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Tax community slams retrospective tax law change

The tax law will be changed such that certain decisions currently required to be made by an HMRC officer will instead be performed automatically by the HMRC computer. This change will apply retrospectively to all open decisions. 

1st Nov 2019
Tax Writer Taxwriter Ltd
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Late on Halloween, HMRC published a dull-looking technical note about automated processes in the tax system. The tax community was alarmed to find that a significant change to the tax rules around issuing notices and penalties will be brought into effect with no prior consultation. What’s more, the new law will be retrospectively and prospectively applied from 31 October 2019.

What’s the issue?

The machinery of the tax system is largely contained in a law which is now nearly 50 years old: the Taxes Management Act 1970 (TMA 1970). This was written before the automation of a large number of HMRC’s functions, such as the issuing of a notice to file a tax return and the issuing of automatic penalties.  

Where the imposition of a penalty, say for the late filing of a tax return, is challenged by the taxpayer, some tribunal judges have looked very carefully at the evidence presented by HMRC to the tribunal. If the judge is a pedantic mood, they will ask which HMRC officer made the decision to issue the notice to the taxpayer, as that is what the law requires.

For example, Judge Popperwell in Craig Shaw (TC06547) ruled that in order for the notice to file a tax return (TMA 1970 s 8) to be valid, it must be given to the taxpayer by “an officer of the Board” (meaning HMRC), and he expected the notice to be signed by a named HMRC officer. In that case, and in many other similar cases, HMRC’s evidence consisted of:

  • a generic copy of a notice to file letter
  • an extract from the HMRC computer records showing when the notice was issued
  • a record of the taxpayer’s address at the relevant date (which may be wrong)

The judge is asked to infer from those documents that the notice was sent by an HMRC officer to the taxpayer at the appropriate time and to the correct address. Many judges are refusing to make that inference and are cancelling the disputed penalties.  

Technology is driving change

The professional bodies have long been calling for a major review and consolidation of the powers contained in TMA 1970. For example, in evidence to the House of Lords Economic Affairs Finance Bill sub-committee, the CIOT says: “The transition to digital is transforming tax administration and consequently the nature and operation of HMRC’s powers will need to reflect this fundamental change. The last comprehensive powers review took place before this digital transformation was underway.”

The CIOT goes on to say: “A new review is needed to establish the principles that should govern HMRC’s powers in a digital age … but consultation is the best approach to working out the practical implications of such changes.”

No consultation

The technical note gives no indication that the changes to HMRC powers will be consulted on. It says that legislation will be introduced in the next Finance Bill to “affirm that HMRC’s practice of using automated processes to help fulfil certain functions has a firm legal footing.”

In other words, HMRC is now asking Parliament to change the law so as to legitimise their conduct in issuing notices automatically by a computer without the actions of a real HMRC officer.

Barrister Keith Gordon commented: “Several cases are being litigated which turn on HMRC being required to comply with their own legislation and not merely with some approximation of the statute. One example concerns the need for certain actions to be taken by ‘an officer’ yet HMRC think that a computer will do.”

Retrospection

The technical note states: “This is not a new policy and nothing will change for taxpayers.” However, this is not true for taxpayers in the middle of a dispute with HMRC over the automatic issue of a notice or penalty. If the taxpayer had not received a settled judgment on the matter before 31 October 2019, they will be subject to the new legislation – which is yet to be published and does not have a date of publication.

As Keith Gordon points out, this proposal undermines cases which are already queued up in the court system. For example, next month the upper tribunal is due to hear HMRC's appeals against the decisions in Craig Shaw (TC06547) and Nigel Rogers ( TC06542). There are also many unnamed cases in the FTT that HMRC sought to have stayed pending the UT's decisions in those cases.

Gordon notes: “HMRC is proposing to extend this retrospective treatment to all taxpayers who are in the middle of litigation on this very point, thereby rendering any such litigation wholly redundant and irrespective of what the judge was going to say.”

