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vintage post office sign with crack running through it | accountingweb | Post Office may owe £100m in tax after incorrectly deducting compensation payments
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£100m tax bill could make Post Office insolvent

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Post Office may owe £100m in tax after incorrectly deducting compensation payments to subpostmasters in the Horizon scandal.

16th Jan 2024
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A report published by Tax Policy Associates on Friday 12 January raises concerns about the tax treatment of compensation payments to subpostmasters in the Horizon software case

The report by Dan Neidle analyses the financial statements of the Post Office from 2018/19 to 2022/23 with some shocking conclusions drawn, including a potential £100m+ in underpaid tax which could lead the Post Office into voluntary insolvency.

In the notes to the accounts, no specific contingent liability is disclosed, however reference is made (page 121 of the 2022/23 accounts) to discussions with HMRC which the directors accept could be material: “As at the balance sheet date the company was engaged in discussions with HMRC regarding potential taxation liabilities that could arise in relation to past events but for which no liability has been recognised…

“While the directors recognise that an adverse outcome could be material, they are currently unable to determine whether the outcome of the discussions would have a material adverse impact on the consolidated position of the group and are unlikely to be able to do so until the discussions with HMRC are substantially concluded.”

Further analysis of the last 10 years of Post Office’s accounts by Tax Policy Associate’s “team of eminent tax and accounting experts” strongly suggests that the past events in question relate to the treatment of compensation payments made to subpostmasters – essentially that these have been incorrectly deducted. 

Compensation payments not deductible

Corporation Tax Act 2009 section 54 is clear that deductions are only allowed to reduce taxable profit if they are wholly and exclusively for the purposes of trade. Whether the Post Office knowingly incorrectly prosecuted the thousands of subpostmasters who have since received compensation is a matter to be decided by the ongoing investigation. It does seem likely, though, that even if the false accusations and subsequent cover-up were not deliberate they were outside the scope of the nature of trade.

The compensation – as well as other legal fees and penalties associated with the scandal – are highly unlikely to qualify as deductible for tax. 

Several highly respected tax experts have agreed with Neidle’s conclusion, including award-winning corporate tax adviser Heather Self, who is credited in the report for providing technical expertise. 

Case law supports the view that the compensation payments in this case were not related to trade. Parallels can be drawn with the 1906 House of Lords ruling in Strong & Co vs Woodifield where a customer sleeping in the inn owned and managed by the appellants was injured by a falling chimney. The £1,490 paid in compensation to the customer was not tax deductible, according to the Lords present, as it was incurred due to the appellant’s lapse in maintenance of their property, not a trading loss. 

More recently the upper tribunal decided that energy provider Scottish Power should not be permitted to deduct compensation paid to customers who had been mis-sold energy. 

There are some unanswered questions, which means this report cannot be relied on (and nor does it purport to be) as 100% correct at this stage. The Post Office could try to claim that the compensation payments were incurred wholly and exclusively for the purposes of trade, but it seems unlikely. 

As Neidle puts it in his report: “At this point we cannot say with certainty why the Post Office falsely accused 4,000+ postmasters of theft, but we can be sure it was not for any bona fide purpose of its trade.”

Government bail-out on the horizon?

The total amount deducted over the five years since compensation payments began is £934m according to the Post Office’s accounts from 2018/19 to 2021/22. In his report, Neidle calculates the impact of reversing out these payments from the taxable profit, taking into account relief for considerable available losses brought forward.

The result is an estimated amount of over £100m which the Post Office may have to pay back. There could also be penalties added to that, reaching up to 30% (or less if the Post Office has come forward to HMRC and made a “prompted” disclosure). 

This could have catastrophic consequences for the company, with the BBC reporting that the Post Office risks insolvency if it has to repay the shortfall. One can only imagine the public outcry that would ensue if the government stepped in to bail out the Post Office. Feel free to drop your suggestions into the comments for who might play Rishi Sunak and/or Jeremy Hunt in the ITV sequel. 

More to come out

There is evidence to suggest that as well as unlawfully deducting compensation payments from taxable profits the Post Office may have received funding from the government that was wrongly omitted from its taxable profits. There are also questions raised in the report over the deductibility of certain legal fees. 

Speaking to AccountingWEB, Neidle said: “The Horizon scandal raises a host of questions as to the Post Office’s tax and accounting.

