Around 450,000 unsolicited tax returns are filed every year without HMRC first issuing a paper return, or a notice to file, to the individual. But what can HMRC do if it doesn’t agree with the income reported on a voluntary return?
Most taxpayers’ self assessment (SA) tax returns are filed in response to HMRC issuing them a notice under TMA 1970 s8(1) – in fact that is the only way someone can be obliged to file a return.
Shiva Patel and Ushma Patel (TC06426) attempted to register online for SA but failed to jump through the necessary hoops. So they downloaded tax forms for 2008/09 from the HMRC website and submitted paper returns by 31 January 2010.
HMRC accepted these returns, and issued the ladies with UTR numbers. The letters of acknowledgement stated that HMRC “will treat the form for all purposes as though you sent it in response to a notice from us requiring you to make a Tax Return by the date we received it”.
In October 2010, HMRC sent both taxpayers what purported to be notices of enquiry into the returns (under TMA 1970 s 9A). HMRC received no response, and those enquiries remained open until March 2016 when closure notices (under TMA 1970, s28A) were issued by HMRC, together with amendments increasing each person’s tax liability.
The Patels appealed, and the first tier tribunal (FTT) was asked to consider the validity of HMRC’s actions.
What’s the problem?
Everything HMRC did (the enquiry, the closure notice and the amendment to the taxpayers’ self assessed tax position) is only possible when the return in question is “a return under section 8”. The Patels argued that, as they had never received a notice under TMA 1970 s8(1), their returns were no such thing, and therefore HMRC had no power to enquire into or to amend them.
HMRC accepted that no TMA 1970 s 8(1) notices had been issued, but it argued that it is entitled to treat the Patel’s returns as if they were made under section 8.
There is nothing in the legislation which prevents treating a voluntary return as though it had been submitted in response to a section 8 notice. Otherwise, it would be necessary for a notice to be issued, and for the taxpayer to respond by sending in what was essentially the same document as they had submitted voluntarily – surely a needless extra level of bureaucracy.
It isn’t all one-sided: having the returns treated as “under section 8” provides some safeguards to the taxpayer as well as powers for HMRC (for example, some protection against discovery assessments).
Finally, the general “collection and management powers” granted to HMRC by the Commissioners of Revenue & Customs Act 2005 should count as authority for what had been done regarding the self assessments.
The legislation sets out a series of steps which each follow from, and depend upon, the previous steps. If there was no section 8(1) notice, the return was not made in response to it: so no enquiry, no closure and no amendment were possible.
In Bloomsbury Verlag GmbH (TC04778), HMRC had argued that an unsolicited return made by a company was not sufficient to enable it to crystallise a loss for offset in later years. Sauce for the gander?
HMRC’s policy on accepting voluntary returns hinges on the taxpayer’s not objecting to the lack of a formal section 8 notice. However, “if the returns were not statutory returns made under TMA 1970, s 8, no waiver or consent or other action on the part of the taxpayer could alter that position”.
In Revell (TC04887), the FTT had firmly stated “if Parliament had meant the submission of a voluntary return to amount to a waiver of the requirement to give notice [under section 8] then it could have said so”.
The only possible interpretation of the statute is that a return needs to have been made in response to a section 8 notice if any of the subsequent actions (enquiry, closure etc) are to happen. If inconvenient additional steps (issuing a notice, to which the taxpayers then need to submit the same information again) are needed to satisfy that need, then so be it.
The tribunal ruled that HMRC’s collection and management powers, “do not give HMRC carte blanche to dispense with express statutory requirements”.
The Patels won their appeal. The returns were not “under section 8”, and so the enquiries etc were not validly made.
What should HMRC have done instead?
If presented with a voluntary return where HMRC wants to take any follow-up action, the available responses are:
Issue a TMA 1970 s8 notice and make the taxpayers resubmit their information in a statutory format;
Make a discovery assessment under TMA 1970, s 29; or
For cases arising after September 2017, make a Simple Assessment under TMA 1970 s 28H, which hopefully will solve this problem for the thousands of voluntary returns which are made each year.
This is not a new situation. The judge considered several previous cases, both income tax and corporation tax (which runs on separate but essentially similar legislation in FA1998, Sch18). Since they are all at FTT level, there is as yet no judgement which will act as a precedent for subsequent cases.