No adverse impacts

The technical note also claims: “There will be no adverse impacts on taxpayers”. This is also questionable, as Ray McCann, past president of the CIOT, notes: “It will undermine decisions of the tribunal that make clear that a human should give some thought before causing problems to another.”

George Bull, senior tax partner of RSM, commented: “This has been a long-running issue. I am disappointed to see an announcement scrape through just before this Parliament ends.”

Replies (27)

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By Justin Bryant
04th Nov 2019 12:19

For once I agree with HMRC and see nothing wrong with this law change and it clearly complies with their Protocol on retrospective tax legislation (it was also a highly predictable if not certain to happen soon law change), so the tax community can't complain too much can they (e.g. it's not as bad as the loan charge is it)?

https://www.parliament.uk/business/publications/written-questions-answer...

Also, the fact that HMRC have had to change the law strongly suggests these particular judges (NB it's Judge Popplewell) were right after all.

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By richard thomas
01st Nov 2019 18:30

The difficulty I have with HMRC's statement that "this is not a new policy" (TN 2.4) is that it is not true. None of HMRC, IR nor CCE have ever introduced legislation to say that a decision which the law entrusts to the Commissioners or to any officer of theirs to make may be made "automatically" ie by a computer. If they had done so the description of the legislation they intend to introduce would not be necessary.

In Khan Properties Ltd v HMRC [2017] UKFTT 830 (TC) (Khan) at §§43-47 I pointed out that s 2 Social Security Act 1998 (SSA) did allow an automatic or computer-made decision in relation to social security benefits (and at that time NICs). What is described in TN 2.2 is s 2 SSA 1998 with necessary modifications. So it is by no means a new policy for government departments but that is not I suspect what HMRC meant by saying what they did in 2.4.

Khan at §47 also points out that s 113(1B) and (1D) TMA (and its equivalents in other taxes) does not affect the matter. In the case to which that legislation responded (Burford v Durkin) there was a decision to assess by an officer.

Like Justin Bryant I do not think that in these circumstances there is anything reprehensible about seeking to make the new legislation retrospective: it is quite likely that if HMRC were to lose Craig Shaw et al in the UT they would be faced with tens of thousands of calls for late filing and other s 100 TMA penalties to be cancelled by those who accepted the penalties at the time they were issued without appealing.

That is not to say that HMRC are right to wait until now and not to have acted earlier (say in 2017 when they decided not to appeal Khan, but did nothing to overturn it).

Whether those who did appeal and whose cases were stayed behind Shaw & Rogers or are still in the appeals process should be treated in the same way is a different matter.

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Replying to richard thomas:
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By whitevanman
02nd Nov 2019 23:53

It depends on what they mean by "this".
It is certainly not new policy that they believed it perfectly proper to have automatic processes. All they have done is to put that beyond doubt given the unfavourable decisions of the FTT.
You say that HMRC "decided" not to appeal the decision in Khan.
Had the judgement dealt solely with the "automatic" issue, fine, they could have done so. But the court went on to find also that there was a reasonable excuse and that is a question of fact. So an appeal would have been pointless if not an abuse.
I suspect they waited to get a decision in Shaw before taking the nuclear option.

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By unearned luck
03rd Nov 2019 21:54

Shame on Justin and Richard for siding with HMRC.

HMRC were aware of this issue a long time before Khan, for example Keith Gordon (who is quoted in the article) wrote about it in 2014 (https://www.taxation.co.uk/Articles/2014-02-04-320031-hamstrung-durch-te...). HMRC could easily have asked Parliament to make this change in the law in the early days of automation, but must have chosen not to. Why?

As some of the proposed changes affect people’s liability to penalties, I wonder if the retrospection is in line with the rule of law and the ECHR?

In their charter HMRC say “We’ll act within the law…”. I didn’t appreciate, until now, that if caught breaking the law HMRC would change the law to mirror their temporary ultra vires acts. Heads HMRC win; tails the taxpayer loses.

