HMRC - Using a sledgehammer to crack a nut?

Over the years, HMRC’s approach to compliance has evolved depending on the different types of threats the department believes it is facing and the most efficient way to address them. For avoidance schemes, HMRC came up with accelerated payment notices (APNs) and follower notices. For assets held overseas, there were a number of information exchange agreements and more recently the common reporting standard. However, arguably the biggest threats to HMRC are the significant cuts to finances and technically capable staff.

Now, in order to ‘function’, it appears HMRC is focusing its meagre budgets on methods to obtain the best return, regardless of the impact on taxpayers.

One-to-many letters

When HMRC first began to issue nudge or one-to-many letters, it was suggested that the department had identified areas of difficulty and was targeting the taxpayers whom HMRC had identified as being at high risk of making an error or as having made an error. Those taxpayers were being given the opportunity to come forward to resolve the matter.

From a commercial perspective, the nudge letters have had great success. Taxpayers come forward to declare matters with HMRC having to do little work and use little resource to collect additional tax. Off the back of that success, the nudge letter campaign has expanded to include everything from the annual tax on enveloped dwellings and the sale of overseas assets to P11Ds. While the use of nudge letters is a good use of resources, the concept that they are considered a prompt from HMRC and therefore mitigation of penalties is reduced is more contentious.

According to FA 2007, Sch 24 para 9(2), disclosure is ‘“unprompted” if made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy [, the supply of false information or withholding of information, or the under-assessment]’.

FA 2020, s 103(4) states ‘“HMRC” means Her Majesty’s Revenue and Customs; references to an officer of Revenue and Customs include an officer of a particular kind, such as an officer authorised for the purposes of an enactment’. So references to HMRC mean the officers in the department, not the computers.

Given that so many of HMRC’s internal functions are automated and that nudge letters are often not signed by an individual, is it a reasonable belief that HMRC has discovered the inaccuracy and therefore that these letters should be considered prompted?

With dwindling resources, we see that HMRC has moved from a personal touch to a computerised/automated system and this is evident throughout the department.

Reduction in personal service

It may be an obvious point – in that there has been plenty of publicity about this over the past weeks (months, years…) – but it is incredibly difficult to speak to an HMRC officer on the phone and nigh on impossible when it comes to speaking to someone who is either technically capable of assisting with tax queries or the decision maker.

This not only drags things out for the client, it also increases the queues and the waiting times for responses and reduces the overall efficiency of the HMRC operation.

By way of example, a client who has been caught by the loan charge (combined with APNs and enquiry assessments, which we shall not be discussing in detail) has offered to sell his house and give HMRC the proceeds he is entitled to. HMRC has refused the offer because the value of the client’s share of the property is less than the total amount owed. Time was, we would have been able to negotiate a settlement based on circumstances, but now it appears that ‘policy’ and ‘computers’ determine outcomes.

While I appreciate the importance of having policies to ensure all taxpayers are treated equally, it is very difficult to come to a settlement agreement when these policies are not clearly stated and when officers communicating with us cannot adequately explain the basis on which the decision was made and what offer HMRC will accept.

There is also a big difference between treating people equally and treating them equitably, the latter implying some consideration of circumstances – as illustrated by the above diagram.

Automating systems means that everyone is treated the same but in situations such as debt management, specifically when we are talking about draconian legislation, this approach is not good enough. The lack of resources and increasing digitalisation are some of the reasons for the department’s inability to address these issues and this is not down to HMRC alone (ahem … budget cuts).

It is unclear whether decisions are made by people or computers because there are no explanations for decisions. I consider this a major flaw in the department – as well as an excellent way to undermine trust in HMRC. In terms of settlement agreements, there appears to be little to no appreciation of the impact of these decisions on:

• the taxpayer’s mental health;
• the implications for those around the taxpayer affected by the decisions, such as family living in the same property; or
• the welfare state/benefits system.

If HMRC makes a contractor bankrupt and takes their homes, that person will be unlikely to be able to obtain another mortgage. Further, contracts in some industries are unavailable to undischarged bankrupts. These individuals will lose their livelihoods and be reliant on the state – assuming they do not take their own lives, which for some is a real risk – regardless of whether we are talking about tax avoidance, evasion or a huge tax bill despite having taken reasonable care. In all cases, the way the matter is dealt with has a huge impact on the taxpayer, something HMRC does not seem to consider. We can only assume that the department is being run by robots.

In this real case study, the taxpayer is the main breadwinner in any case of modest means (a salary of about £40,000) and two adult children who have jobs but do not earn enough to rent their own homes. If HMRC makes him bankrupt, the taxpayer, his spouse and children will lose their home. He will be unable to get a mortgage, his wife earns less than £20,000 a year and the mortgage she will be able to obtain will be limited especially since they are both close to retirement. These clients will have no choice but to make their money back from the state in the form of benefits. By making them bankrupt instead of accepting the offer of the proceeds of the property, HMRC will also retrieve less than was offered as a result of trustee in bankruptcy fees and internal costs.

Computers are not commercial and although tax is a legal matter it is inherently personal. HMRC should treat it as such and consider the impact of policies before implementing them.

Guilty until proven innocent

The cost of proving innocence means that many taxpayers pay HMRC rather than go to tribunal. It is not acceptable for HMRC to use this as a strategy and we suggest that discretion is given to tribunals to award costs where there is a genuine belief that the case should never have gone there.

Let’s take the case of Pavan Trading Ltd (TC8712) where the tribunal judge said: ‘It seems to us the only reason that the appellant has had to bring an appeal was based on an erroneous view of the law set out in HMRC’s own Notice 703… This error was started by Officer Bains, perpetuated by the nonsense written by the review officer, and then compounded by HMRC’s statement of case and skeleton argument. If there was ever a counsel of perfection for the provision of export documentation, then this appellant has achieved it.’