What happened to the “theft losses” that weren’t actually losses at all – did they take deductions? What happened to the “shortfalls” they forced postmasters to repay – did they book as income?

Can they justify having claimed deductions for all the expenses of the prosecutions, and subsequent legal cover-ups?

And how can they justify taking a deduction for paying compensation for illegal acts?

It doesn’t look like the Post Office has spent five minutes considering any of this.”

HMRC is unable to comment on identifiable taxpayers. Speaking to AccountingWEB, an HMRC spokesperson said: “We collect the tax due under the law, creating a level playing field for everyone and funding public services.”

Satisfying irony

The irony of this latest development has not been missed within the accounting and tax communities – there is some satisfaction to be found in the idea of the Post Office being forced to repay amounts it has (allegedly) fraudulently stolen from HMRC, having accused over 4,000 innocent postmasters of stealing from it.

As tax expert and former tax inspector, Anthony Monger commented on LinkedIn: “What irony! After accusing all those innocent people of fraud, they commit tax fraud!”

Don’t forget Dan Neidle is headlining the Festival of Accounting & Bookkeeping (FAB24) on 13–14 March 2024. Book your FREE ticket today!

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Replies (45)

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By Justin Bryant
16th Jan 2024 11:57

This story is a bit overblown (as DN is inclined to do of course) and should be basic corporation tax dispute (and consequential insolvency) stuff for most people here (except the usual suspects). See here similar examples: https://www.accountingweb.co.uk/community/industry-insights/gabelle-tax-...
https://www.nortonrosefulbright.com/en-gb/knowledge/publications/8dcfa32...

Furthermore, you cannot blame companies too much for not providing for the disputed CT (on legal advice), as if you do provide that is a red rag to an HMRC bull.

The tax fraud allegation is a bit OTT to put it mildly.

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Replying to Justin Bryant:
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By kirstiej
16th Jan 2024 15:07

Isn’t the point less that it’s intentional fraud and more the impact on the balance sheet?

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Replying to kirstiej:
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By Justin Bryant
16th Jan 2024 15:11

Yes, per my above comments.

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Replying to Justin Bryant:
Ray McCann
By Ray McCann
17th Jan 2024 09:45

Hey Justin, why don’t you go properly public and give the people the benefit of your vast experience and wisdom? You know, put your views up to be shot down?

If a company takes a deduction for a loss that it knows it has not incurred, what would we call that, innocent error, careless, deliberate?

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Replying to RayM55:
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By Justin Bryant
19th Jan 2024 14:20

Ray, as usual I'm not entirely sure what you're blathering on about (a bit like in last night's episode of Newsnight that made no sense, as the 20 year retrospective 2019 LC was the fault of no-one other than HMRC), but I simply have a less extreme and less biased and I think more reasonable (i.e. non-political) view of things here, a bit like this person, who also (at least partly) disagrees with DN (who is very often wrong about very basic things - like yourself):

https://www.taxjournal.com/articles/tax-clouds-on-the-horizon-for-the-po...

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Replying to Justin Bryant:
Ray McCann
By Ray McCann
20th Jan 2024 16:14

And as usual Justin you simply demonstrate that you have no real idea what you are talking about. As I said, you should give the world at large the benefit of your vast knowledge, you could give the BBC a call and see if they are interested.

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Replying to Justin Bryant:
Amy Chin
By Amy Chin
20th Jan 2024 19:37

"This person" is Heather Self, a highly regarded and very experienced tax expert. As you would know had you read this article, Heather is credited in Dan's report for providing her technical expertise on the corporation tax issue. In the TJ article you cite, she fully agrees with Neidle on the compensation payments, the subject of this article. Where she is "less convinced", but doesn't fully disagree either, is whether funding received from the Government to cover the shortfall should be taxable. I have not mentioned this at all in my article.

(Incidentally I'm pleased to see that Heather made the same comparison to Scottish Power as I did above!)

I'm not sure where in my article (or Dan Neidle's report) you're seeing any suggestion that a company should provide for the disputed CT. I agree, the contingent liability is sufficient until the outflow of economic resources moves from possible to probable and I never suggested otherwise.

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Replying to Amy Chin:
Ray McCann
By Ray McCann
21st Jan 2024 22:09

And for completeness I discussed these issues with both Dan and Heather.

