Tax From The Trenches: Stand Your Ground
This months blog is about a win we secured at the Tax Tribunal earlier this month. We also received an award of costs against HMRC which is almost unheard of at a Tribunal hearing. The case in interesting for a variety of reasons, not least the costs award, but the most important lesson we can learn is to stand your ground when faced with a HMRC officer who is being unreasonable.
BACKGROUND
The background is that HMRC stated a PAYE compliance review into the client’s business back in early 2019. The officer seemed a genial enough chap and we agreed to hold the opening meeting at the business premises. We gave him a short guided tour of the business which lasted ten minutes and he then spent around an hour asking the usual questions about who maintained the payroll, company cars, cash payments and benefits in kind. Following the meeting we received requests for certain payroll records, expense invoices and general information that were straightforward that we were happy to provide.
I think the first warning signs came after a few months. The HMRC officer had analysed some information about the cash wages payments and had drawn the conclusion that there was too much cash unaccounted for. He announced that this was evidence of additional wages payments and that he would be extrapolating the discrepancy into earlier years and assessing it to PAYE and NIC. He also referred to an invoice (less than £1,000) for a small repair at the business premises that the client had paid in cash. Admittedly there wasn’t an ideal level of information on the invoice but there was a name and address together with a description of the work being carried out. The HMRC officer felt the invoice was not genuine and proposed treating the £1,000 as off record wages.
I can remember scratching my head in disbelief at HMRC’s approach. Up until this point I had found the officer to be pleasant enough and happy to work to the standard script. Suddenly he had changed to an “all guns blazing” approach with requests for additional records and information. His analysis of the wages payments was inaccurate and I took the time to prepare the correct analysis and explain that the purported discrepancy related to timing differences the officer had not considered. We also undertook some additional research on the invoice to confirm is was completely legitimate. At this stage I expected the review to be closed or at least a return to normality. How wrong I was!
The next communication was a demand for records and information over a four year period with little or no explanation why it was being asked for. Some of the records asked for were statutory documents which cannot be appealed against, but the majority of the information didn’t even relate to the clients tax position. I tried speaking directly to the officer to try and resolve the position but to no effect. It was like he had undergone a complete change in personality and I could only assume that perhaps his manager was bringing pressure to bear to find something wrong and bring in some tax-cash.
He followed up our conversation with a request for even more information, all of which was unconnected to the client’s tax position. After a further fruitless conversation I suggested that the officer issue an information notice which we could appeal against. We received the notice a few weeks later and, lo and behold, it contained yet further information and documents that had not been asked for previously.
We appealed the notice and asked for the case to be independently reviewed. I explained why we felt the information was not reasonably required and I also pointed out that we had not been asked to provide some of the information before the notice had been issued (making the notice invalid). I have always had faith in the independent review process but on this occasion it let me down. The reviewing officer supported the officers request and completely ignored the issue of the notice being invalid in certain legal aspects. There seemed little point in engaging with the officer again and so we listed the appeal for tribunal hearing.
I was convinced that common sense would prevail at some point. Surely when HMRC Solicitors Office looked at the appeal and reviewed the case papers they would see the irregularities in the notice? Surely they would acknowledge that the requests for information were irrelevant to a PAYE compliance review and had no possible bearing on the client’s tax position? It was with a sense of disbelief when we started to receive the standard document bundles and the statement of case from HMRC in response to the Tribunal’s directions. How on earth could they go ahead with a hearing with such a flawed case?
Fast forward several months to the hearing. I had spent a considerable amount of time preparing for the hearing and providing guidance to the client in preparing his witness statement. We had a test two weeks before the meeting to make sure that everyone’s computer and video camera was working (which took another few hours) and I had spent copious hours reviewing HMRC’s bundle of documents which was several hundred pages (not uncommon in tribunal hearings). I had travelled into work over the weekend before the hearing to finalise my opening statement and questions for the witnesses.
The meeting began in standard fashion with the Judge explaining the process and inviting us as the appellant to open proceedings by questioning the client but before I could begin the HMRC advocate advised the Judge that they wished to make an application to change the basis of HMRC’s case. It seemed that a last minute review of the case had resulted in a change of mind in HMRC’s camp and they now wished to withdraw the request for all the non statutory information and records. I was incensed to say the least and to say the Judge was not impressed is an understatement!
Because HMRC did not withdraw its request for a few minor non statutory records I was able to question the HMRC officer in detail about his approach and conduct in the case because it ultimately related to whether his approach was reasonable and proportionate in requesting the remaining records. I can only assume that HMRC wanted to press ahead with some aspect to the notice because a complete withdrawal at this late stage would have resulted in a claim for costs, however HMRC’s gambit misfired spectacularly. I was able to challenge almost every decision the officer had taken on the case and establish that he didn’t seem to know what he was doing or why he was doing it. When the proceedings were closing I asked the Judge for an award of costs anyway, pointing out that HMRC’s change of case on the morning of the hearing was completely unacceptable and that significant time had been spent preparing for elements of the hearing that was unnecessary. The Judge supported my application and awarded costs against HMRC.
The compliance review has not been closed yet and we are waiting for the Judge’s decision on a few minor points regarding whether some of the minor records are in fact statutory records. The client isn’t bothered by this and neither am I. The records are inconsequential and will take us less than an hour to provide if the Judge rules in HMRC’s favour on this point. If HMRC had asked for the records in question without the deluge of other information we would have provided them.
The moral to this story is to stand your ground when faced with an unreasonable HMRC officer dealing with an enquiry or compliance review. HMRC’s internal review process did not cover itself with glory but thank goodness we have a tax tribunal system that is fair and impartial.
If you are currently the subject of a tax enquiry and are experiencing difficulty with HMRC then feel free to get in contact with our Tax Partner, Neill Staff.