Tax from the Trenches: "I have never seen such a short-sighted decision..."

Thursday 3 October 2019

Tax from the Trenches: "I have never seen such a short-sighted decision..."

The best and the worst of HMRC………

I have now written a few articles about the best and the worst of HMRC. This months blog is based on two new clients to Raffingers and the conflicting problems that they were experiencing with HMRC.

Client 1 (The best of HMRC)

The director of a long established company came to see me and wanted Raffingers to complete the company accounts and the director’s personal tax returns. He went on to explain that there was a HMRC aspect enquiry in progress and that the Inspector had asked a few questions about the company accounts for the previous year. The director went on to explain that he wasn’t 100% convinced the accounts under enquiry from HMRC were correct. There were a few complicated transactions that he didn’t think his accountant had fully understood and he was worried that the HMRC Inspector might take a dim view if something was found to be wrong.

We were duly appointed to be the company’s agents and we started looking at the transactions in question as soon as we had received the hand over information from the previous agent. Within a few days we had established that the previous agent had indeed made a mistake and had capitalised a series of transactions when he should have treated them as taxable income. The profits of the company had been quite substantially understated although thankfully it only happened in the year that HMRC were looking at. I rang the Inspector to explain that we had taken over the case and that we had identified an issue with the accounts. I promised him a full response and summary within 4 weeks together with a payment on account of the additional tax which we believed would be due. We provided the Inspector with a comprehensive letter within four weeks as promised setting out the errors in the accounts along with our calculation of the additional tax due. The company made a substantial payment on account and two weeks later I rang the Inspector to see how he wanted to proceed.    

For anyone who deals with HMRC on a regular basis, you will know that speaking with an investigation Inspector can be something of a lottery. Most are reasonable, pleasant, polite and professional. Some, as we will see later, have a very limited grasp of what they are doing, but thankfully some Inspectors are absolute gems. This was a case where the Inspector clearly knew what he was talking about. He ran through the transactions and clearly understood the technical issues. We spoke for a short while about the penalty position and he had no problem in agreeing that there was nothing deliberate on the part of the company or its directors. He accepted that the fault lay primarily with the agent and acknowledged that it was an unusual technical issue. He also accepted that this wasn’t a recurring error that was likely to have happened in earlier years. The case was settled within the space of a telephone call lasting little more than half an hour and the client was relieved beyond belief.

Client 2 (The worst of HMRC)

Client number 2 is also the director of a long established large company who was looking for Raffingers to be the company’s auditors and accountants. Towards the end of our meeting he mentioned that he had been receiving tax demands in the region of £250,000 and believed this was connected to a PAYE review from HMRC that finished a few months before. He genuinely had no knowledge of what HMRC were asking for and the existing accountants seemed unable to help. He had tried phoning HMRC without any success and appointed me to look into the matter.

Over the course of the last 6 weeks I have uncovered an absolute catalogue of mistakes and bad practise from HMRC, the like of which I haven’t seen in years. The whole sorry episode started life with a basic PAYE compliance review on the company where HMRC Inspectors visit the business to make sure that PAYE is being operated correctly on salaries and any benefits are being submitted on forms P11d. The director was not at the meeting because of health issues and the payroll manager attempted to answer the Inspector’s questions. When the meeting finished, HMRC had obtained the director’s credit card statements (which were paid by the company) and drew the conclusion that all of the payments were taxable benefits. A review of the statements and payment summaries showed that the director had paid for business expenses on the card and any private payments had been correctly treated as business drawings. None of the credit card payments should have been assessed as a benefit by the director but this was disregarded by the caseworker who proceeded to charge Employers National Insurance on the company of around £70,000, and then raise tax assessments on the director personally for £180,000.

Just when you think it couldn’t get any worse, it does. The settlement letter to the company for HMRC included national insurance liabilities that were out of date for legal recovery purposes and the settlement documents were never signed by the director. To be clear, the officer working the case either knew he was asking for national insurance for some earlier years that he wasn’t entitled to collect but asked anyway, or he didn’t know the law regarding what he should and shouldn’t be asking for. I’m not sure what is worse really. The HMRC decided to charge the director deliberate penalties for not completing his tax returns correctly and restricted penalty mitigation to less than 50%. It took about a month of speaking with one of the case officers to get to the bottom of what had happened and then ,after speaking to the director and submitting late appeals against the various tax and penalty assessments, I submitted our proposals to settle matters without the need to reopen the PAYE compliance review and to adjust the assessments. To my complete surprise the proposals were rejected in full. I have never seen such a short-sighted decision.

The current position is that following further correspondence HMRC have now agreed that the penalties on the personal assessments were completely wrong and that at least one of the tax assessments is out of date for assessment purposes. I am waiting to hear back from the senior officer who authorised the company settlement as to the legality of HMRC including liabilities in a letter of offer to the company that the case officer must have known should not be included. This particular point could well end up the subject of a formal complaint and a claim for compensation for the time we are now spending dealing with this point. The issue of the credit card expenses being assessed to tax has not been agreed yet and I am really not sure why HMRC is digging its heels in on this point when it is clear that every action by HMRC in this case has been incorrect and potentially negligent.

I will comment on this case again in a few months time however in the meantime, the point to this story is that HMRC do not get things right on each and every case and that every once in a while you might come across HMRC officers who do not really understand what they are doing or simply don’t play by the rules. If you have an issue with HMRC and it seems that the Inspector is being unreasonable or unnecessarily heavy handed you should speak to a tax specialist and get them to review the case.

By Neill Staff
Tax Partner and Tax Investigation Specialist

If you need advice regarding responding to a HMRC enquiry, contact our Tax Partner at or call him on 020 3146 1605. 

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