Unintended consequences

One of my clients called me in a panic. She had received a "threatening notice" from HMRC saying that she would be fined £100 for not sending in her Tax Return. Actually, I submitted her return for 2014-15 on 11th May 2015.

Hers is always one of the first I do each year. Why? Because she is ninety-five years old and does not like anything hanging over her.

Obviously I was very puzzled about the threatening letter. It turns out this was her Notice to File a return. Normally one would expect these to be posted in April, but due to the HMRC contract with Royal Mail they are still trickling through; hence my client's was received on 1st July.

Not everyone can immediately understand that some letters from Officialdom are due to inefficiency and incompetence, and therefore some people take these letters seriously, especially vulnerable people.

Surely we can hope that next year all Notices to File are sent out in April and that taxpayers receiving them will not feel threatened? My ninety-five year-old was in a tail-spin and could scarcely catch her breath. Government contracts with Royal Mail should not cause such distress.

HMRC, the stick and the carrot

Can HMRC's aggressive stance towards individual taxpayers be counterproductive?

Frustrated of Essex

It is no secret, especially not on this blog, that I have been frustrated by HMRC's attitude towards those who found out at a late stage that tax had been under-recovered from their pensions etc. and they had a significant tax bill. Even though HMRC has had the power under ESC A19 to “forgive” the tax paid, in the last couple of years they have steadfastly refused claims and appeal which would have been accepted prior to 2011.

We know that HMRC is under extreme pressure to collect as much as possible. I understand that, and let me be clear, I think everyone should pay their fair share according to the law. I wrote last July:

“I would like to see all dishonest tax-dodgers caught. The so-called black economy consisting of people who offer to re-lay your drive or clean your house soffits and fascias for cash and all the other “cash-in-hand” people who knock on your door cost the country billions in lost tax.”

It is just that in some areas, HMRC, and maybe Government, have lost track of what might be fair with regard to honest taxpayers, those who out themselves from the black economy, and others whose tax affairs are in arrears and they seek to get themselves up to date.

My own patch

In my own practice, there are areas of taxation I do not enjoy, do not regard as my strengths, and which I pass to others. No one can gain the experience to be strong in all areas of tax because there just isn't time, whether one is a practitioner in private practice like me, or an employee.

I have two or three favourite areas or niches of tax that I do specialise in. One of those is in helping”delinquent” taxpayers, which usually means those who have not paid tax recently, to get themselves up to date and to negotiate a decent settlement with HMRC.

Those who have been “caught” by HMRC are in worse position from the point of view of the penalty regime than those who come forward voluntarily. That is understandable, but I can still help them in agreeing their back-tax, interest and penalties and getting a settlement with HMRC.

A puzzle

Those making voluntary disclosures should be entitled to better treatment with lower penalties. What has worried me recently is that in one case, where the individual simply did not have the means to pay all his tax (of course his fault) HMRC preferred to make him bankrupt with a lower tax recovery than if they had agreed his offer of payment of a quite significantly greater amount over three years. HMRC preferred less jam today than the more jam they might have had tomorrow, and by making anyone bankrupt they have to join the queue with the other creditors. I thought this was pretty silly.

Late return penalties

Another issue is the new daily penalties regime introduced by HMRC from 2010-11, and I quote them;

“Following a review of HM Revenue and Customs powers new legislation was introduced. Under Schedule 55 Finance Act 2009 the way in which HMRC applies its late filing penalties saw major changes particularly in respect of raising Daily Penalties. This change only applied to Tax returns for 2010-11 onwards with the previous legislation and guidance remaining for 2009-10 and earlier.

Where a customer has not filed a Tax return 3 months from the return due date Daily penalties will start to accrue for a period up to 90 days at a rate of £10.00 per day, the rate is fixed and can not be changed (except by legislation) and in the majority of cases this will be an automatic process. There is no longer a requirement to apply to the Tribunal to charge a Daily Penalty or for a “fixed £100 penalty” to have been charged before applying it. A Revenue Determination can be considered at any time during the period of which a Tax return remains outstanding but it is not a requirement before a Daily Penalty is applied.”

Note the irony of calling someone a customer and then in the same sentence imposing daily penalties.

Disincentive

My concern is that the daily penalties may be a disincentive to comply in some circumstances. Someone more itinerant “self-employed” might, if the penalty notice catches up with them, be less inclined to let HMRC know where they are. Also, not everyone who works in the UK was born here or even has strong ties to the UK. Many, in the face of threats, will melt away whence they came, or to some other jurisdiction. Of course the individual amounts of tax lost each time might be small, but in a fluid situation of cross-border working, I think the penalty regime may be a disincentive to comply, especially if the first a worker knows of her or his obligations is the penalty notice rather than the original notice to complete a tax return.