Section 9ZB TMA 1970 shouldn’t be one of the measures being changed as HMRC can’t program their computer properly. For example, not existent earlier years’ balancing payments have been inserted because the computer confuses current year underpayments in PAYE codes with earlier year ones and makes unwarranted changes to class 2 NICs self-assessed (it seems that if the tax return and HMRC’s NIC computer don’t agree the computer changes the SA without investigation of the difference. This often means the class 2NIC is deleted with could deprive the taxpayer of a full state pension).

At the moment section 100 of the TMA contains three safeguards: 1) the penalty has to be issued a human being, 2) that human being has to be specially “authorised for the purpose” of issuing the penalty and 3) he or she decides on the amount of the penalty (having, I trust, taken the circumstances of the default into consideration). All of these safeguards are being ditched merely for HMRC’s convenience.

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Replying to unearned luck:
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By Justin Bryant
04th Nov 2019 10:51

You are being a bit disingenuous here or simply do not understand this law change. This is not like the loan charge where it is clearly reprehensible for HMRC to delay the change in retrospective law. The delay here has helped more taxpayers argue (and win) the point (when arguably they don't deserve to as they generally have not complied with a deadline and this is simply a loophole that has been blocked - a bit like blocking a driving offence loophole that otherwise exonerates bad or at least questionable behaviour). Think about it. Another delay of 10 years would have been a good thing, not a bad thing, as unlike the loan charge the retrospection is only to the date of the announcement (per the Treasury's Protocol - so taxpayers and their advisers cannot really complain and unlike the loan charge any HMRC incompetence has worked in their favour).

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Replying to Justin Bryant:
By Duggimon
04th Nov 2019 11:37

Justin Bryant wrote:

this is simply a loophole that has been blocked

Much like the loan charge debacle to which you keep referring. Although, of course, with the loan charge there was never an actual loophole, only a perceived one, and the change to the law was more of a clarification than anything else.

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Replying to Duggimon:
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By Justin Bryant
04th Nov 2019 12:38

You and the person who thanked you are fools to think that re the loan charge (without the loan charge HMRC would lose lots of tax via their own incompetence and I suggest you await the loan charge review that should confirm that if it's independent).

Furthermore, the loan charge is a new (retrospective) tax and does not merely confirm Rangers.

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Replying to Justin Bryant:
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By unearned luck
06th Nov 2019 02:05

I didn't mention the loan charge (which technically isn't retrospective - but that doesn't reduce its wrongness). HMRC have been caught out flouting the law. In the same case the taxpayer has also, apparently broken the law (by allegedly not filing a tax return on time in response to a purported notice to file). But it is OK per you for one side to change the rules retrospectively so that their sin is no longer a sin so that they can win.

Other taxpayers have won penalty appeals because HMRC's system does adequately record evidence that a notice to file has been issued. Are you also suggesting that HMRC be relieved of the burden of proof that NTFs have been issued in penalty appeals?

You are wrong the degree of retrospection. the proposed law is to be backdated to when HMRC first flouted the law. This means that taxpayers who have not yet appealed (but are in time to do) and taxpayers who have open appeals, will have their ground of appeal removed from them.

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By silverghost
04th Nov 2019 10:45

How does this stand with the decision on Schofield v HMRC 2011? HMRC revoked a contractor's CIS gross status in such a fashion, but this was overturned at FTT in that an inspector had not been involved in the decision, ie had not exercised discretion.

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By Philip Nickson
04th Nov 2019 10:49

I would have no problem with this change in the law if we could rely on HMRC actually sending notices out to clients or, perhaps more charitably, clients genuinely receiving the notices. HMRC are insisting on computerising this process but then relying on "snail mail" to deliver a notice which if not acted upon will result in the taxpayer being fined. It would be a bit more even handed if the Agent Services Account gave INFORMATION rather than a few bits of DATA. Currently all we can extract is a list of clients and their UTR. Why not add extra fields like the date a notice to file was issued, Date TR received, any prior year tax in current year code, amount of state pension. If this could be downloaded for all clients en masse it would make keeping track of the situation a lot easier.

