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Making Tax Dysfunctional

26th Apr 2017
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Those Impossible Situations – A Fair Tax System?

HMRC have over recent years spent a fortune on “Management Consultants”.  Consultants preaching efficiency often talk about an 80:20 rule, pointing out that the majority of “profits” come from the “best” customers.  Great, if you are a focused, private sector profit generator.  What though if you are a Government body, which surely ought to be run by Civil Servants trained to treat all citizens equally?  We are not “customers”, despite HMRC Newspeak.  As a Firm we tend to deal with taxpayer exceptions and unusual situations, so understand that not everyone is “average”.  We believe that the tax system should cater for those who, for whatever reason, do not fit within the “normal” generality.

We are keen that the tax system should be administered fairly, in accordance with the law.

A current fear is that the present HMRC focus on penalties, with much greater fines than in the past, may result in unfairness.  The current system may result in a breakdown of trust.  Currently, it is common place for there to be greater penalties for innocent arithmetic errors in tax computations, compared to deliberate theft, say in terms of shoplifting, which apparently is below the police threshold in most cases.  Current treatment appears bias against the small business or individual taxpayer.

Here is a ‘hypothetical’ situation to consider:

A UK resident taxpayer leaves UK part way through year to take up a new job abroad

Technically, having been resident at the start of the tax year, he would be resident for the whole of it, but his new job contract means he can expect to meet the conditions for “split-year treatment” for full-time work abroad. This means he is treated as non-resident from the date he leaves the UK.  This would be common sense in most peoples’ view, not tax avoidance.  Practically, in such a situation, it also means he does not write to tell HMRC about his overseas employment.  He pays tax to the local country where he lives and works.

However, to get the split year UK treatment, the rules require that the taxpayer be non-UK resident in the following tax year too, by virtue of work abroad. Of course, the happy recipient of the new job offer expects to meet this, because he is going to be working abroad and intends this to continue.

Suppose though, for whatever reason; say, illness/ sickness/ redundancy/ war/ sheer misery at the job not being what was promised, the taxpayer returns to the UK after some months. As a result therefore, he becomes UK resident again.  Not only does this affect his tax residence status for the year of return, it also means he fails to meet the conditions for non-residence for the preceding year.

As a result of this, the worker is now taxable on all worldwide income for the whole of the previous tax year as well.

Technically, HMRC may then argue for late notification and issue penalties, even though the individual involved acted perfectly properly, in terms of his anticipated and existing circumstances at the relevant times for notifying HMRC. The required dates altered after the event, because of changed circumstances!

HMRC may say “They may not take the point.” With respect, that is not the principle at stake.  Ordinary, innocent actions should not be subject to a potential fine, which may [or may not] be released by State discretion.   That is not the Rule of Law, but the empowerment of bureaucrats, with obvious dangers of corrupt dealing.  We are not suggesting HMRC are corrupt, but experience with history and other jurisdictions makes the risk…kind of obvious!

We would be interested to hear people’s thoughts on how a fair tax system can potentially impose a punitive penalty on ordinary law-abiding citizens for being as “morally suspect” as to get unexpected illness?

Practical experience and thoughts on the principles welcome!

Replies (2)

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Chris M
By mr. mischief
27th Apr 2017 08:13

My worst case on this goes back 4 years now but was so blatant I think it is worth repeating.

I got a new client who had personally paid £1,400 demanded by HMRC in respect of his brother. His brother had been mentally ill since 1974 and was in receipt of a non-taxable benefit as his main source of income.

In looking into this case, HMRC had made 2 blunders:

1. Confused his non-taxable benefit with a similar one which is taxable.

2. Mixed up his tax record with someone living 200 miles away with the same surname but different Christian name.

Having unearthed these facts within the first 2 months, it then took me a further 10 months to get HMRC to admit to these blunders.

It was only by issuing a formal Complaint Case and notification that I would also puruse compensation that HMRC finally caved in and refunded the £1,400.

We got about £400 back in compensation.

Why this case is no bad is every single officer dealing with this guy knew full well he was a very vulnerable taxpayer, as clearly anyone who has been receipt of a disability benefit in respect of mental illness for 40 years cannot conceivably be considered anything else surely.

Yet still full speed ahead at 100mph issuing fines and threats. My client had tried his best for over a year before approaching me.

Thanks (2)
Replying to mr. mischief:
By DotasScandalDotOrg
27th Apr 2017 12:00

Expect more of this not that HMRC's business plan has changed from "making sure you pay the correct amount of tax" to "maximizing the amount of tax collected" - courtesy of pyschopaths like David Gauke.

Thanks (4)