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KEY POINTS
- The technical issue at dispute.
- The benefits of listing an appeal before the Special Commissioners.
- What is HMRC's policy on compensation claims?
- Dealing with the Adjudicator.
- Should HMRC's compensation procedures be reviewed?
When I started work on this article nearly two years ago I was optimistic. At that time we had just reached the end of a long hard slog with HMRC that dated back about a year before that.
Our initial problem with HMRC was never a complex technical issue, the bare bones of the dispute having been published as a question, 'Salt in the wound' (see Related Links).
In a nutshell, our client was due to retire in April 2003 at the age of 65, but by mutual agreement with his employer he was granted short-term temporary extended rolling contracts of employment; however, it was agreed that he would no longer be entitled to medical benefit.
Unfortunately, by an administrative error, this medical insurance cover was not actually cancelled until almost a year later in February 2004.
HMRC determined to assess this benefit despite our contention that he never did receive any 'money's worth' benefit (ITEPA 2003, s 62).
Perversely, he was the victim of a very serious accident in the summer of 2003, but on the basis of his understanding that his medical insurance cover had already ceased no claim or use of the cover was made.
So what follows is a cautionary tale, but it might give comfort to any other 'champions of lost causes' in the smaller practice part of the profession.
Tell me why
Helpful suggestions were printed in Taxation on 30 June 2005. but, as it turned out, a much more useful suggestion appeared by Kevin Slevin in his lead article, 'Stand and deliver' (see Related Links).
We had, at that time and for the previous eight or nine months, been unsuccessfully 'banging our heads' seeking to have rational dialogue with senior HMRC officials. Kevin's article made general proposals as to how to 'tackle HMRC' in situations such as this and suggested taking an appeal to the Special Commissioners.
Frankly, after all the months of dialogue and frustrating negotiations with HMRC, we and our client were by then more than happy to take our chances and the appeal was duly lodged before 'the Specials' in September 2005.
Almost immediately, HMRC (in the person of the Area Director) conceded matters ('on a strictly without prejudice basis') in early November 2005. Great news, obviously, for our client and for ourselves — but at what cost? Until then our client's straightforward annual tax fee was just about £250 plus VAT.
But by November 2005 we had been 'negotiating' and 'preparing for battle' for about a year and our costs had, by this time, well and truly outstripped the tax liability at stake, which might have been just about £1,000 (benefit almost £2,500 at 40%).
I think that it is fair to say that we could never reasonably have expected becoming so deeply entrenched over such a simple and straightforward matter. Necessarily, we maintained dialogue with our client on the subject of these accruing charges. Not all our costs had, at that time, been converted into a fee account although an interim invoice for £1,250 plus VAT had been issued in March 2005.
Throughout these painstaking negotiations we had also constantly aimed to keep HMRC generally aware as to how our costs (for which we maintained their ultimate responsibility) were stacking up; consequently, in response to the Area Director in early November 2005, we explained that our costs by then amounted to some £5,750 plus VAT. Laying any of this on the client would be utterly iniquitous; although that has always been part of the system.
We explained to HMRC that we were 'very happy to close the matter and reach agreement with you on a “without prejudice basis”'. Our letter went on:
'This then leads us to the matter of a claim for compensation, and in this respect I am afraid that our costs are now pretty hefty. The bottom line, at this time, is costs amounting to £5,750 plus VAT, which is just over a further £1,000. We confirm that our client … is not VAT registered …'
We never did hear from the Area Director again.
I should have known better
As one might imagine — especially those who have read Mike Truman's article, 'What's the form?' (see Related Links) — HMRC did not immediately fall over themselves to accept their responsibility for our costs in this.
A few weeks ago — celebrating this magazine's eightieth birthday — I was pleased to read Simon Owen's article about 'Taxation in the 1980s' (see Related Links).
Certainly those years and the early 1990s saw an encouraging general shift in the Revenue's attitude with 'The Taxpayer's Charter' and the 'Working Together' initiative and a number of other very constructive initiatives including (I believe) a commonsense Government-sponsored approach.
Even in those days, when we necessarily had to go back to the Revenue for 'Putting things right' (COP1) and for compensation, a fair response could then reasonably be expected.
It was also the case that, up until about four or five years ago, where it was established that the Revenue had made an error and that a taxpayer had been disadvantaged, one was then able — on behalf of that taxpayer/client — to make a compensation claim against the department.
While these compensation claims had to be processed in Regional Offices, one seldom encountered any strong resistance to genuine compensation claims and these were handled relatively fairly in respect to the additional accountancy costs incurred.
How very unlike today! It seems to me that there now exists an utterly different culture, as the title of this article implies.
Anytime at all
Very fortunately, we do still have the Adjudicator's Office to fall back upon, but it is generally symptomatic of the pressures imposed on all government departments to rein back on expenditure wherever and whenever possible, and given the 5% net budget reduction year on year that HMRC have been set it is not surprising (to me) that things have changed.