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Replying to Philip Nickson:
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By leon0001
04th Nov 2019 11:12

There is also the fact that there is no way that notices to file SA100 returns are issued on 6 April as printed on them. These are often not received by post until well into June.
This also appears to apply to many other written communications.

As for retrospectively changing the position of outstanding cases - this must be a human rights breach.

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Replying to leon0001:
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By ruth.julian
04th Nov 2019 13:08

Probably because such communications are sent by third class mail to save costs. It can also take 10 working days from HMRC creating a letter to it being posted, so I've been told.

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By sammerchant
04th Nov 2019 11:03

The first sign of a dictatorship is the retrospective changing of laws to suit those in power. Just saying.

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By leon0001
04th Nov 2019 11:14

What Finance Bill?
When?

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By Justin Bryant
04th Nov 2019 11:14

Very interesting to see the indignation over this pretty benign and totally justified retrospective law change and yet the acceptance and indeed strong support on this website (by muppets admittedly) for the loan charge that is a million times worse and totally unjustified!

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Replying to Justin Bryant:
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By sammerchant
04th Nov 2019 11:32

As a sole practitioner, I routinely send any letters, forms etc to HMRC by 'signed for' delivery. I track the item and make a note of the date and time of the delivery and name of the signatory. I have had multiple instances when HMRC have appeared sceptical of my claim to have sent them something via 'snail mail'. Their demeanour immediately changes when I tell them that I have proof, i.e. tracking details.

However, I can't remember the last time that HMRC sent me anything by recorded delivery. Yet, their CLAIM to have sent it seems to be sufficient. That is my primary objection to this change in the law.

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Replying to Justin Bryant:
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By dgilmour51
04th Nov 2019 13:01

Justin Bryant wrote:

Very interesting to see the indignation over this pretty benign and totally justified retrospective law change and yet the acceptance and indeed strong support on this website (by muppets admittedly) for the loan charge that is a million times worse and totally unjustified!

ANY retrospection in application of enacted law is reprehensible and dishonest.
It nullifies and negates certainty of legal compliance - and renders our legal system on a par with that of China or Turkmenistan.
There is a big difference between HMRC indicating its thoughts and preferences, or even moral expectations [framed by its own rather special interpretation thereof] and written statute.
Even re-interpretation of 'common practice' in the application of statute, such as we have seen in recent years, significantly undermines the ability to comply.
I would hazard that Legal Certainty would probably, if tested, be considered a Fundamental Human Right - and this is definitely undermined by ANY form or retrospection.
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By tedbuck
04th Nov 2019 11:25

Just wondering - all missives from HMRC take at least a week to arrive - some even more. I have been told by an HMRC employee that a weeks delay in the postroom is not at all uncommon.

Add to that the lack of intelligence applied to coding notices by the computers and the many other daft things they do and you rapidly conclude that such a policy on penalties is probably not fit for purpose.

But doesn't that describe a lot of HMRC's endeavours?

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By G Webber CTA
04th Nov 2019 11:51

Unlike Justin and the others above, I cannot find it in me to accept that this is the way that the tax collecting arm of Government should behave.

If they were bringing in technology and delegating certain functions to a computer, then like many private businesses, they should have thought beyond the end of their nose and legislated AT THE TIME.

Legislating later, once the Tribunals and Courts have basically found them abusing their position, is reprehensible. Wherefore the certainty and security of the tax system for individuals? Sacrificed to HMRC hitting targets - that's where.

Worse, they do this without consultation - (breach of policy) - and when Government arguably has a number of more important matters to deal with, or are not sitting because of a GE. I cannot help think that this is a cynical and potentially unlawful move by HMRC.

I really hope that this is not the way in which HMRC will deal with matters under their new CEO who does have a reputation for being at the more extreme edge of policy.

I suspect however that the decision in Inverclyde ( not the case on this link but an excellent article https://www.rpc.co.uk/perspectives/tax-take/inverclyde-enquiry-into-llp-...) has a lot to do with this.

