An effective referee

KEY POINTS

• Are penalty charges a true penalty or an extra tax?
• Is there a fair balance of power between HMRC and the taxpayer?
• Should the Adjudicator employ HMRC staff members?
• Why are more complaints using ESC A19 not upheld?
• The need for a strong independent Adjudicator.

The tax world changes fast, and new automatic penalties seem to appear every year. For example, there are penalties for failure to submit monthly contractor returns under the construction industry scheme, which are £100 per month for each month on a continuing basis for 12 months, when they increase to up to £3,000.

We have seen cases where the total penalties exceed £10,000 and in some cases the total charges have exceeded £30,000. HMRC guidance suggests penalties will be issued and notified as the returns become late, but in all the cases that have been brought to our attention the penalties were only issued when the returns were submitted.

The penalties then represent an extra tax rather than an encouragement to submit returns on time. This is unreasonable, but to whom should representations be made to get HMRC to operate the penalty regime more fairly, other than appealing through the tribunal system and citing the human rights law of proportionality?

In addition, HMRC have obtained powers to give them the right of access to businesses and homes where businesses are in any way run from homes.

Safeguards for the taxpayer are included in an HMRC code of contact, but it is the department’s code of contact and is subject to the department’s interpretation.

HMRC also want to considerably strengthen their debt-collecting powers by being able to take money directly from a taxpayer’s bank account; this despite the risks of money being taken from taxpayers who actually do not owe anything, but cannot get their representations dealt with by HMRC in anything like a reasonable time.

We all know the difficulties of dealing with separate assessing and collection departments, despite these functions apparently having been merged some time ago.

Furthermore, HMRC have been HM Revenue and Customs for several years now and yet we still see inspectors of taxes working enquiries and settling income or corporate tax liabilities as they always have and then handing over to the VAT officer who makes his VAT calculations and asks for another chunk of tax, interest and penalties. What happened to successive government initiatives to ensure, so far as is possible, that the department deals with everything in one go so as to reduce administration and businesses costs?

Clearly, the profession will continue to make representations about all these issues and will continue to resist the extension of powers or policies which are patently unfair, unnecessarily intrusive or that just leave the ordinary everyday taxpayer completely at the mercy of the tax authorities.

This can be done during the consultation process for new measures proposed by HMRC… when there is one, although of course there are many instances when HMRC do not listen.

At least we now have the taxpayers’ charter, which the profession fought hard to obtain, but who is to rule, for example, on whether or not HMRC have dealt with a case ‘even-handedly’?

Seeking a fair decision

Where the profession fails to change HMRC’s mind, what then? Who can the taxpayer turn to when things go wrong and who, more importantly, can bring about change in the way HMRC
do things?

At present, the taxpayer has three places to go to seek redress: the HMRC Complaints Team for the area dealing with his affairs, the Adjudicator and the Ombudsman. Our experience is that the Ombudsman will not be very interested if the Adjudicator has seen the case, so in practice the latter two avenues are really only either/or and are just one approach.

In addition, there is always, theoretically, the option of a judicial review, but because a barrister will almost certainly be needed, legal costs prohibit this being an option for all small-to-medium tax liabilities.

Complaining to HMRC can feel like complaining to a shop assistant and then asking for the manager – at which point the shop assistant says he or she is the manager.

HMRC appear to have organised themselves into more specialist sections (e.g. concerning the operation of PAYE or residence) so after a challenge to the ordinary local office the case is referred to one or more specialist officers and then a senior officer before it can be referred to the complaints team.

This is all very long-winded and it can take six months or so before a final response to the complaint is received and the case can be taken further. HMRC insist that they be given a proper chance to answer the complaint before it is referred and this is eminently reasonable, but only if this happens quickly.

What about the Adjudicator?

So what about the Adjudicator? Who are they and how has this office performed in dealing with complaints?

Details of the 2010 annual report can be found in Annual adjudication by Rachael Down. In brief, the Adjudicator is an appointed, respected figure often with considerable experience in public office.

The current Adjudicator is Judy Clements OBE, who previously worked at the Independent Police Complaints Commission. Staff members are seconded to work for the Adjudicator from HMRC and I am not aware of any changes in this practice.

The Adjudicator can only make recommendations, although their recommendations are nearly if not always accepted by HMRC.

I wonder if taxpayers are aware that the staff in the Adjudicator’s office are seconded from HMRC, despite titles such as adjudicator manager and officer. I think most taxpayers would be happier if at least the officers making and recommending the decisions – the managers – were not HMRC employees.

So how has the Adjudicators Office done?

Tax credit complaints accounted for some 70% of the cases in 2010. Substantially upheld complaints were 17% of the total, while partially upheld complaints were 29% of the total.

However, it seems from Rachael’s article that only 20% of non-tax credit complaints were substantially or even partially upheld. That is a matter of concern.

Even ruling out a proportion of taxpayers who complain without any substantive justification, I find it very hard to believe that some 80% of complaints were unjustified.

The Adjudicator’s Office does not seem to be handling that many non-tax credit complaints for the size of the taxpaying population. Even taking into account that there are appeal processes, which effectively absorb disputes with HMRC into the appeals system so that they never reach the Adjudicator, the organisation, which taxpayers will see as their main champion does not seem to get called to battle that often and the results are not at all encouraging.

Using a concession

We know that one of the areas that has received a lot of scrutiny is Extra-statutory Concession A19 because we learn that the Adjudicator called together representatives of the office of the Parliamentary and Health Service Ombudsman (PHSO) and HMRC to discuss the handling of these cases.

ESC A19 is also particularly relevant at present, given all the extra tax bills that have been arriving on people’s doorsteps as a result of HMRC’s new PAYE computer systems becoming effective at checking PAYE tax deductions of the last couple of years.

HMRC’s view on ESC A19 in PAYE cases is that it rarely succeeds because the taxpayer should have known by virtue of their coding notices that they were not paying the right amount of tax along the way. On our side, we know that most taxpayers do not understand notices of coding and that they trust HMRC to get their PAYE tax deductions right.

It is a concern to me that the Adjudicator’s Office has a tendency to view ESC A19 as HMRC do and they do not put themselves in the shoes of the taxpayer and look at what is reasonable for a person to understand taking into account the layout and content of coding notices.

For 2010, it appears that one of the very few ESC A19 cases where the complaint was upheld was upheld only partially and the only years where the Adjudicator recommended that HMRC should surrender a proportion of the tax were apparently years where no coding notices at all had been issued.

Is all in order?

The vast majority of PAYE ‘tax corrections’ that received much publicity recently were overpayments due to taxpayers. This just proves that taxpayers believed that their tax affairs were in order. If they hadn’t they would have been on the phone to HMRC at the time to ensure that their codes were corrected so they paid less tax.

But of course this did not happen because taxpayers did not understand they were paying too much tax.

So the profession’s strategy must be two-fold. First, it must continue to fight for any unmerited extension of powers and for a fair tax system. But secondly, push, and push hard, for a complaints body with real teeth and more senior staff who are not on secondment from HMRC.

Just the existence of a strong, powerful and independent Adjudicator will encourage HMRC to think twice about their actions. If we don’t all push for an independent complaints body, then we deserve the tax regime that we get.

Alex Byrne FTII is a former inspector of taxes and helps accountants and clients nationwide who are having difficulties with HMRC’s handling of enquiry cases. He can be contacted on 01926 400055 and 07957 393010.

Issue: 4279 / Categories: Comment & Analysis , Adjudicator , ESC A19 , Judy Clements