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iStock_RapidEye_Conspiracy

SA loss relief calculation: Bug mystery hunt

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10th Dec 2015
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It’s the mistake no one is publicly willing to admit. Tax department and software suppliers are locked in a conspiracy of silence to play down the significance of a minor calculation error that has been written into the software specification used by HMRC itself and commercial developers to write the programs that calculate and submit personal tax returns.

In October, AccountingWEB’s tax policy editor Rebecca Cave reported on the experience of accountant Glenn Collingbourne. Collingbourne noticed an error in how his software calculated the restriction for sideways relief for losses. He alerted his provider and was told, “HMRC have only recently changed their stance on the issue.” In a Freudian slip, his software provider spoke only of “HMRC’s stance” with no mention of tax law.

When approached for comment, a HMRC spokesperson stated: “The adjusted income rules have not changed. We have already updated our software to make sure all calculations are correct.” A draft guidance published in 2013 described how to calculate the relief limit. The technical specs given to software developers were updated this year to conform to this guidance. This change doesn’t seem to apply to the past two years.

The spokesperson did not clarify, however, why a software update was necessary if the adjusted income rules had not changed.

HMRC’s software standards were wrong and not in line with tax law, said Cave. “How could the HMRC software standards be issued in a format that was not in line with the tax law? And why was this was the case since 2013/14?” she asked. 

“There are probably lots of other errors with the HMRC tax software standards that have not come to light.”

HMRC’s systems include a built-in check that will reject any calculation discrepancy bigger than one pound, an industry insider told us.  That means the software industry has to comply with the tax calculation document circulated by HMRC. Otherwise their submissions would be rejected.

It is not uncommon for HMRC’s documentation to include mistakes. Most of these tend to be transcription and typographical errors, usually corrected before the tax year actually begins. What makes the loss relief issue unusual is that it was not spotted beforehand, so all of the programs sending in tax calculations to HMRC are using the wrong logic, for 2013/14 onwards.

If it’s an in-year mistake, then you don’t just have to fix it, you need to match up the change to HMRC’s back end. “They’ve got to be corrected at the same time. I can’t really see that happening,” one tax software developer told us.

Conversations with AccountingWEB members and several software houses confirmed that the published document is wrong - but HMRC can’t change it, because it’s SA processing systems are programmed only to accept submissions that include the wrong calculation method.

The issue is emblematic of a storm cloud looming over HMRC’s leadership in the software realm. For Cave, the existence of an uncorrected software procedure that results in extra tax being collected undermines the rule of law within the tax system. In response, Cave has called for the creation of an independent oversight authority to verify that HMRC is interpreting and documenting tax policy correctly.

At present, HMRC is both the tax collector and controller of software standards. Cave points out it would be possible for HMRC to deliberately ignore an ‘error’ if it conveniently tilted tax collection in the department's favour. “No one would be able to find that error,” said Cave. “Currently ‘flaws’ or ‘bugs’ in the system can operate in HMRC’s favour with no oversight.”

These concerns cast a shadow over Chancellor George Osborne’s plan for a digital tax future of minimal paperwork and seamless collection. “We’re going to build one of the most digitally advanced tax administrations in the world,” said Osborne in his Autumn Statement.

But these ambitions could extend HMRC's powers into uncharted and unregulated areas if it's software specfications are not subjected to appropriate professional oversight.

HMRC was invited to comment on these points, but had not responded at the time of publication. Any further update will be posted here when AccountingWEB hears back. 

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Replies (15)

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By carnmores
10th Dec 2015 12:36

Should you be repeating the opening comments

if we did you would rap our knuckles, is it right to defame HMRC and others by implication? I am certainly not saying they are above accountability only the ways and means you are reporting this as there appears a case to answer , but CONSPIRACY?

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By miketombs
10th Dec 2015 14:02

.....of Silence

If there's a bug in the calculations and neither HMRC nor any of the software developers have brought it to our attention, 'Conspiracy of Silence' seems a perfectly acceptable label. Presumably the software developers write the code as they see fit with regards to the legislation, then check the resulting calculations against HMRC test data and results? If so and there's a discrepancy, the only way it can work is by the developers deliberately recreating the HMRC error. Alternatively, if HMRC provide the 'logic' so the developers don't need to look at the legislation, then there absolutely has to be an outside independent review before it's released.

Like most of us (I suspect), I sub-consciously check the results of tax calculations for sensibility but I've never considered the need to manually re-perform the calculations as a check. When I have spotted anomalies, it's invariably been my guesstimate that's been wrong, so I'm fairly confident that the software is solid in most cases, but nontheless it can't just rely on HMRC's interpretation.

I must say though that if HMRC discovered an error had slipped through in their favour, I have absolutely no doubt that they would in fact correct it.

