Tax nightmare: HMRC errors and taxpayer misled

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The owner of a chain of beauty salons was advised to wind-up his business to pay overstated tax assessments and received confusing advice about the appeals process. 

Two injustices

Chiragkumar Kansara is the owner and director of Angel Beauty Parlour Ltd (ABP), which operates a number of beauty salons, some from shop premises and others from kiosks in shopping malls. He has been caught up in a tax nightmare which almost led to the liquidation of his entire business.

Not only was the tax demanded manifestly excessive, but the appeals process was almost denied to him due to unclear instructions provided by various branches of HMRC. The accuracy of the tax demands will be examined at a later hearing, but this first tier tribunal (TC07093) hearing primarily considered whether a late appeal could be accepted.

Compliance review

In 2016, HMRC undertook a PAYE compliance review of the beauty business which included mystery shopper visits by HMRC officers. The evidence collected in those visits was extrapolated to cover the whole business for four years using the following contradictory assumptions:

  1. All the salons were open for 7 hours a day, 365 days a year.
  2. All the staff worked full time.
  3. All the staff had other employments in which their personal allowances were used.

Point 1 was not a reasonable assumption and flew in the face of the information provided by ABP to HMRC.

Points 2 and 3 are mutually exclusive, and appear to be designed to demand the maximum amount of PAYE from the employer. 

A full-time worker paid the national minimum wage will suffer very little PAYE if they have a full personal allowance available. Two part-time workers sharing the position will pay no income tax. HMRC was aware from the company’s records that many employees worked part time but chose to ignore this fact.

HMRC held detailed PAYE records for a number of the employees but chose a bizarre means of taking this into account. Rather than deduct their known gross salaries from the hypothetical undeclared gross salary total, HMRC merely deducted the known PAYE from the hypothetical liability. In effect this clawed back all the personal allowances HMRC itself had previously allowed these individuals!

HMRC’s methods were also questionable:

  • The HMRC officers had all visited salons at lunchtime (presumably the busiest time), yet HMRC assumed that this level of activity was continuous throughout the day.
  • Evidence of staff numbers derived from those visits was palpably unreliable: two officers visited the same salon at the exact same time but failed to agree on the number of staff they had seen!

Tax demands

As a result of the compliance review, HMRC decided that ABP was failing to deduct PAYE and NIC from payments made to its staff. HMRC issued Regulation 80 determinations for the tax years 2012/13 to 2016/17 totalling £528,056, together with penalties totalling £369,639.

To have funded a ghost employee operation of this scale ABP would have needed additional revenues of between £400,000 and £700,000 a year, and to have paid all the employees in cash. HMRC’s secret shoppers witnessed all takings being rung into tills or placed into the cash drawer: there was no evidence of any missing turnover.

What happened next?

In July 2017, HMRC carried out a statutory review of the assessments but no figures were changed.

A well-advised taxpayer would have appealed to the FTT within 30 days. However, Kansara did not appeal until 2 February 2018, as he followed this chain of events:

  • He was first aware of the result of the review at the end of August 2017 when he returned from holiday.
  • He telephoned HMRC, who informed him he had three options:
  1. Speak with HMRC Debt Management (phone number provided);
  2. Apply for Alternative Dispute Resolution (ADR); or
  3. Appeal to the FTT.
  • Kansara, believing that this meant he had a choice of how to settle the matter, chose to call Debt Management. After a delayed response, he wrote setting out the details of ABP’s case, ending the letter “so please accept my appeal against this decision”.
  • On 19 October 2017, HMRC emailed Kansara telling him that, if he wished to pursue the case any further, he should appeal to the FTT, “or alternatively you can apply for ADR”.
  • Kansara, still under the impression that this was an either/or situation, applied for ADR, while continuing to correspond with Debt Management. An ADR Facilitator wrote back to him on 23 November 2017, pointing out that he could not currently avail himself of ADR since he did not “currently have an appeal that has been accepted by the tribunal”.
  • Meanwhile, HMRC filed a winding-up petition at the High Court on 1 December. Kansara met with a firm of insolvency practitioners, who advised him to put the company into voluntary liquidation.
  • Instead, in January 2018 Kansara spoke with solicitors Mills Chody LLP, who instructed tax Counsel on his behalf and advised Kansara to make a late appeal to the FTT.

