Guilty unless proved innocent?

21 December 2016

Andrew Hubbard

HMRC’s Your Charter states in its very first paragraph 'We’ll treat you even-handedly with courtesy and respect. We’ll presume that you are telling us the truth unless we have good reason to think otherwise'. These are important principles: indeed the self-assessment system would collapse without them.

So when a tribunal judge is moved to comment that 'HMRC’s task is to assess tax which is due, not to put up the maximum possible figure and leave the taxpayer to knock it down', it is clear that something has gone seriously wrong. The case concerned the tax status of quarterly honorarium payments by a trade union to volunteer branch secretaries. There was no doubt that the payments (modest in amounts) were taxable: the question was who was responsible for payment of the tax. The individuals concerned had declared the income on their tax returns and had paid via an adjustment to their PAYE coding. There was clear evidence that HMRC had accepted this treatment for many years and no suggestion that any tax had not been paid. But in 2012 HMRC changed its view and decided that the secretaries were office holders: this meant that the union had an obligation to deduct PAYE at source from the payments. HMRC issued determinations to recover PAYE from the union for the four years which were in date for raising assessments.

The tribunal agreed with HMRC that the individuals concerned were office holders and had always been office holders and thus they accepted that HMRC had the right to require PAYE from the union. But the judge was extremely critical of the way that HMRC had gone about the task. The PAYE assessments which were raised took no account of the fact that the individuals had already paid tax on the amounts received. HMRC said that this was because there were too many branch secretaries for HMRC to check each individual’s return to see whether or not he/she had declared the income. Quite rightly the judge was not impressed by this and commented: 'Even if that is true, it is difficult to understand why HMRC did not direct a change for the future while leaving untouched the past outcome of an arrangement in which they not only acquiesced but also actively participated.'

The Judge left the taxpayer and HMRC to agree revised figures taking into account the tax which had already been paid.

This is an unedifying episode. The individuals and the union had complied with their obligations for many years in a way which had HMRC’s support. I doubt that they felt that they had been treated with respect or regarded as honest.  

HMRC sometimes has a difficult job to do. In a case where a taxpayer has clearly been understating income and is not co-operating in attempting to quantify the true amount of tax which it due HMRC does have the power to issue assessments and say to the taxpayer 'you are the only one who knows the truth – if you won’t tell us we have to estimate your liability and it is up to you to show us why we are wrong.' I don’t have a problem with HMRC having this power (though HMRC must show some reasonable basis for their estimates as the courts will throw out assessments made on purely arbitrary figures). But this case is a million miles from that and the taxpayers should never have been put to the trouble and expense of a tribunal hearing: it all should have been sorted out amicably behind the scenes before it ever went to court.

For more information please get in touch with Andrew Hubbard, or your usual RSM contact.

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