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Home » Business News, News in Brief

Baker Tilly’s Weekly Tax Brief – 4 June 2014…

Submitted by on June 6, 2014 – 7:12 am |


Baker TillyIn this edition of Baker Tilly’s weekly round-up of the most important tax news, we cover the latest developments…

1. Who authorised HMRC’s “bully-boy” letter campaign?

Mike Down and George Bull

Following the furore surrounding HMRC’s decision to mail 1000 ‘nudge’ letters to individuals paying tax at a lower-than-expected ‘effective rate’, we question why and how this extraordinary campaign was authorised. Whichever way you look at it, there’s no excuse for people within HMRC selectively ignoring information in their possession, then using that incomplete data to scare innocent taxpayers.

2. Could Tory tax plans for Scotland lead to federalism in the UK?

David Heaton

Rarely a week goes past without politicians wading into the issue of tax if Scotland says ‘yes’ or ‘no’ to independence in September. This week it’s the turn of the Scottish Conservatives who propose devolving most of personal income tax and leaving all other tax revenues in Westminster. But could this result in workers flitting across the border to wherever the rates were lowest? And what do the other parties – including UKIP – propose?

3. Man scores goal against Machine

David Heaton

HMRC has come under fire many times for its continuing problems with IT.  Is it losing taxpayer trust through excessive reliance on automation?

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1. Who authorised HMRC’s “bully-boy” letter campaign?

Following the furore surrounding HMRC’s decision to mail ‘nudge’ letters to individuals paying tax at a lower-than-expected ‘effective rate’, we question why and how this extraordinary campaign was authorised. Whichever way you look at it, there’s no excuse for people within HMRC selectively ignoring information in their possession, then using that incomplete data to scare innocent taxpayers. HMRC has yet to clarify the sign-off processes involved, and perhaps more importantly, provide assurances that such an ill-advised campaign won’t be sanctioned again.

To recap, HMRC is on record confirming that 1,000 letters were being issued ‘as part of a trial’ to those whose effective rate of tax was lower than the department anticipated. HMRC considers that ‘nudge’ campaigns ‘help individuals identify any mistakes they may have made on their self-assessment returns’.

The problem is that these letters were sent to many individuals who had explained perfectly well in their tax returns why their ‘effective rate of tax’ was lower than might be expected. Examples included one individual whose generous charitable donations benefitted from relief under Gift Aid, and a trader who’d incurred losses which were tax relievable.  Had a simple check been carried out on these tax returns, HMRC would have immediately realised the reason for the relatively low tax rate.

So, what process should have been followed?

In theory, HMRC could (and perhaps should) have consulted the Compliance Reform Forum. Made up of representatives from all the accountancy professional bodies and members of no fewer than nine HMRC Departments, the Forum seeks input from tax agents and their clients into the design and delivery of new compliance checking activities. But published minutes from the most recent meeting on 26 February make no reference to this campaign, and it appears that this wasn’t even discussed.

The wording of the ‘nudge’ letter also provokes questions about who signed off the text.  Regardless of the worrying tone, the letter also refers recipients to their 2011/12 tax returns, despite the fact that the statutory time limit for queries about this tax year closed on 31 January 2014. In these circumstances, HMRC is only permitted to follow up on a ‘closed’ year if it has grounds to suspect that something is wrong. As information being queried is clearly shown on the tax returns in question, it seems very unlikely that data held on the individuals HMRC chose to target provides any grounds to justify suspicion.

So, the question remains – was it the process which was flawed, or the execution?

Perhaps HMRC should let us know before undertaking another campaign.

2. Could Tory tax plans for Scotland lead to federalism in the UK?

Although there is no devolution question in the referendum ballot paper, the Scottish Conservatives are the latest of the political parties to advocate the devolution of further tax ‘powers’ to Scotland. While their proposals are for superficially greater taxation powers for the Scottish Parliament than those proposed by Labour, they remain unambitious, and likely to cause an increase in administrative burden for taxpayers and collectors alike.

Of the top seven sources of income in Scotland, the party proposes fully devolving just personal income tax, albeit with the income tax threshold and income tax on dividends and savings remaining under Westminster’s control. Under these proposals Westminster would also retain control of NI (employers & employees), North Sea revenues, corporation tax, fuel duties, alcohol and tobacco duties.

Although in principle VAT would be suitable for a devolved Parliament, EU law requires uniform rates across the UK. The Conservatives are therefore recommending that, as an alternative, “there should be serious examination of the case for a share of VAT receipts raised in Scotland being assigned to the Scottish Parliament”.

Would the devolution of further taxes provide value for money for Scottish and UK taxpayers in setting up operations already covered by HMRC? Would VAT returns, for instance, have to be extended to account for intra-UK supplies and purchases?

More to the point, can there effectively be different income tax rates within a unitary state? The vast majority of the Scottish population and businesses are situated within 100 miles of the English border, and any differences in income tax rates north and south of the border would surely create loopholes for tax manipulation as workers and companies flit across the border to wherever the rates were lowest. Not to mention accounting for income tax in Scotland and national insurance in England.

And what of the scenario proposed by UKIP and subject to review by the IFS, if Westminster moves towards a ‘flat tax’?

Imagine a further scenario if Westminster increased indirect taxes and reduced direct taxes? People in Scotland could end up with double taxation by paying more in VAT and duty (not devolved) and increased (devolved) income tax.

And what about the Liberal Democrats? Well, federalism, the only sensible solution to the Conservative/Labour proposal, has been part of Liberal political theory for over a hundred years.

3. Man scores goal against Machine

How reliable are the computers? Many people know how hard it can sometimes be to complete online transactions, perhaps having to give up and start again. But what if your tax return, or part of it, disappears in the process?

Mr Banks, a taxpayer with two well-paid jobs, had a penalty awarded against him for omitting his employment income from his tax return, which he submitted online, showing no extra tax due at the end of the year.  HMRC spotted the omission, assessed further tax of £3,241 and a penalty for carelessness of £486.

But Mr Banks objected.  He had not been careless, and he appealed on principle: he had completed the forms online, the programme showed no more tax due, and he argued that it was not his fault that HMRC’s system had failed to register the details submitted, so he should not be penalised.

The tax tribunal, on the balance of probabilities, agreed with him.  The burden of proof was on HMRC to show that Mr Banks had been careless, and their records were inadequate to meet this test.

HMRC argued that the taxpayer had omitted the details because he thought his employers had dealt with all the tax under the PAYE rules. It had checked its system and found no faults, so it denied the taxpayer’s claim that the system was ‘beset by well publicised technical challenges’ and upheld its decision on internal review.

The tribunal disagreed – it could not understand how the taxpayer might have missed the earned income in completing the tax return when it was the only income shown in the return. HMRC’s evidence was not strong enough to support a claim of taxpayer carelessness, and it had failed to explain how its system checked to ensure that the employment pages were completed when the ‘send’ button was pressed.

Most of HMRC’s well-publicised IT problems have been with the RTI system for PAYE, but few IT systems are problem-free. It is reassuring to know that the courts are there to stop the machines taking over completely, although less reassuring to read that the HMRC staff couldn’t explain to the taxpayer or the tribunal certain aspects of how the system worked.


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