By Jason Piper, technical officer, ACCA
It’s not news that HMRC sometimes struggles to do its job. A cynic might suggest that the recent Treasury Select Committee (‘TSC’) report on The Administration and Effectiveness of HMRC seemed to conclude that there wasn’t much evidence of either. And a couple of recent cases on the Discovery Assessment regime illustrate that point.
In both cases, HMRC had been given all the information that any competent Inspector would need to open enquiries into tax returns - in one case, the accountant even wrote to them reminding them to open an enquiry. And yet, no enquiries were opened within the normal two year deadline, so when HMRC did try to open enquiries after the two-year window by using their Discovery powers, they got into a bit of bother with the Tax Tribunal.
Said tribunal wasn’t impressed: they concluded that the Discovery powers were there for when it was discovered out of time that the taxpayer had done something wrong, not when the Revenue discovered out of time that they’d got things wrong.
The first case involved a tax avoidance scheme which was known to be of dubious legality; this was disclosed by taxpayers, complete with reference numbers, on their returns. Dubious legality or not, it’s not great that HMRC tried to recover from their own administrative failures (and there were more than one in this case) using powers designed to combat taxpayer failures.
Case two though is a far more damning indictment of HMRC’s approach, and illustrates many of the problems highlighted by the Treasury Select Committee. This case came to light through an application for costs, as HMRC had belatedly withdrawn the Discovery assessment – but not before putting the accountant to the time and trouble of appealing it and getting a listing before the Tribunal.
The accountant was an experienced practitioner, used to dealing with the unusual quirks of tax for Lloyds ‘names’ (members of the world famous insurance market), and in particular, the process where a name passes away. Because it takes some years to finalise the Lloyds accounts, the final tax return has to be enquired into, even if it is technically correct at time of submission. The Revenue Manuals make this quite clear, because there is no other way that the Lloyds rules and the tax code between them can actually get to the right answer in terms of tax due. And yet, the Revenue failed to open the enquiry, even when the accountant wrote asking where the enquiry letter had got to.
When, some years later, the accountant sent the final figures in, the Inspector realised what had happened and tried to make good the error through discovery. Not only was this something that most people might consider unfair, it was (again, because of the special rules of Lloyds accounting) totally unsustainable. Despite being pointed very clearly to their own guidance, HMRC did not back down until ‘very late in the day’, then did not even send a representative to plead their case before the tribunal when the accountant, to his credit, stuck to his guns and used the hearing to apply for his costs (which he was awarded). The Tribunal seemed unimpressed by HMRC’s failure to own up to their mistakes, either in the correspondence surrounding the case or at the hearing itself.
The sorry events brought into the public gaze by these cases all took place long before the TSC report was published – but that’s hardly the point. HMRC needs to sharpen up its act, and pronto. The image portrayed by these cases is one of an arm of government which is not simply failing on the basics, but then trying to fix things by misusing its powers. Two wrongs don’t make a right. By allowing these cases to reach public tribunals, HMRC is losing more than a few cases; it is losing the trust and respect of taxpayers and their agents.
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