‘When a penalty imposed by the state is under consideration, it is axiomatic that a penalty can only be imposed if it is clear to the citizen exactly what he has to do to avoid the penalty. This is an embodiment of the principle of legal certainty.’
Not my words but those of a judge in a recent tribunal decision. The taxpayer was appealing against a penalty for not paying an Accelerated Payment Notice. Unfortunately for HMRC the notice was inconsistent: it gave two different figures for the amount payable. The penalty which was imposed was calculated as a percentage of the amount payable. With two different amounts specified which was the right one? The judge explained that as the taxpayer did not know which amount to pay in order to avoid a penalty he was placed in an uncertain legal position. Accordingly he cancelled the penalty entirely.
Bear that in mind as you read this second quote from another, unrelated, tribunal decision published in the last few days.
‘The Tribunal was dissatisfied with the explanations from HMRC in respect of what was described in a statement of the appellant’s account as “Balancing payment due for year 14/15” in the sum of £479.80. The appellant had been sacked in March 2014, he had no income in the tax year 2014-2015 so without explanation from HMRC it was difficult for the Tribunal to understand why a balancing charge was necessary for that year. As HMRC could not provide a satisfactory explanation of what this balancing payment represented and how it had been calculated the Tribunal has allowed the taxpayers appeal in respect of this sum plus any interest added thereto.’
The details are not important here. What matters is that the taxpayer was faced with a demand for tax which on the face of it was wrong and which HMRC could not explain. This was, in the view of the judge, unacceptable and accordingly he overturned the assessment.
So two cases where HMRC’s inability to present a clear and unambiguous case to the taxpayer and subsequently to the tribunal led to a loss of tax and or penalty which would otherwise be due.
These are not isolated incidents. It is my impression – and I am quite prepared to be corrected on this if I am wrong – that there are more and more instances where tribunals have criticised HMRC for the lack of clarity in the explanations which they give to taxpayers and the poor standard of evidence which is presented to judges in appeal hearings.
Why is this? Partly it is because the tribunals adopt a much more rigorous standard of proof than would have happened in the days of the informal procedures of the General Commissioners, who would previously have heard most such appeals. But I wonder also whether what we are seeing is the result of HMRC’s IT systems not being designed with enough thought about how their outputs would appear to the taxpayer.
The prevailing ethos when they were designed was in my view largely to ensure that the systems worked effectively from HMRC’s point of view. I know that there are those within HMRC who are equally frustrated by this and by the very inflexible ways in which those systems are set up. All too often even minor changes require very complex and expensive software re-engineering.
To the extent that we are stuck with the problems of the past there is little that can be done – but my concern here, as so often in recent briefings, is about how this will all play out in Making Tax Digital.
There is a once-in-a-generation opportunity to use the digital revolution to build systems with the needs of the end user in mind, so that taxpayers have the necessary clarity on their tax position.
I did initially have high hopes for this. After all, the first MTD publication was entitled ‘making tax easier’ and one of the key bullet points said ‘Taxpayers will get a real-time view of their tax affairs and see how their tax is calculated’. I fear however that those laudable aspirations (which many in HMRC share) are in danger of getting side-lined in an environment where the main driver for MTD now appears to be closing the tax gap.
I hope that I am wrong. I’ll have long retired before we see a build-up of tribunal cases where taxpayers have filed digitally. I would like to think, however, that by then the sorts of comments which I have quoted at the top of this piece are a thing of the past. I doubt that the next generation of taxpayers will be any more enthusiastic about paying taxes on time than the taxpayers of today – but I really hope that they will at least be able to understand what they are supposed to pay and when.
For more information please get in touch with Andrew Hubbard, or your usual RSM contact.