HMRC’s remit now includes administration of the whole range of taxes and duties, some of which most people will never have heard of, as well as tax credits, minimum wage legislation, money laundering – to mention a few. It has its hands fairly full it seems fair to say.
However, the taxpaying public’s main contact with HMRC is either via the PAYE and national insurance deducted from their wages or completion of their annual self-assessment tax return and settlement of liabilities. Businesses of course have additional compliance duties such as operating VAT and PAYE (including ‘real-time information’).
HMRC have extensive powers to enquire into taxpayer’s returns and require further information and explanations to be provided if they are not satisfied with the contents of the return. They only have a limited opportunity to do so however: generally one year from the date of filing in the case of personal returns or one year from the end of the accounting period for company tax returns. Some returns are selected for enquiry at random, or so we are told, but in most cases the enquiry will be triggered by something included in the return for example if the return includes business income and expenses and there has been a substantial increase in the expenses claimed for. A claim for a relief such as CGT ‘entrepreneurs’ relief’ might also trigger an enquiry.
If during the course of an enquiry HMRC consider that income or gains have been understated based on information supplied to them in the course of the enquiry they may amend the taxpayer’s self- assessment resulting in further tax becoming payable. Often this will be a matter for negotiation between the inspector and the professional advisers but if HMRC amend the self-assessment and the taxpayer or their agent does not agree with it, an appeal may be made for the matter(s) in dispute to be determined by the tax tribunal (known as the First-tier Tax Tribunal (FTT)). The FTT will determine the relevant facts and apply the law (including any relevant case law precedents) to those facts in deciding for the taxpayer or HMRC. The losing party may then appeal to the Upper Tax Tribunal and further to the Court of Appeal and the Supreme Court, though the cost of doing so will be prohibitive except where very large amounts of tax are at stake.
In most cases it will be a matter of coming to some agreement with HMRC on the amount(s) of any understated profits or gains by negotiation or technical argument. HMRC officers sometimes apply bogus methodology to arrive at understated profits and then may try to multiply the result over a number of years which they consider may be similarly affected to end up with a large sum of underpaid tax, to which interest and penalties are added. This is not a correct procedure because an enquiry can only cover one year. If HMRC consider other years may be affected they need to make what is called a ‘discovery’ assessment. Moreover, HMRC officers are often not technically competent and so their argument on a particular issue may simply be wrong and I have had considerable success in arguing technicalities with HMRC – sometimes winning an argument I never expected to win. Also if they do not follow correct procedures they may run out of time for taking certain actions, raising assessments etc. The tax professional’s job of course is to resist HMRC’s assertions using all their skills, be it technical, procedural, or tactical. I have on occasion protracted an argument beyond the date when HMRC could raise an assessment without them realising, so they were forced to simply back off. The point is there is often quite a lot that a skilled tax adviser can do in these situations to mitigate any tax due. It is also true that if a sufficiently robust response is given the officer may decide, maybe after some debate, to move on to an easier target.
An unfortunate trend I have noticed is for some officers to simply parrot HMRC’s published guidance for example concerning ‘reasonable excuse’ where a taxpayer was prevented from doing something which incurred a penalty through no fault of their own – even though that guidance may be contrary to decisions of the FTT. Basically they rely upon the fact that most taxpayers will not wish to or cannot afford the cost of appealing to the FTT. Again there may be things that could be done such as requesting an independent internal review.