Particularly with the taxation of individuals I believe HMRC should take a more pragmatic approach to collecting tax, by which I mean adopting methods to collect more through negotiation, rather than less tax through preferring the stick over the carrot.

Of course everyone should meet their tax obligations under the law. Punishing especially those who have come clean or have just got behind with their tax affairs, at the expense of lowering the overall tax take, seems rather foolish.

Common sense?

I believe there is a case for removing most of the penalties imposed for late submission of Returns once they are submitted, with perhaps HMRC raising their interest rate charge for late-paid tax. I also think more common sense should be applied where an individual simply cannot meet their tax obligations. I would not want to encourage anyone to dodge their responsibilities; rather I would hope they should face up to them with more encouragement.

How do you feel about HMRC's aggressive stance? Do you believe it is counterproductive?

HMRC wasting our money on trivial matters

Posting paper

These two cases nearly slipped by without my noticing, but really we have to wonder why HMRC do not use their resources rather better.

In Eamas Consulting LLP v HMTC 4.4.12 TC 02009 a partnership received a paper Tax Return for 2007-08 in April 2008. HMRC issued a penalty notice in February 2009 indicating they had not received it back. The partnership said they had submitted a nil return as soon as they had received it, and indeed paper Self Assessment Returns had been submitted on behalf of the two partners also in April 2008.

The lead partner then requested a duplicate paper Return, which was eventually both received and completed in August 2009 also showing “nil” partnership income, but by which time a second penalty notice had been issued as the July deadline had passed.

There were telephone calls with HMRC and letters written to different offices which no doubt caused confusion. Anyway, the partnership appealed on the grounds that a Return had been submitted in April 2008 and HMRC should be able to find the original Return, even though the partnership could not find a copy.

A second First Tier Tribunal (referred from the Upper Tribunal) found that on the balance of probability the partnership had submitted the original Partnership Return in April 2008 since the Returns of the individual partners, with nil profits from the partnership, were submitted then. The appeals against the penalty notices were allowed.

What a waste of money with HMRC staff going to three tribunal hearings, when a little common sense would have saved everyone time and worry!

In Kathleen Lomas v HMRC TC 02010 the older lady taxpayer received a letter on 10^th January 2011 telling her that she needed to complete a Self assessment Tax Return for the year ended 5^th April 2010. She called HMRC and was sent a paper Tax Return which she sent back, duly completed on 17^th January 2011.  This Return was "captured" by HMRC's system on 27th January. The lady had an underpayment of £270.84 which she paid in March 2011, the day after she returned from abroad, having been away since 18^th January.

The lady had upon her return found a penalty notice because she had not submitted the Return on-line, the deadline for paper returns having been 31^st October 2010, two and a half months before she was sent the paper return for completion.

The taxpayer appealed against the penalty notice and the First Tier Tribunal found that HMRC had waived the requirement for e-filing by issuing a paper return in January. Again, common sense should have prevailed, and only did when the case reached the FTT. Judge Geraint Jones Q.C. said “The appellant is a lady who, it is accepted, has no blemish on her tax return or tax payment record over the last 40 years. There is no reason whatsoever to doubt her veracity.”

In neither case was there any great precedent being set. “Reasonable Excuse” allows HMRC to cancel penalty notices. Once upon a time, more junior staff of HMRC, or perhaps historically in the Inland Revenue, could exercise their discretion and cancel charges which seemed unreasonable. Since these cases went to the Tribunals, it seems that even very senior staff of HMRC have no power to make sensible decisions or they are incapable of doing so.

It does not inspire confidence in HMRC's ability to extract “the right amount of tax” from the taxpaying public whether errant or otherwise when they apparently show such incompetence in dealing with trivial matters and waste our resources at the same time. What do you think?

Price of HMRC's delays in dealing with post

Image via Wikipedia

As we know, our friends at HM Revenue and Customs don't look at their post for months after it is received. This has many detrimental effects on the relationships with taxpayers, and also those who have decided to come in from the cold and pay the tax they should have been paying for several years.

If I have a new client who wishes to own up to income received which should have been declared, he or she probably doesn't have a Universal Taxpayer Reference (UTR) and the only way of applying for one is by post. At the same time one wants to send a “marker” letter to HMRC to start the process of getting the individual into the system and establish it is at their own volition in case (a long shot) HMRC get their oar in first. That would theoretically increase the penalty potential which one wants to keep to a minimum.

