions of its accountants.  It did accept that the company would be prejudiced if its application is denied (because the tax bill was around £230,000) and that by refusing the appeal “HMRC would become entitled to a substantial windfall”.  It also accepted that “I must form a general impression of the strength or weakness of MPTL’s case and weigh that in the balance”.  In doing so it felt that the company’s prospects of success on the IR35 point are not good.  It seemed to base this to a large extent on a misreading of the Court of Appeal’s decision in Atholl House Productions Ltd, dismissing its relevance because in that case Ms Adams had a background of being a freelance journalist whereas Mr Lynagh had a background of being an employee of a company in a different field.  What the Court of Appeal actually said in Atholl House Productions was that in construing the contract one should take account of circumstances known to the parties at the time the contract was entered into but not of anything that occurred after that time.  In other words, in construing the MPTL contract, account should be taken of any facts known to Sky TV at the time the contract was entered into.  I would have thought that the fact that Mr Lynagh had a full-time employment contract with someone else, is highly relevant to what sort of contract Sky thought they were entering into with MPTL.

 

The carefully reasoned Court of Appeal decision in Atholl House Productions Ltd seems to me to have fundamentally changed the landscape in relation to IR35.  In these circumstances, I find the MPTL decision very worrying and hope very much that the company will appeal against the refusal.  However, I accept that this is a very difficult decision, as whilst an appeal to the FTT is made in a no-costs environment, an onward appeal to the Upper Tribunal involves a risk of having to pay HMRC’s costs if the Tribunal upholds the FTT decision.

 

 

ROBERT MAAS