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.

A brief history of my time in tax

Image by alancleaver_2000 via Flickr

I am not going to tell you how long I have been working in tax, but suffice it to say I have a lot of experience. Things have changed so much that it seems to me that the public in general still entertains ideas about tax which are long outdated if indeed they were ever correct in the first place.

Once upon a time in the UK tax system, people did not get tax bills unless they actually sent in their income tax returns. In the distant past, there were two arms of the old Inland Revenue. One dealt with assessing tax at the standard rate (now called the basic rate) after deducting personal allowances, and the other charged the higher rates of tax which were due. This higher rate of tax was called surtax, only a small percentage of the population had income which went into the surtax bands, and the Revenue did not send out a tax bill until they had a Return; some were sent in very late for understandable reasons.

I am telling you this because strangely, some people still believe in a similar philosophy. If they delay sending in a tax return, they believe they won't have to pay the tax. That is not a good approach to modern taxation and at the very least will incur interest charges and statutory penalties as well as a wild guess by HMRC in terms of a tax demand in the absence or a return.

The biggest change to taxation in the UK in the last fifty years or so was the introduction of the Self Assessment process in the nineties. Effectively this is supposed to do what it says on the tin. The taxpayer has to work out his or her tax liability and pay it to HMRC. HMRC checks the figures using their software. Not surprisingly many taxpayers use agents such as my firm to do their tax returns for them and work out their tax positions. This huge shift of responsibility from HMRC to the taxpayer to calculate the tax due was a cost-saving measure in terms of the number of staff theoretically needed to be retained as HMRC Civil Servants. The costs saved by the Government were shifted to the taxpayer who either had to spend valuable time working out his or her tax position, or pay someone else to do it

The shifting of responsibility also shifted the burden of scrutiny, at least initially, to the taxpayer and the agent. Prior to Self Assessment, as long as there was full disclosure of the facts in a tax return, there was a tendency for taxpayers and sometimes for their agents to “try it on”.

For example, I remember a long time ago a science writer claiming in his accounts for a new and expensive pair of glasses (spectacles was the technical term) on the basis that he could not see to do his work without them. He insisted that my then firm put in for the deduction. We knew that a real person in an Inland Revenue office should look at the accounts and write us a letter saying why the expense had been disallowed, which would be on the basis that the client needed the glasses in the course of his everyday life, not just when he sat at his desk to write. As you might understand, a claim for some tax relief on a microscope would have been more in order. Actually the accounts went through unchallenged and the glasses got tax relief. This was felt to be acceptable in our office because the Revenue had not been misled but had not picked up on the deduction when they had the chance.

Now we have to do HMRC's job for them, and they are anyway far more aggressive in chasing down supposed errors and incorrect claims in the returns that they pick out for enquiry after we have done all the work for them. They will attempt to charge penalties for anything much beyond simple errors, and will certainly charge interest on tax paid late as a result of an amendment to a return.

Doing HMRC's job for them entails scrutiny of every item of expenditure and every allowance claimed. We have clients who will be very unhappy to accept our advice. As you will understand, especially in view of incidents such as the spectacles affair, many people still do not accept that the tax world has changed. We get comments along the lines of “in my old company we used to claim for our days at the races” even though this was either a benefit that never got charged to tax or was client entertainment which should have properly disallowed in the company tax computations even way back.

We have to be strict with claims for deduction of expenditure, we have to present as much information as we can about any unusual item and we have to follow strict accounting rules, which was not always the case. We have to report any uncorrected errors we pick up, and under the Money Laundering Regulations we as agents have to report any suspicions we have concerning possible dishonesty spotted in the course of our business; that of our clients (fair enough) and former clients but also other people's clients, and we must not tell the people reported that we have done so.

I have no problem reporting the dishonest of course. What is a worry is that I could be punished for not suspecting someone that a Government Agency thinks I should have.

Nowadays, we have to report any even mildly artificial scheme to avoid tax when making a tax return. We have to put up with bullying enquiries made by HMRC where they may be wrong, but the cost of going to the Tax Tribunal to appeal may be more than a client can afford in monetary terms in exceeding the extra tax which might be due. An appeal might be simply more than the client can stomach in terms of worry. HMRC is not always right. Their interpretation of the law is not always correct but they might have their way because if a taxpayer sees the leviathan coming for them that person may throw in the towel..

So, in summary, we cannot “get away” with a claim which would not stand proper scrutiny, our records must be good, and we must remember that taxpayers challenged by HMRC are guilty until proven innocent. Do not ask me to try anything on. I will make a claim for you if it has good merit and precedent because I have been round the block. I will do my best and might well know a quite legitimate relief that a taxpayer-client would not know about. Just don't tell me that you want to claim a deduction because someone at the club or on the checkout at the supermarket told you it was all right.

© 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