The trouble is that the first response from HMRC will be considerably delayed. It takes months to get a UTR. It takes an age for HMRC to respond to a marker letter after they eventually read it and then allocate it to a case officer. You might say that offenders deserve what comes to them but once someone has decided to make a clean breast of things, I think it is only fair that they can get matters settled and get their tax (and interest and penalties) paid.

Of course HMRC also wait longer for their money because of their tardiness in dealing with these matters even after we get as far as being supplied with HMRC red spot stickers to mark our correspondence as more urgent than that from the hoi polloi. It just doesn't seem right, but HMRC apparently have 15 million open cases which means issues of any sort including over- and under-payment matters that haven't been resolved. They also have more unresolved than they know about with all those confessions sitting in their pile of post.

Bank's poor service costs its customers dear

Image via WikipediaI have High Net Worth (HNW) clients, and they are very important to me. They present more of a challenge and provide more variety in their tax affairs. Generally they are appreciative of the service they get and also they pay my bills promptly. All my clients are created and treated equally, but I am sure that I can be forgiven for saying that some are more rewarding to deal with.

Banks apparently treat HNW customers no differently from the rest of their customers. They may give their service a different title such as Private Banking or Premier Banking, and in theory HNW customers might have a real person allocated in a branch whom they can talk to, but when it comes to the important things they seem to be in the same boat as everyone else.

I have had considerable trouble with one bank (light blue eagle emblem). Some years ago a client had an enquiry into her tax return when apparently the bank had failed to advise her of all the deposit interest she had received and consequently it did not go on the return. This was despite the bank's assurance they had found details of all interest arising to the client. It turned out that where an account had been closed before 5th April it did not show up on their list and consequently the interest was not notified to the client. If the account had been opened within the past year neither the customer nor the agent would be looking for interest details since the account would not have had interest to declare in the earlier year.

Now it has happened again even though I wrote three letters to the Bank last year and the client eventually had to make a special journey to the branch to get the relevant information. Somehow, and quite properly, the bank always manages to advise HMRC concerning all the accounts, but not the recipients of the interest, their own customers.

My client is likely to face a penalty and certainly interest on tax which should have been due last year. She cannot be expected to know whether the figures the bank gives her are complete when they open and close “bond” accounts with such frequency, and an aspect of being wealthy is that there is much more to keep track of and that is why HNWs pay extra to have people manage their affairs. Despite her Premier Banking plainly the bank does not deliver.

Of course the client and I will complain. The bank will apologize and then very likely will re-offend, and it will be so difficult to spot the offence until the letter from HMRC drops on the mat.

Do you have the same trouble with the banks? How do you deal with it?

© Jon Stow 2010

Be responsible and pay your tax

Last Spring I wrote a piece entitled “Render unto Caesar...” which pretty much sets out my view concerning tax avoidance and those who are reluctant to pay tax. For the record I reiterate that I have no objection to people taking sensible uncomplicated steps to pay less tax. That is no different from choosing to fill your car with petrol, diesel or gas at a particular establishment which charges a little less than the one down the road. Daily essentials everyone buys on price because the value is the same. Complicated and artificial tax avoidance schemes really have no place in a responsible society.

There is a moral case to pay a fair share of tax. We may not like a particular Government but we all use the infrastructure, the roads, education, the health service and so on, and we should cough up according to our fair share. There are occasional refuseniks who choose to withhold a portion e.g. of their perceived share of the defence budget, quoting moral grounds, and they may at least appear principled if foolhardy in making a futile stand against the system, though at least gaining publicity for their cause.

What really gets my goat is those who dodge the system, take cash so that it does not go through their books and appear in their accounts (“save the VAT, mate?”) and those who fiddle in other ways, such as inflating their business expenses. None of these people are clients of us professional practitioners of course, because if we sign them up they are in the system they wish to avoid, and subject to our scrutiny.

Just the same, it is certain that there are still many tax dodgers and if any are reading this, let me tell you that if you have dodged £5,000 of tax you have stolen it from the Government and from us taxpayers and it is no different from stealing £5,000 from the state-owned Post Office. The punishment on getting caught may not be the same, but perhaps it should be? It is money taken from our back pockets.

The financial penalties for tax evasion have been raised subject to various targeted initiatives in particular areas. Should we see more custodial sentences? How can more dishonest tax evaders be caught given the limited resources of HMRC? What do you think?

© Jon Stow 2010