HMRC Powers: With great power comes great responsibility

I’d like to concentrate my contribution to tonight’s debate on the balance of power between HMRC and the individual, unrepresented taxpayer; and to consider what effect increased digitalisation has on this.

The first thing that I want to talk about is the adage that “with great power comes great responsibility”. In the context of HMRC, I think we would all agree that this means HMRC should use their powers judiciously.

Clearly, there is always going to be scope for things to go wrong and it would be wrong to expect perfection from a Department dealing with millions of people, and with finite resources. There is a danger, however, that ever-increasing automation through digital systems creates a further disconnect with the public. HMRC therefore need to manage their use of powers carefully and recognise when they can use them to help people as against when it is appropriate to penalise people for getting it wrong. Powers are proportionate and effective if they are geared to the situation of the taxpayer and tax at stake. So a £100 penalty may be devastating for a pensioner on a low income but insignificant for a large corporation.

LITRG’s four websites received almost 5 million visits last year. As we have a contact us facility on the sites, naturally we get people asking us for help. Although we do not offer an advice service to the public, we signpost them to sources of information and support. We receive pleas for help from many different people, but usually the way their enquiry is phrased suggests they are doing their best to meet their tax obligations.

Let me just read an extract of one enquiry we received in the last three weeks from someone called Martin:

“I have received a tax bill for £2,517 which I cannot pay. It is for high income tax on child benefit… I took my pension… which pushed my total income just above £60,000. The money was spent on essential home improvements… we have 3 children to support…. We feel this is very unfair as all other years our income is well below the threshold for the high income tax. My wife does not even have a permanent job. Please help as we don’t know what to do… HMRC won’t even arrange a payment plan and want the full amount in 3 weeks.”

If we set aside the grumble about fairness of the high income child benefit charge (and what a pity it is that Martin didn’t find LITRG’s website page warning him that a pension withdrawal could trigger it), what does this email say to us in terms of HMRC’s use of powers?

My reaction was that this person appears to be trying to engage with HMRC in a reasonable way. He has told them he can’t afford to pay all in one go the tax debt that he has accidentally incurred and has offered to set up a payment plan. So why, having the power to do so, would HMRC not agree time to pay?

Perhaps it is because he took a substantial sum out of his pension and – perhaps unwisely in HMRC’s view – spent all of the money without checking his tax liability. But what lay person would logically connect taking a pension lump sum with receipt of child benefit and the consequent tax charge that we, as tax experts, know can arise? Is it reasonable to have expected him to have understood this?

As HMRC moves towards an ever more digital tax system, such lack of understanding in terms of taxpayers’ responsibilities in dealing with their tax affairs arguably comes into sharper focus. Don’t get me wrong – a digital tax system has the potential to benefit the unrepresented taxpayer. Digital can and should be used to facilitate the operation of the tax system by enhancing accuracy and reducing cost for both the taxpayer and HMRC. But HMRC shouldn’t need more powers because of it and it isn’t a justification for a reduction in safeguards.

Pre-population of data on returns and moves towards automated reconciliation of people’s affairs via the P800 tax calculation or Simple Assessment are welcome developments. But where does the responsibility for accuracy of the data lie? HMRC would no doubt say it is with the individual, to check it and verify it. The danger is, however, that many people will simply take it as read – potentially risking inaccuracy penalties.  

People already think HMRC know everything, but the more HMRC do to reinforce that (by replaying information back to them) the more inclined they will be not to report things to them or check things carefully.

There is also the question of what happens if the individual does check pre-populated data, but believes it to be wrong. Even with PAYE, we have seen cases of individuals being caught between HMRC and their employer, being told one thing by HMRC and another by their employer. One enquirer said:

“HMRC maintain that this is my ex-employer’s issue as they have sent the wrong data through. I have spoken to my ex-employer and they said that everything is correct and the tax office is wrong… I feel stuck in the middle and going round in circles. I do not have the knowledge to speak to my ex-employer and they keep fobbing me off. I feel very overwhelmed with this and get upset just thinking about it.”

It seems clear to me in this situation that the balance of power is wrong. An unrepresented taxpayer has raised a query with HMRC as to whether an amount is being treated as taxed in the correct tax year, and has been told that he has to go back to the data supplier – his employer – to resolve the matter. His employer in return says that HMRC has got it wrong. Ultimately the taxpayer is himself completely powerless to resolve the matter.

With increased use of third party data, such issues could crop up ever more frequently, so it is vital that there are clear systems in place to resolve disputes over data accuracy and that HMRC has realistic expectations of what the taxpayer should do.

There is naturally a tension between a large organisation dealing with things in a standard way and taxpayers with particular needs. System-generated notices and standard letters obviously have their place and it cannot be expected that HMRC should deal with everyone on a personal level.

That said, HMRC could do more to ensure that, where they are alerted to a taxpayer’s particular needs, they act upon that information. HMRC must have processes in place to ensure that their Needs Enhanced Support service reaches those who need it. Otherwise, the Department’s reputation is in jeopardy.

We should not see cases coming before the Tribunal such as those of Sandpiper Car Hire Limited v HMRC [2018] UKFTT 0267 (TC) and, published only two weeks ago, Pokorowski v HMRC [2019] UKFTT 0086 (TC). You cannot help but wonder how cases in which the taxpayer had clearly displayed particular needs got to court.

In Sandpiper, the proprietor had explained to HMRC that he had Meniere’s disease. This resulted in many spells in hospital and had caused him to become profoundly deaf, yet several letters from HMRC still insisted that he telephone their helpline.

The second case, Pokorowski, demonstrated spectacularly poor judgment on HMRC’s part in pursuing a homeless man for late-filing penalties, with the tribunal judge describing the case as ‘a scandal’. The judgment concludes:

“For HMRC to expect a homeless person to keep HMRC up-to-date with their address is ridiculous – and just needs to be stated to show its absurdity.”

We would hope some lessons are being learned from the tribunal’s rebukes.

The Sandpiper case also revealed a further interesting point. HMRC suggest in their guidance on reasonable excuse that if a taxpayer is aware they might have difficulty in complying, for example due to ill-health, that they should put alternative arrangements in place. Yet ‘other arrangements’ would naturally necessitate relying on a third party, which the legislation specifically prevents from being a reasonable excuse.

Fortunately, the Tribunal gave us the answer to this dichotomy, concluding that if the reason that a taxpayer has to rely on a third party is because they are themselves ill or incapacitated, the illness or incapacity forms the reasonable excuse in the event that the third party fails to fulfil the obligation.

Less clear, however, is how taxpayers can demonstrate having taken reasonable care with their tax affairs if they rely on a third party. For those who are digitally excluded, this might well mean asking a friend or relative to help them enter or check tax figures online. For this purpose, there is a ‘trusted helper’ scheme, allowing an individual to register with HMRC to help up to 5 others with their tax. All well and good so far.

However, GOV.UK guidance on this scheme makes it clear that: “The person you’re helping will still be legally responsible for their own tax.”

This of course seems reasonable from the viewpoint that the helper might be dissuaded from assisting someone if they were opening themselves up to liability for mistakes. But equally, would it be reasonable to penalise the individual for mistakes that their helper made, for example in transposing paper figures to an online system? Much depends on the circumstances, but I know from my own experience as a volunteer for Tax Help for Older People that often people are prepared to simply trust those helping them to get things right.

In a digital tax system, HMRC therefore need to ensure that their approach to reasonable excuse and reasonable care caters for situations in which taxpayers have relied on someone else in a bid to comply but where unfortunately something has gone wrong.

By Kelly Sizer, Senior Technical Manager at LITRG and CTA (Fellow).