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By carnmores
10th Dec 2015 14:17

Thanks Mike

that's my approach and the point of software !

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By Sue Murby
10th Dec 2015 14:33

SA Loss Relief

This year (2015) I have noticed that my software will not allow me to carry forward brought forward losses to the following year and that the b/fwd losses have been set against my client's 2015 taxable income. Since her income is less than the PA I want to carry forward her losses to the following year. Is this a software problem or have HMRC changed the rules?

The majority of my clients are artists and I have been dealing with loss relief claims for many years and I have often carried forward losses in the past, even when the client made a profit in one year, if it was beneficial to the client.

 

 

 

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Replying to DJKL:
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By thomas34
10th Dec 2015 15:24

Losses

Sue Murby wrote:

This year (2015) I have noticed that my software will not allow me to carry forward brought forward losses to the following year and that the b/fwd losses have been set against my client's 2015 taxable income. Since her income is less than the PA I want to carry forward her losses to the following year. Is this a software problem or have HMRC changed the rules?

The majority of my clients are artists and I have been dealing with loss relief claims for many years and I have often carried forward losses in the past, even when the client made a profit in one year, if it was beneficial to the client.

 

 

 

Er, isn't that the way the law is framed?

Unless I've totally misunderstood this post, are you saying that loss relief has been deferred to a year in which it's beneficial from a tax point of view?

 

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Replying to lionofludesch:
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By Sue Murby
10th Dec 2015 16:17

Yes, in answer to your question. I have just been talking to a friend who informed me that I was wrong, that losses must be utilised against profits from the same business.

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Replying to DJKL:
By Tim Vane
10th Dec 2015 18:41

Amendment time.

Sue Murby wrote:

This year (2015) I have noticed that my software will not allow me to carry forward brought forward losses to the following year and that the b/fwd losses have been set against my client's 2015 taxable income. Since her income is less than the PA I want to carry forward her losses to the following year. Is this a software problem or have HMRC changed the rules?

The inference I would draw from this is that for several years you HAVE been failing to correctly offset brought forward losses against the earliest trade profits and have, presumably, filed quite a number of later year returns with understated profits. Will you be going back and amending all those returns, I wonder, and advising your clients to cough up the additional tax. Of course you will be, so brava.

And in this case, well done for the software developers who have at least put correct validation into the software, highlighted the issue, and thus enabled you to go back and correct all those earlier mistakes. I hope you'll be sending them a thank you note.

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By Marion Hayes
10th Dec 2015 16:30

loss c/fwd

You have to use income losses b/fwd against the next available profits from the same source. This has always been the case as far as I remember

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By jonnyd
10th Dec 2015 17:09

Conspiracy?

Is anyone surprised that an organisation which uses bully-boy tactics, equates legitimate tax avoidance with evasion and uses retrospective legislation in contravention to the Human Rights Act, is silent about software problems which are advantageous to it? I think it is time "Carnmores" had a grasp of the reality of the current UK tax system!

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By Marion Hayes
12th Dec 2015 10:27

Not a new attitude

from HMRC.

Back in the mists of time, in order to align the Collectors system for the introduction of self assessment either software developers or HMRC misunderstood the rules on repayment set offs. Instead of calculating repayment supplement on the full repayment it used the refund after the set off.

Our query went to technical division who confirmed that legally the full refund should be used but it would be too expensive to correct the programme so it was up to each individual to spot and query each incorrect refund. As in the main refunds were only pennies out most agents, and certainly all unrepresented taxpayers didn't even notice - no computers to calculate how much should have been received then!!   But I am sure if you added all the shortfalls together over the years............... 

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By AndrewV12
12th Dec 2015 12:26

Extract above

There are probably lots of other errors with the HMRC tax software standards that have not come to light.”

Oh my gosh, just goes to show your you accountancy software is really good but like all technology it has its floors, and no one wants to admit it has floors. Thats why whenever on this site some folk talk up the merits of the Cloud etc....I have my doubts to all of it, more security than performance.

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By Tim Vane
12th Dec 2015 13:57

Can software really have "floors" if it is in the cloud?

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Replying to DJKL:
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By AndrewV12
12th Dec 2015 15:09

Floors

Tim Vane wrote:

Can software really have "floors" if it is in the cloud?

Very funny, soft lad.

You wait, time will vindicate me.

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By carnmores
14th Dec 2015 10:12

@jonnyd

bit of a tirade , read Kiplings IF and calm down

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By jonnyd
15th Dec 2015 12:33

Tirade?

Not a tirade-Simply my experience of being an Accountant in Practice in the UK today? Maybe you do not have the dubious pleasure of dealing with these people?

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