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A thwarted appellant, ROBERT MAAS FCA, FTII, laments the fact that his own tax appeal is not to reach the Special Commissioners.
A thwarted appellant, ROBERT MAAS FCA, FTII, laments the fact that his own tax appeal is not to reach the Special Commissioners.
THE INLAND REVENUE rejected my 1999-2000 tax return. It included provisional figures in relation to an investment which I had in an enterprise zone property trust. I ticked box 22.3 and put a note in the white space that 'the income from this source is provisional as per the attached letter'. The Revenue sent it back to me because I did not include a date when I expected to provide the final information. I was somewhat taken aback as the letter I enclosed gave all the information that I had. I also believed that I had fully satisfied my statutory obligation under section 8, Taxes Management Act 1970. I therefore decided to let the Revenue raise a penalty assessment and then I appealed against it.
This was not solely because I wanted to be awkward. I do not believe the Revenue actually has power to reject a tax return. When it sends a client's return back, it causes a great deal of upset to the client, aggravation to the agent and unnecessary costs. Most clients do not want to throw good money after bad by incurring the costs of an appeal. Nor did I, but I was prepared to spend my own time to go along and argue the case.
Extraordinary reaction
The Revenue's reaction seemed to me quite extraordinary. The case went straight to the Solicitor's Office. When I asked in early May for the appeal to be heard before the end of July, the Revenue waited until the end of June and then told me that it intended to instruct counsel and, even if the appeal were to be heard in July, I would not know where I stood as it might go to appeal. A hearing date was ultimately fixed for 29 October.
Then the Revenue told me that it had used its care and management powers to extend the filing deadline to the date I had actually supplied the final information, so would I withdraw my appeal. I told the Revenue, after some research, that I did not believe that it could exercise such power once I had given notice of appeal. The Revenue asked for this issue to be determined by the Commissioners as a preliminary issue, and also asked for more time as 'to present its case effectively the Revenue will be required to undertake considerable work including the production of a detailed witness statement'. I objected. The Commissioners decided to hear this preliminary issue immediately before the appeal.
Finally, about a week before the appeal, the Revenue told me that it now accepted 'that the return I filed on 31 January 2001 fully complied with my statutory obligations under section 8'.
Puzzled
I am puzzled that the Revenue went to so much trouble to thwart my attempt to have my appeal heard by the Commissioners. I do not know why it changed its mind and decided that I had fully complied with the law after all. I had intended to argue that my return was correct and complete for a number of reasons.
Firstly, the obligation is to make a return that to the best of my knowledge is correct and complete (section 8(2)). I had no knowledge of when I expected to provide final figures. Parliament and the Treasury have taken away from me and given to the enterprise zone property trust managers the right to establish the figures by Regulation 5 of the Income Tax (Definition of Unit Trust Scheme) Regulations 1988. I could not possibly know at 31 January how long it would take the managers to agree the figures with the Revenue. I am not entitled to simply make a wild guess.
Secondly, my obligation where I do not know figures is to do my best. The judge in Dunk v General Commissioners of Income Tax for Havant and Commissioners of Inland Revenue 51 TC 519, the leading case, said that it is open to the taxpayer to put against a figure such words as 'see accompanying memorandum'. That is precisely what I did. The obligation prior to self assessment was to make a return of my income to the best of my knowledge; and that is still the obligation. The Revenue has said in the past that Dunk is still good law.
Thirdly, 'to the best of my knowledge' must be a subjective test. By rejecting my return without first enquiring into my state of mind at 31 January, the Inspector is in effect substituting for mine his own belief that I would know the date I expected to provide final figures. That is not the statutory test.
Fourthly, I do not think that there is a statutory requirement to give a date. Question 22 of the tax return form states 'Please tick boxes 22.1 to 22.5 if they apply'. I cannot recollect in 35 years ever having seen the Revenue use the word 'please' where it believes that it has a statutory entitlement to something! The tax return is not the return required under section 8. It incorporates the section 8 return, but also asks for quite a lot of information that is non-statutory. For example, it asks for some information in relation to other years. A taxpayer can be penalised only for not providing the statutory information. While the Revenue has power under section 8(1)(a) to require me to give 'such information as may reasonably be required in pursuance of the notice', my belief is that the information sought must be 'for the purpose of establishing the amounts in which [I am] chargeable to income tax' – the opening words of section 8(1). The date on which I expect to be able to give more information does not seem to me to meet that test.
Incomplete but compliant
I had also intended to argue that even if my return had not been complete, I had complied with section 8 by submitting it. If the Revenue chooses to send it back to me, it is entitled to do so as the law does not impose any obligation on it to process the return. What the Revenue does with it, though, cannot affect the fact that I submitted it. Despite what the Revenue says in Tax Bulletins 37 and 44, I do not believe that the legislation has a concept of an incomplete return. The only reference to a return being incomplete is in section 19A(2)(a). How can the Revenue enquire into a return to determine whether it is incomplete, if an incomplete return is not a return at all? If it were found to be incomplete, the Revenue would have had no power to make the enquiry. The legislation would need to empower the Inspector to enquire into a return or a purported return.
Furthermore, if the Revenue contention that an incomplete return is not a return at all is correct, this seems to me to have astounding consequences; if I deliberately omit some of my income and the Revenue picks it up as the result of an enquiry, I can turn round and say, 'Thank you for pointing that out; thank goodness what I submitted was not a return, you can only penalise me for not having submitted the return, not for submitting an incorrect one'. The Revenue surely cannot have its proverbial cake and eat it. If something is not a return initially, it cannot somehow become a return if the omission is only picked up after the return has been processed (a non-statutory operation).
There is also a VAT case, Commissioners of Customs and Excise v Nomura Property Management Services Ltd [1994] STC 461, where the taxpayer contended that errors on its return were so gross as to make the VAT return invalid. The judge held that, 'Whatever the taxpayer sends back on form VAT 193 … is a return. If it contains errors, obvious or not, the consequences are prescribed by law. There is in my judgment no class of error which will invalidate a return so as to afford the taxpayer a contention that no return has been made'. Although the judge refers only to errors, he later says that he thinks Customs were right to resile from a concession that 'clearly the dispatch of a form, which is totally blank, would not constitute making a return'.
VAT is different legislation, but the interpretation of what is a return is not dependent on the wording of the legislation. VAT and income tax are both self-assessed taxes and the return is an essential part of the system for both taxes. In these circumstances, the Nomura decision appears equally applicable to income tax returns.
Public debate required
I do not know whether the Revenue's eventual acceptance of the validity of my tax return reflects an acceptance of one of the above arguments or something else of its own. As I did not have the chance to argue my appeal, my arguments could not actually have swayed the Revenue.
I still believe that the above are important issues that should be aired. If anyone has a client who wants to take to the Special Commissioners a penalty imposed following a rejection of the return, I am happy to volunteer my time to help!