Making a late appeal

The three-stage test for considering a late appeal was set out in Martland [2018] UKUT 0178:

  1. Was there a serious or significant delay?
  2. What is the explanation for that delay?
  3. How can the tribunal deal justly with the application?

Of these, the first and second were relatively straightforward. Five months, in relation to a 30-day deadline, is clearly a significant delay.

HMRC’s somewhat vague and garbled information given to Kansara regarding his options, combined with the fact that English was not his native tongue, adequately explained his failure to appeal immediately to the tribunal.

At no stage prior to contacting Mills Chody in early 2018 did anyone set out clearly to him that – whatever else he might do – he must appeal to the FTT without further delay. Which is what he then did.

Justice delayed

The FTT needed to consider fairness and balance for both parties. It must balance the consequences for HMRC of allowing an appeal to be heard late, against the consequences to the taxpayer of denying that application (termed “prejudice”).

Judge Redston ruled the prejudice issue in Kansara’s favour. Allowing the determinations and penalties to stand unchallenged could involve insolvency, personal debt and even “naming and shaming” as a deliberate defaulter. Against that, the downside for HMRC of allowing the appeal to be heard was minimal.

In addition, there was the strength of his case. Martland makes it clear that justice is best served by allowing a particularly strong case to be heard, and Kansara’s case was strong indeed.


The PAYE/NIC demands calculated by HMRC were, the judge declared, “unreasonable, even ludicrous”. She granted permission for the appeal to be heard.

This appears to be yet another case where HMRC’s “best judgment” in making tax assessments turns out to be speculation and wholesale exaggeration.

It also draws further attention to HMRC’s frequently lamentable ability to communicate clearly and effectively with taxpayers.

About Andy Keates


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28th May 2019 11:58

What's really shocking about this case is that HMRC did not resile from these ludicrously excessive assessments at the hearing and that these PAYE assessments would have been visited on him personally had he not had the fortune to come across a decent tax advisor and a sensible judge.

It is quite shocking that our tax system allows such a risk to arise in the 1st place (simply because the 30 day appeal deadline is missed for one reason or another - potentially leaving no safeguard whatsoever from a ludicrously excessive assessment) and no doubt this risk has materialised in other unreported cases (amounting to unjustified confiscation by the state).

Thanks (7)
29th May 2019 10:19

Mind you if he had run PAYE properly in the first place he wouldn't have got in a pickle.

Thanks (0)
to Tom 7000
29th May 2019 10:38

I thought it was a PAYE compliance audit - doesn't necessarily mean he hadn't been processing PAYE correctly

Thanks (1)
to Tom 7000
29th May 2019 12:46

What kind of an answer is that? A mugger of old grannies does not risk his entire wealth being confiscated by the state, yet an honest business person does, merely for an innocent oversight. HMRC should consider themselves lucky that they are not facing a misconduct charge like the guy in the link below:

Thanks (2)
29th May 2019 10:30

Clearly no abuse of powers going on here, or any need for independent oversight of HMRC. Sigh....

Thanks (2)
29th May 2019 11:03

So we add another case to the growing list of those where HMRC have acted in an arrogant, bullying, unaccountable and morally, legally and ethically unacceptable manner.

This comes soon after their "seriously flawed" attempt to prosecute Zeus Partners over a film scheme (come on, 25 years after legislation allowing relief on film, 10 years after a series of "victories" in tax cases, HMRC still does not understand them?) - which is going to cost you and me millions in fees and compensation.

HMRC is out of control. They consider themselves unaccountable and if you have the temerity to insist that they follow the rule of law or treat you like they treat a multi national or even admit that their collection tactics are little more than strong arm intimidation, you are first branded as "difficult", then given a "take it or leave it" ultimatum or face more bullying, then forced into endless and expensive delay trying to get to Tribunal.

The House of Lords called for a powers review last year.

I think we need more.

I think we need a root and branch review of how HMRC has been corrupted from being a trusted and trustworthy organisation doing a difficult job, fairly, and now is seen (and acts and demonstrates at regular intervals) as a faceless, thoughtless, pernicious and vindictive pursuer of "maximum revenue".

