By Jason Piper, ACCA’s Senior Manager, Tax and Business Law
Those of you with long memories (or chronic insomnia) may remember a blog I wrote in 2011 on the topic of HMRC’s approach to discovery assessments. To recap, the worry was that HMRC were using discovery as a backstop to try to cover up their own administrative failings, trying to claim that some technical deficiency in the taxpayer’s documentation entitled them to the longer time limits of what is meant to be a reserve power used only in rare cases.
Well, this week I read another case report, and they’re still at it. Like one of the earlier cases, the taxpayer had been using a reportable “DOTAS” arrangement, and the question was whether they had properly alerted HMRC to the structure so that HMRC could challenge it inside the usual 12 month window. What sets this latest case apart and makes it particularly relevant is that the debate only arose because of an issue in the taxpayer’s software package.
The details of the case turn on fine technical points of law, but the fundamental issue was whether the taxpayer had deliberately caused a loss of tax. For this to be the case, they needed to have consciously entered the relevant entries where they did in the return. In fact they had only put the entries where they did because a shortcoming in the software prevented the “correct” disclosure – all the right numbers were there to create the intended result, and there was clear notification in the “white space” of what had happened and why.
Neither the taxpayer nor his advisers appreciated that strictly the boxes they had used created a subtly different legal groundwork for the desired liability, with an immediate and inevitable loss of tax, rather than the creation of a freestanding credit which as a matter of choice had been set against the relevant income.
The practical upshot was that because the taxpayer had not deliberately created a loss of tax, HMRC could not apply the 20 year limit for claims that they would have needed to rely upon by the time they got around to trying to sort things out properly. Now, none of this goes to the rights and wrongs of the underlying scheme – but what it does illustrate is that the tax law and the software that purports to implement it are inextricably linked.
How *does* the law deal with situations where the software doesn’t quite align to the legal requirements? On the basis of this case, the answer to that would appear to be “slowly and painfully”. If it were only the users of esoteric avoidance schemes finding that the software can’t quite reflect the reality of their tax affairs in strict accordance with the minutiae of the 19,000 pages of UK tax law then it may not be such an issue.
But HMRC’s brave new world of Making Tax Digital beckons, and in this new legislative wonderland of interim reports, revised record keeping requirements and The Death Of The Tax Return, the Tribunals, taxpayers and HMRC alike will be finding out for the first time just how well the software developers have been able to predict what the final shape of the clauses passed in Finance Act 2017 will turn out to have been.
The new software packages haven’t been written yet – but then again neither have the rules that they’re supposed to implement. As Raymond Tooth and the Commissioners for Her Majesty’s Revenue and Customs, 2016 UKFTT 723 TC05452 illustrates, the ability (or otherwise) of the software to accurately reflect precisely the requirements of the Taxes Acts can be fundamental to whether a tax liability even exists – and that’s too important an issue to rush. There’s a line to be drawn between agile development and clairvoyance; developing the process and software for MTD before we know what the legal basis is for it runs the risk of falling the wrong side of that line.