Morality in tax is a concept that HMRC is keen to encourage, especially when dealing with issues of tax avoidance. Press releases from HMRC often lead with how it is ‘right and fair’ that everyone pays the ‘correct amount of tax’.
Establishing the ‘correct’ amount of tax, however, is often difficult enough when just looking at the letter of the law; it becomes even more so when also considering the moral aspects.
Situations do arise where a historic liability is found to be due but HMRC is unable to collect the tax, often because time limits for raising assessments have passed. In these situations, some taxpayers decide to ‘do the right thing’ and make a voluntary payment in respect of the tax that can no longer be collected. This is known as voluntary restitution.
More recently, we see HMRC trying to apply the concept of voluntary restitution to cases where a refund has arisen from the use of a historic tax avoidance scheme.
There are tax avoidance schemes that generate losses and create significant tax refunds. HMRC tend to withhold the repayment of these amounts whilst it determines the validity of the loss being claimed. But not always.
Whilst much of the legislation and recent tax tribunal decisions are strongly in HMRC’s favour when it comes to tackling perceived tax avoidance, a Supreme Court decision in the case of Derry has made the collection of tax more difficult for HMRC in some situations.
The decision in Derry broadly means that, for HMRC to enquire into a loss carry-back claim, a valid enquiry must have been open for the year in which the loss is carried back. Previously HMRC had believed and contended that it was sufficient to enquire into the tax year for the return upon which the claim was made, and as such failed to ‘protect’ the earlier year for enquiry.
Following the decision in Derry, some cases where a refund was withheld following a loss carry-back are now out of time to be challenged. HMRC can longer stop the issue of the refund, even in cases in which it is likely the losses originally claimed to create the refund are not technically due.
HMRC is however appealing to taxpayers’ consciences in these cases by writing to them and clearly stating that it does not believe them to be entitled to the repayment and asking if they wish to give up their right to receive it.
At a time of great hardship for many and on the back of the well-publicised difficulties some people experienced trying to resolve failed tax avoidance schemes, this is a bold and interesting development from HMRC. We wonder if we will continue to see HMRC increasingly pursuing a moral outlook when it comes to collecting tax. Similarly, will HMRC itself apply a moral perspective in those situations when legislation gives a perverse and adverse outcome for taxpayers?