Either successive Governments have forced HMRC into this situation via their policies - especially austerity - or a senior cabal of Civil Servants, with their eyes on the prize of that end of career gong - has taken HMRC into a downward spiral.

We need a Royal Commission and we need it fast.

Thanks (7)
to G Webber CTA
29th May 2019 11:30

Sadly, where this sort of stuff used to be a mark of imcompetence, its now de rigeur policy mendaciously driven from the top.
What easier way to extract more than by driving taxpayers into the proxy-tax nightmare of fines and penalties.

Thanks (1)
to G Webber CTA
29th May 2019 11:30

Sadly, where this sort of stuff used to be a mark of imcompetence, its now de rigeur policy mendaciously driven from the top.
What easier way to extract more than by driving taxpayers into the proxy-tax nightmare of fines and penalties.

Thanks (0)
to G Webber CTA
29th May 2019 12:55

Gordon Brown started this HMRC fiasco. I don't know of one case where HMRC have made assessments on the information they hold.
PAYE compliance visits are really bad and have not been thought out properly. Probably because HMRC have got away with their antics many times.

Thanks (0)
By tedbuck
29th May 2019 11:22

In the old days when HMRC had offices with people this wouldn't have happened because the people were trained and had an element of what used to be called 'common sense'. Now the staff are partly trained and used to following the rule book so have no 'common sense'. The Iceland case shows this very clearly.
Unfortunately 'common sense' has now become 'uncommon sense' not helped I am sure by the virtually incomprehensible tax regime under which we now live.

Thanks (1)
29th May 2019 11:25

I'm kind of surprised that the term "Back Duty" seemed arcane - IMHO its a common every-day term for potential liability from a previously omitted or forgotten circumstance. I even posit that the term is completely self explanatory. Its [translated] equivalent is used in many countries.

The tale as a whole merely underscores the incresingly mendacious duplicity of HMRC - who clearly set out to obfuscate in order to force the client into the proxy-tax nightmare of Fines etc. in order to increase grab.

This stuff used to be put down to the occasional incompency of the odd HMRC officer - sadly now it is a culture driven from the top.

Thanks (0)
29th May 2019 12:48

Surely this heavy handed approach raising excessive assessments on the basis of probability , the Inspector having found some irregularities , has always taken place. In the 1980s I encountered a very aggresive lady tax inspector who loved to put the knife in
With the onus on the taxpayer to disprove these HMRC raised assessments its not easy for the taxpayer to contest the levies.

Thanks (0)
29th May 2019 16:24

It seems, if you read the full appeal, that the director did not help himself very much. HMRC tried to arrange a compliance visit on 08/07/15. A schedule 36 notice was served on 20/11/15 for the director to furnish HMRC with his business records. The notice was not complied with and HMRC, issued penalties and commenced their own enquiry. The director did not meet with HMRC until 11/01/17 which was shortly after the assessments had been raised.
I'm surprised the director did not consult his own accountant for a steer and that he took so long to communicate with HMRC which may have prevented the subsequent mess.

Thanks (0)
29th May 2019 16:26

This is appalling. How could anyone even with just GCSE maths at HMRC not see that you cannot have both assumption 2 and 3.

Thanks (2)
29th May 2019 21:43

What amazes me is HMRC's tunnel vision approach to this issue. From the beginning it is clear, based on the ludicrous assumptions used to assess the case, they were looking for the worst possible outcome winding this SME and putting them out of business. So going forward no corporation tax, VAT even income tax because this was about compliance not non payment from this business as PAYE was being paid to some extent. If he was a sole trader and declared himself bankrupt they wouldn't get much. Wouldn't a more tempered approach have been reasonable with the business trading making profit paying taxes and any tax compliance issues advised on and a reasonable fine paid as necessary. How is trying really hard to wind up a business good for anyone?

Thanks (2)
03rd Jun 2019 12:13

HMRC is once again wasting tax payers money by making this ludirous accusation without foundation and evidence.

In this is just one example. There are more cases un published.

Thanks (0)
22nd Jun 2019 20:10

An interesting read for learning on how to do your tax by yourself.

Thanks (0)

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