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KEY POINTS
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HMRC offices should have greater contact with each other.
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It would help taxpayers if HMRC explained how they reach decisions.
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Time limits should apply on all sides.
- HMRC are just as susceptible to human frailties as are taxpayers.
Many of us will have read with interest HMRC's thoughts on openness and early dialogue in enquiry cases (29 October 2007) and, earlier this year, the report of the Tax Faculty's meeting on 17 March with Dave Hartnett who touched on similar matters.
From HMRC's point of view, the general approach is a fair and reasonable one, but it does highlight the somewhat one-sided view of 'dialogue' apparently held by HMRC and which is considered in this article.
Consultation can and should be beneficial to both sides, who should at least start with a fairly open mind. However, we are all familiar with the kind of consultation which demonstrates that the official mind is already made up, and which appears to be undertaken merely as a public relations exercise.
This article is concerned with the continuing discussions between representatives of HMRC and professional and other bodies with a view to resolving practical problems.
I have attended such meetings as a representative of a leading professional body, and the views expressed below are based on my experiences. It should be emphasised that they are my own and not necessarily shared by any such body.
Breadth of vision
Unless the matter under discussion demands a particular and specific type of expertise, taxpayers' representatives and those of professional bodies usually demonstrate a fairly wide range of knowledge and experience within their specialist areas; for example, a person who is principally concerned with PAYE matters will also have some idea of the practical effect on the taxpayer involved.
Not only has HMRC become so specialised that this breadth of vision has been lost, but the various specialist offices do not necessarily have any mutual contact. I have recently been told, for example, that those dealing with the affairs of an individual who is recategorised as employed (having been treated as self-employed) do not talk to those responsible for PAYE compliance by the employer.
This compartmentalisation can sometimes reflect badly on HMRC. Competent people are kept within so narrow a field of specialist work that they have perforce little knowledge of matters outside that field and can appear to be very ill-informed.
There are occasional cases where HMRC representatives attending such meetings are not up to the job, but it is fair to say that the same criticism may be made of taxpayers' representatives.
For whatever reason, in such circumstances the scope of dialogue, as an informed and constructive exchange of views, is necessarily limited.
Openness
It is not unusual for legal advice obtained by taxpayers' representatives to be placed before HMRC, whether or not in an edited form, with a view to arriving at the correct interpretation of a particular provision.
On the other hand, HMRC, to the best of my knowledge, will never disclose details of any legal advice given, but will merely state the conclusions.
It is accordingly possible only to speculate how those conclusions were arrived at, and any constructive discussion is again severely limited as a result.
Taxpayers' representatives are usually prepared to cite authority or practical experience to support any proposition which they put forward, which HMRC are not always prepared to do (possibly as a result of the excessive specialisation referred to above).
Admittedly, HMRC are constrained by taxpayer confidentiality, but a similar constraint applies between professional advisers and their clients, and does not normally prevent actual cases being referred to on an anonymous basis.
In particular, and perhaps understandably, refuge is taken, particularly in discussions with HMRC officers relating to the affairs of particular clients, not in the legislation, but in the official guidance, be it taken from the various HMRC manuals or from UK or European statements of practice or their equivalent.
While it is true that such guidance has usually been prepared with a view to ensuring the practical, consistent and accurate application of the law, the possibility that it may be wrong, either generally or in its application to a particular case, is seldom considered.
Indeed, it is understood that the right of HMRC officers, even at very senior level, to disregard such guidance is extremely limited.
As a case in point, I have recently seen legal advice based on the actual legislation which HMRC refused to countenance because it was contrary to official guidance. It is not disputed that such advice may be wrong, but to refuse to discuss its substance is a negation of dialogue.
Fairness
HMRC, as we are all well aware, have extensive powers to enforce compliance with time limits, principally by means of heavy penalties. Whether these powers are justified is not a subject for this article, but the taxpayer should be entitled to have reasonable time limits observed by HMRC, e.g. in dealing with correspondence — a point raised with Dave Hartnett.
This is particularly the case if interest and penalties will be directly affected by any unreasonable delay in resolving a general point of difficulty.
Also, there is no reason in fairness and equity why the concept of unjust enrichment should not apply to the Government in the same way as it applies to the taxpayer.
An officer of HMRC has told me, in a case where a liability for tax was unlikely to be ascertained until the time limits for making a related repayment claim had passed, that the full amount of any liability would be recovered (and any potential repayment disregarded), and that such action was fully justified by the law.
This may be accurate, but it is hardly conducive to constructive dialogue — especially as the claim may have become time-barred by HMRC's own action, or lack of it.
General attitude
The embattled taxpayer can be forgiven for sometimes thinking that to HMRC he is a suspicious character who will always indulge in sharp practice given the chance and is, accordingly, to be regarded as guilty until proven innocent.
Attitudes such as those outlined above are likely to harden this view and give HMRC an unsavoury reputation of establishing an official line, right or wrong, and sticking to it through thick and thin.
It has occasionally been observed that the taxpayer can always resolve the matter in the courts. Up to a point this is true, but is not necessarily to HMRC's advantage, since litigation is time-consuming and expensive for both sides and may be rendered unnecessary by a constructive dialogue earlier in the proceedings.
Indeed, there are other areas of law in which recourse to the courts is actively discouraged until all other avenues have been explored.
In any event, as the aftermath of the Arctic Systems case (Jones v Garnett [2007] STC 1536) shows, if HMRC do not like the decision, they simply seek to have the law changed to what they always wanted it to be, so that the alternative of going to the courts for the taxpayer may be an empty one.
While the collection and protection of national revenue is of greater importance than the affairs of the individual taxpayer, the apparent assumption by HMRC that the nobility of the objective increases the sanctity of its pursuers is a false one.
HMRC staff are just as prone to human frailties, foibles and sheer bloody-mindedness as the rest of us.
Conclusion
HMRC are right to stress the importance of dialogue, but whether they are prepared to accept that term as meaning a full and frank exchange of views with room for movement and influence on both sides is open to question.
We are regularly assured that meetings with taxpayers and their representatives are useful and instructive from HMRC's point of view.
However, if 'dialogue' in the latter sense is not exercised to the full, the input of those well informed, active and experienced people who can make the most worthwhile contribution to such meetings may not be forthcoming.
David R Harris LLM, barrister is head of Prince Henry's Chambers, which specialises in all aspects of UK direct and indirect taxation, customs and excise duties and VAT. He can be contacted on d.harris4@btconnect.com.