The appeal was allowed in full against VAT assessments of £70,652 but the client had to incur significant costs to demonstrate not only had he done nothing wrong, but that his record-keeping was perfect. This was all because of one officer’s ‘erroneous view of the law’ and his senior’s failure to pick this up. One cannot help but wonder what (if any) reviews were undertaken and whether there was another matter pushing the investigation.

If readers think this is just a one-off, think again. In Chrisovalandis Georgiou (TC8660), HMRC raised corporation tax and VAT assessments for a total of £371,885 plus interest and penalties for deliberate behaviour. It was noted in the decision that ‘the company is in any event insolvent and unable to pay any liabilities which may be found to be due. Mr Georgiou wishes to challenge the assessments against the company in order to restore the reputation of himself and his family’. While one applauds the principles upheld by Mr Georgiou, it is not a stand one should have to take.

At the tribunal, the taxpayer’s representative tore to shreds HMRC’s information gathering exercises and the method for calculating undeclared tax. The case report states: ‘HMRC carried out a covert invigilations on Friday 17 November 2017 and Wednesday 22 November 2017 … at the time of the second invigilation, the company no longer owned the businesses having transferred them to new operators on the previous weekend.’ So HMRC used the results of an invigilation exercise when the business it was inspecting was not owned by the taxpayer.

Further, the corporation tax assessments and penalties were based entirely on the VAT ones. The report notes: ‘The [VAT officer] did not pass on to [corporation tax officer (CTO)] any indication that he considered that purchases had also been suppressed. Indeed at the time she issued the assessments, [CTO] was unaware of the cash reconciliation exercise, the covert invigilation and all the other details of the VAT enquiry, relying solely on the VAT, and VAT penalty assessments, to inform her conclusions. She did not ask for any other documents or ask any questions about methodology or anything else. She indicated that this was “standard procedure”.’

It states further in the report that the CTO ‘based the corporation tax penalties solely on what was contained in the VAT penalty assessments and made no attempt to consider the appropriate behaviour herself. Nor did she have, or seek, any information which would have enabled her to conduct a review herself’. Why? It seems that the answer is because that is ‘standard’. But is it really just another cost saving measure?

The judge found it was ‘also clear that what began as a “suggestion” of suppressed sales and purchases became, in HMRC’s eyes as the enquiry progressed, “proof” or “evidence” of such suppression’.

There are also suggestions of HMRC officers forgetting (ignoring?) evidence presented to them because it didn’t match their assumptions, for example ‘[the VAT officer] asserted that there were no price rises in the period. When challenged, he said there were none disclosed. This is not correct. The original accountant … stated in his email of 3 January that selling prices increased. Mr Arenstein also raised the point in his letter of 26 February 2020. Mr Georgiou, in his witness statement, explained that prices had been increased gradually over the period’. The taxpayer went on to explain that increase in prices was part of the efficiencies implemented once he got to grips with the business following his father’s death.

The judge said: ‘All this provides a cogent and credible explanation as to why purchases only increased slightly during the period, but sales increased significantly as these changes attracted back customers lost following the death and made the sales more profitable. [The VAT officer] rejected this explanation and suggested it was a result of a reduction in the suppression of sales during the enquiry. We find this explanation neither cogent nor credible.’

The tribunal also took issue with the way covert invigilations were carried out, the basis of assumptions and extrapolations including the fact that the death of the owner was not taken into account as a reason for reduced sales in the middle of the assessment period.

The judge said: ‘There was in fact no evidence of suppressed sales other than [HMRC’s] flawed cash reconciliation exercises. HMRC’s own evidence from the invigilations did not show any trading with an open till or other suspicious activity and did show that the test transactions and other purchases in the shop at the time were recorded in the till. As Mr Georgiou did not take the money from customers it is difficult to see how extra cash could have been hidden without the active assistance of all the staff which we have found to be inherently not credible. Nor did HMRC have any curiosity as to what had happened to nearly £1m which was allegedly removed from the business.

‘HMRC allege that Mr Georgiou took the best part of £1m, tax free, out of the company over a four-year period. That is the total of the alleged omitted sales, somehow extracted from the cash takings… Even if sales were undeclared… HMRC have not produced a shred of evidence that any money was taken by Mr Georgiou for his own use. [The CTO] admitted that she did not look at Mr Georgiou’s lifestyle or carry out any sort of credibility check, such as an examination of personal bank statements for suspicious deposits, to consider whether he had taken the money. She had taken the view that the money from the assumed omitted sales as calculated in the VAT assessment must have gone somewhere and by default, she assumed that the director took it for his own use.’

The fact that HMRC allowed these cases to go to tribunal demonstrates either a lack of technical knowledge or a lack of oversight of more junior members of staff and in either case, a lack of commerciality and respect for taxpayers who are funding the department. The cases clearly show that HMRC require a taxpayer to prove their innocence rather than HMRC proving guilt – a fantastic strategy if the department is aiming at lower and middle income taxpayers who cannot afford tribunal costs and will pay tax and penalties whether or not they are due. This is not how ‘great British’ justice is supposed to work. In cases like these, I believe the taxpayer should be able to claim costs from HMRC. There should not be a cost to proving innocence when cases are so clear cut.

It appears that the main reasons for HMRC’s decline in service are reduced resources and poorly trained staff – throughout the department, not just junior staff. The only way to fix this is to provide the department with adequate funds (and benefits) to train staff and to attract competent professionals away from the private sector, if that is what it takes.

HMRC funds the entirety of the UK and we cannot afford for the department not to work.

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