If Inverclyde is correct, then HMRC has opened enquiries into tax schemes at which, literally, billions of pounds are at stake. HMRC risks losing all extant cases where they claimed that an LLP was not trading - their standard, go to argument - because they did not understand the law and/or did not comply with it.

The list of HMRC errors being covered up by legislation, much of it retrospective in effect if not semantics, grows and seemingly NOBODY in Government cares. The judiciary cares and is increasingly critical but the message is being ignored by politicians.

One can only imagine what somersaults the hierarchy at HMRC perform in meetings with Treasury when these, let's face it, errors caused by a failure of successive leadership to think through and understand consequences, are discussed. Perhaps they are not discussed. We already see senior HMRC officers admit to Parliamentary committee that the reasoning behind policy is not always as presented in Budget documents. We also see HMRC briefing MPs and Treasury inaccurately, causing them to perhaps perjure themselves.

No. This is another step down an increasingly steep and slippery slope and unless we have a Government that actually cares enough to call a halt - my preference would be a wide ranging powers review - we will arrive at, unless we are already there, an unaccountable, out of control and not fit for purpose HMRC.

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Replying to G Webber CTA:
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By sammerchant
04th Nov 2019 11:57

The slippery slope started with the use of Statutory Instruments to enact what should have been discussed in the HoC.

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Replying to G Webber CTA:
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By Justin Bryant
04th Nov 2019 12:17

Eh? Who said this affects the ratio in Inverclyde? This change is only re computers issuing notices à la Popplewell n'est-ce pas (I am happy to be proved wrong)?

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Replying to Justin Bryant:
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By G Webber CTA
04th Nov 2019 12:45

I fully expect that this is a forerunner to a retrospective change of law which will "clarify" or "restore" HMRC's ability to use incorrect law in Inverclyde.

Having once made a retrospection for "administrative" matters, it's a small step to reversing a decision in Tribunal.

Wedge - thin end - or more precisely, perhaps more than the thin end.

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Replying to Justin Bryant:
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By unearned luck
06th Nov 2019 01:40

I expect Webber's point was the thin end of the wedge. Today it is removing certain references to 'officers of the board' from the TMA, tomorrow it could be a provision that the partnership tax return provisions apply to LLPs regardless of whether or not they are carrying on a trade and who knows what procedural lose they will fail to take on the chin the day after tomorrow, all made with retrospective effect.

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By Dandan
04th Nov 2019 13:53

Need to cancel my account here. Too many HMRC officers masquerading as commentators. I can't believe the amount of praise and support HMRC gets on Aweb.

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By Mr J Andrews
04th Nov 2019 19:20

The mockery alluded to here is the 'DATE OF ISSUE' compared to DATE RECEIVED.
It's not snail mail , third class post nor Rowland in the Post Room twiddling his thumbs . It's HMRC's inadequate computer and particularly it's batching system , dating the likes of documents { Tax Returns } in early April only to press the button for the HMRC computer to make a general issue some two months after the supposed issue date. Whether an 'Officer of the Board' or machine , it's tantamount to backdating by the Revenue.

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By djtax
07th Nov 2019 09:51

No problem with automation - provided it is accurate and correct. My current concern is the number of incorrect automated 'repairs' issued by the HMRC computer to SA Returns where the figures were correct in the first place! For HMRC to be introducing errors into otherwise correct Returns seems to me to be a direct negation of their primary purpose. I raised this on the HMRC Agent Forum seven weeks ago but have not yet had any reply - shows what priorities HMRC have these days!

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By AndrewV12
11th Nov 2019 12:01

Extract above
'Late on Halloween, HMRC published a dull-looking technical note about automated processes in the tax system. '

Typical of HMRC they sneak out some changes in legalisation on the darkest an coldest of nights, everyone walks up and is oblivious to the changes.

But I suppose the rise of the bots and cut backs in HMRC budgets lead to such changes.

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