Unfortunately, in HMRC's case, the main sacrifices are the services to taxpayers, and the overwhelming emphasis nowadays appears to be on cutting costs and preserving funds rather than trying to do more to improve services.
The anomaly is that if one is to make any headway with a compensation claim one must first try to navigate a route through the various layers of HMRC bureaucracy and in my experience the overall effect of negotiating the diversions of such a labyrinth is one of wearing down and discouraging the pursuit of legitimate compensation claims.
The moral is 'do not allow yourself to be knocked off course!'
In our case, having finally slogged our way through to the end of the technical battle with HMRC in November 2005, we then embarked on yet another mammoth expedition; the claim for our costs and compensation for HMRC's mismanagement and time wasting.
At this point, the very man who might have been able to easily settle matters, the Area Director, disappeared from the stage and we became involved with the (hardly aptly named) 'Customer Contact Complaints Service' section.
In my experience, this office seems to exist primarily to resist any admission of HMRC culpability and to further frustrate and obfuscate a satisfactory compensation payment outcome, while at the same time seeking to give the impression of impartiality and open-handedness to its long suffering customers.
Again feeling that we were stuck in a sea of mud, we finally approached the Adjudicator's Office just before Christmas 2005. Despite some inevitable delays, the Adjudicator's staff were splendid and their decisions have been worth waiting for.
The Adjudicator's letter of December 2006 explained that: 'the HMRC Area Director … considered that, whilst there was a legal liability to pay tax on the benefit, in view of the special circumstances of the case, this would be an unfair result and, exercising his discretionary powers, he wrote to you and advised you that, on a without prejudice basis he would accept that Mr A [our client] had not received a taxable medical benefit …
'In my view, HMRC had all the facts having a bearing on the case when they received Mr A's letter dated 10 February 2005. At that stage, the case should have been reviewed by an officer of the appropriate grade with the specific view of considering whether, given the circumstances, pursuing the liability would be fair …
'In my view HMRC did not handle your complaint well. They should have recognised that the decision to waive the tax on the medical benefit could have been taken earlier and that the failure to do so showed poor judgement.'
You can't do that
So in December 2006, whilst upholding the justification of our complaint against HMRC, the Adjudicator was not prepared to recommend any financial compensation relative to all our chargeable time.
At that point, only one interim invoice had been raised (in March 2005), but nothing had actually been paid in respect of any of these professional costs relative to all this special work, so the Adjudicator's position was that no tangible compensation payment would be reimbursed.
The Adjudicator did, at that time, 'ask' HMRC to make a payment to our client of '£100 compensation for the worry and upset that he had experienced because of their failure to exercise their discretion properly when the special circumstances of his case were first fully made known to them'.
So was no more to come by way of compensation or reimbursement? A rethink and change of strategy was clearly called for. Sportingly, our client was prepared to accept a further (final) invoice in respect of all our successful efforts in the sum of £4,500 plus VAT.
Once this and our previous fee account had been paid, we again approached the 'Local Compliance Complaints Team' for compensation or reimbursement for our client.
In July this year our client finally received a partial compensation payment of £6,100 (a restricted amount of £5,200 plus VAT). We then went back to the Adjudicator, who, in October 2007, has now 'asked HMRC to pay your client £450 plus VAT'.
The Adjudicator also stated: 'The issue was never about the correct interpretation of the law, but about discretion. It was whether applying the rules strictly in this case would produce an unreasonable and unjust outcome. … the Area Director, recognised that the outcome would have been unjust and used his powers of discretion to waive the liability'.
So with the payments made (£100, £5,200 plus VAT and £450 plus VAT) we are now pretty well there, but what a slog! Our client has had justice and we have now been paid for all our special work.
But in terms of our 'larger equation' — no account is taken of all the extra time, work and effort (and costly Government time too) over the past two years since November 2005; still we and our client are finally content with this outcome.
All this might benefit other practitioners and their clients in similar apparently intransigent situations. In the event that an influential Government official might also be reading this one wonders whether some 'further good' might even eventuate as a result.
My conclusions
A just outcome, but I believe that the efforts to achieve it have been utterly disproportionate to what should have been necessary. At an early stage we were in negotiations with at least two experienced and quite senior tax inspectors who could (and should) — with a little forethought and real consideration — have taken responsibility themselves or else have passed this matter up to Area Director level at a much earlier stage.
And under current criteria for compensation claims; what if our client had not been inclined to be quite so 'sporting' in partaking of a long slog across muddy tax fields; or simply could not have afforded our fees? In that case would we not all have been losers? I believe that a serious customer re-think is required.
Malcolm Bowen is a personal tax advisor with McKenzies, chartered accountants in Oxted (malcolm.bowen@taxshopatoxted.co.uk). The views and opinions expressed in this article are his own personal views and do not necessarily reflect the views and opinions of the firm.
