Archives For HMRC

Chas Roy-Chowdhury-14

By Chas Roy-Chowdhury, head of taxation, ACCA

I gave evidence to the House of Lords Select Committee on Economic Affairs recently about corporation tax and how revenue is now being secured from companies through other means.

The bigger picture needs to be looked at when it comes to how corporations are taxed in the UK. There are other and additional ways by which companies in the UK are taxed, for example through VAT and through National Insurance Contributions (NICs).

A publication produced by the Office of National Statistics back in March, shows VAT numbers have held up remarkably well since the economic downturn because, the VAT rate has gone up to 20 per cent. That is probably what we need to look at in terms of the basket of taxes that we have moved towards—those companies that we know are going to be tied into the UK rather than those that can look at different locations to do business that are more favourable for them, taking tax as one of the factors and one of the components that they look at.

The fundamental problem is that large companies are by nature multinational – their shareholders, activities and customers are spread across the world – whilst national governments are not.

There is a tax chasm between what governments seek to capture by way of corporation tax and what companies, many of which are global in terms of their shareholders, activities and customers, generate in terms of global profits.

In practice, existing rules are highly complex and differences between countries can be exploited well within the law. HMRC has adapted to this and is not sitting on its laurels as some other Parliamentary committees have suggested. They are quick and effective and have developed a greater understanding of how companies work. The majority of corporations go through the tax process with ease. HMRC has achieved this despite declining resources.

ACCA wants to see tax simplicity. But that’s a big ask. Adam Smith’s four principles of what makes a good tax system – proportionality, transparency, convenience, and efficiency – still stand centuries later. I don’t think we’re near this and I also think we are in danger of losing trust in the tax system.

The House of Lords Economic Affairs Committee also raised the issue of naming and shaming those who have promoted aggressive tax avoidance or tax evasion schemes.

ACCA believes if naming and shaming is going to be introduced for tax avoidance, which is legal, the bar needs to be set very high. The complexity of the tax system means there is a risk that mis-interpretation could result in naming and shaming of a tax adviser; this could result in severe reputational damage.

We have long been calling for greater regulation of tax advice. While ACCA and other accountancy bodies have strict regulation and standards, anyone can set up and offer tax advice without those safeguards in place.

There’s no denying that all this is a very tricky and complex situation. But it is heartening to see that the issue is being discussed at international level, from the EU, to the US; and of course the G8 will be looking at the avoidance/evasion debate in June when it meets in Ireland.

By Jason Piper, technical officer, ACCA

When is the exceptional “reasonable”, and the predictable “unreasonable”?

When you’re talking tax of course – or to be more precise, the excuses people have for not filing their UK tax returns. If you file late or pay your tax late, you’re subject to a penalty, unless you can show you had a “reasonable excuse” for the delay. “Reasonable Excuse” is not by any means a new concept – it’s in the Magna Carta, so the courts should have had a while to get used to it and maybe work out what it means.

But it seems we’re still having trouble.

HMRC have published guidance on what grounds they think are “reasonable excuse” (fire, flood, bereavement, coma etc.) and what aren’t (e.g. tax return too difficult, failure by agent), but emphasise that “[a] reasonable excuse can only exist where an exceptional event beyond the control of the taxpayer prevented completion and return of the tax return by the due date.”

Historically, taxpayers have had to jump through hoops to demonstrate some “exceptional” circumstance, and HMRC set the bar high. In one recent case a taxpayer successfully appealed against a fine of over £3,000 for not setting up a payment instruction properly to service a capital gains tax payment plan. The taxpayer couldn’t explain exactly why the relevant details hadn’t been forwarded to HMRC on time, but the Tribunal agreed that the hospitalisation of his elderly father/business partner, and associated burden of caring for his mother, was certainly relevant. HMRC’s conduct in writing to him and confirming that the payment plan was in place was a further contributory factor; he had done all that a reasonable taxpayer could be expected to, and the fine was overturned.

However, a recent run of cases has seen some robust criticism of the “exceptional” principle. In two out of the three cases where the tax Tribunal found there was a reasonable excuse without an exceptional event (so not including the one above), HMRC themselves had been responsible for providing, or failing to provide, the information which led to the late payment of taxes.

As a point of principle, it certainly feels wrong that HMRC could fine people for doing what HMRC led them to believe was the right thing. (It would also be nice to think that an error by HMRC was “exceptional” in itself.) And from a PR perspective you have to wonder what positive message the officials concerned thought that they would give out by punishing taxpayers for the authority’s shortcomings; refusing to back down and pushing the cases to appeal has simply led to publicity for both the initial failings and the subsequent rigid adherence to the Manual.

But from a practical point of view, it’s also led to the Tribunal stating very clearly that “reasonable” means just that, and “exceptional” is nothing more than an HMRC gloss which the Tribunal was not prepared to uphold. So, will we see a rash of appealed and overturned penalties? It’s hard to say; every case should be judged on its merits, and Tribunal judgments aren’t binding. However, there seems to be a marked reluctance on HMRC’s part to suspend penalties even in cases which might meet their own guidelines. If that continues, we’re bound to see more appeals, and if the Tribunal sticks to its guns, an even higher proportion of those appeals will be successful.