The lunatics have taken over the asylum (Fun Boy Three, 1981)

The original remark is attributed to Richard A. Rowland about the founding of United Artists. It is now commonly used to describe a situation in which those in charge are incapable of handling their responsibilities, and should rather be put under scrutiny themselves.

Fun Boy Three sung a protest song about the action of the Government at the time and the song has real echoes today some 36 years later.  But here I am writing about the crazy way in which the UK’s taxation civil penalty regime is now being applied.

In a widely reported VAT case, a business failed to reclaim input tax to which it was entitled on a VAT return and made the claim on a subsequent return.  To be clear, the business was out of pocket for a while, and the taxman was therefore better off.

However, the business failed to follow the VAT voluntary disclosure rules and just reclaimed what it was owed.  HMRC disallowed that claim to input tax, and then applied a penalty because of the careless error of overclaiming input tax on that specific return.

Really!  I’m not making it up.

There is a very good quote about VAT from Lord Justice Sedley in Royal & Sun Alliance (2003): –

“Beyond the everyday world … lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted.”

But don’t blame VAT, as we’ve now seen our first CIS case where tax is owed to the taxpayer, but upon which penalties running well into five figures have been levied for the administrative errors.

Now, before you get your pen out to write to your local MP, Horrified of Tunbridge Wells, technically HMRC can do this.  They did say they would not when the penalty regime was first introduced, and it was certainly not the intention of the Keith Committee when it considered how to improve VAT compliance all those years ago.  And there lies another tale.

They say that the then Prime Minister, Mrs Thatcher, was horrified by the press coverage reporting the alleged misbehaviour of Customs & Excise VAT officers.  This was doing her Government no good at all, so she asked her civil servants to get “Keith” to sort it out.  And accordingly, they appointed Lord Keith to commit his review, which instead of curbing the powers of Customs & Excise VAT officers, strengthened them.  Word has it that the civil servants appointed the wrong “Keith” – Mrs Thatcher, so they say, wanted her right-hand man Keith Joseph to do the job.  And that is the genesis of the current civil penalty regime for all taxes – a careless error.

So, all this is very interesting (for a tax consultant), but where does it leave us.  Well the first thing to say is to review your compliance procedures as soon as possible.  Get it right. Indeed, that was what Lord Joseph sought from the civil penalty regime – the right tax at the right time.  For example, when dealing with late input tax on VAT returns, we now mark those entries up, check whether they fall below the de minimis limit for adjustment on returns, and if so mark up the entries with “VD” for voluntary disclosure.  If not, we make sure that separate voluntary disclosures are made to reclaim tax to which our clients are entitled.

Crazy?  Maybe Lord Sedley was absolutely right.

And when we are faced with a penalty case on behalf of a client, after establishing the facts (which sometimes help us, but are always needed), we are left with taking a legalistic approach: –

  • Did HMRC properly consider whether the taxpayer had taken reasonable care? 
  • What evidence is there of reasonable care having been taken (effectively, a “compliance audit”?).
  • Did the taxpayer believe that his or her advisers knew what they were doing? 
  • Does the taxpayer have any “special knowledge”, meaning a higher threshold to show reasonable care?  And has HMRC used an arbitrary threshold?
  • Has HMRC applied discretion where the law provides for it?
  • Are the penalties capable of being suspended? 
  • Why wasn’t suspension offered by HMRC? 
  • And even whether the assessment as to penalty has been properly made and in time?

In the meantime, I now need to start ferreting my way through Hansard to establish Parliament’s intention.

Now there is an asylum!

Steve Botham