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Replying to RayM55:
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By Justin Bryant
08th Feb 2024 16:32

I still haven't the foggiest clue what you're on about, but per the following extract from the link below it's not a black & white area per my above comment (and so it's arguably not improper not to provide for the CT despite what DN wrongly says):

"Damages that are compensatory rather than punitive (e.g. damages for defamation payable by a newspaper company) are often deductible, as are payments for breach of contract. Payments to employees for wrongful dismissal, etc. are usually deductible."

https://taxsummaries.pwc.com/united-kingdom/corporate/deductions

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Replying to Justin Bryant:
Ray McCann
By Ray McCann
09th Feb 2024 16:46

Nothing new there Justin eh?

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By D V Fields
16th Jan 2024 13:45

The Post Office accountants, as demonstrated at the current Enquiry, don’t seem to have a grasp of basic double entry bookkeeping so understanding tax was always going to be a challenge.

The Post Office probably needs to be closed regardless and probably reformed/branded and run by its postmasters.

With today’s pathetic gibberish from its current CEO at the Parliament Committee - in which he adequately demonstrated his incompetence – the clock must be ticking…..

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By GHarr497688
16th Jan 2024 16:51

Just read that the money paid back to the PO by victims might have been passed to executives in bonus/remuneration payments but this can't be proved. Question - if money is paid into a bank then it has to be allocated somewhere. How can the PO executives say they can't find out where it's gone. It's ludicrous as all they need to do is look at the bank statements . The plot thickens.

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Replying to GHarr497688:
Ray McCann
By Ray McCann
17th Jan 2024 10:39

Without a forensic exercise it would be impossible to say where the money went and even then we might not get a proper answer.

If bonuses were paid then unquestionably directly or indirectly amounts paid to the Post Office funded them in the same way as any other receipts. That’s just the way accounting works.

The proper question to ask is whether senior executives deliberately excluded losses from the calculation of bonuses.

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Replying to GHarr497688:
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By kirstiej
17th Jan 2024 15:08

According to the Post Office it would be cash correctly remitted. I think the reality is that they have no idea what should be in their accounts. ‘Suspense account’ suggests monitoring of discrepancies, but with such a chaotic system and culture, it’s difficult to know how that would be possible. Nobody wanted to know what the correct figures should be. They just wanted the Post Office to look profitable and no questions to be asked.

Any amount that affects the bottom line would have affected profit related pay, so undoubtedly it would have increased bonuses, as it would also have increased pay to investigators who were incentivised to get convictions.

On the other hand, I think that bugs and errors could also sometimes have operated in the post master’s favour (and if this happened the SPMs would not have had access to data to know whether that was wrong).

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By FactChecker
16th Jan 2024 18:00

"As Neidle puts it in his report: “At this point we cannot say with certainty why the Post Office falsely accused 4,000+ postmasters of theft, but we can be sure it was not for any bona fide purpose of its trade.”"

That's the old "have you stopped beating your wife?" technique being used by Dan.
I've no time for Vennells or any of her erstwhile compadres, but DN should know better ... the word 'falsely' completely changes the question purportedly being raised.
When the P.O. accused postmasters of theft, it was indeed for a bona fide purpose of its trade - in that it believed (we are told) that it was chasing the return of stolen monies.

There IS a more subtle argument to be had here, but headline-chasing isn't the way to do that.

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Replying to FactChecker:
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By Justin Bryant
17th Jan 2024 09:40

Yes, DN does not do himself any favours re his credibility for those of us who know better (which is not many of course).

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Replying to FactChecker:
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By C Graham
17th Jan 2024 13:43

have a read of this to get an idea of what was happening behind the scenes in 2009
https://www.postofficehorizoninquiry.org.uk/sites/default/files/2022-03/...

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7om
By Tom 7000
17th Jan 2024 09:33

Dr Tax liability £100m
Cr share capital £100m

There You go fixed it and HMG still a 100% shareholder

That will be £150k for the advice please

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By listerramjet
17th Jan 2024 09:36

I would have thought that the contingent liability for future compensation payments would be enough to cause the directors to appoint receivers. Given that the taxpayer is on the hook already it would be cheaper all round to get on with it!

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Replying to listerramjet:
7om
By Tom 7000
17th Jan 2024 09:42

Cr Contingent liability 700m
DR HM Treasury non repayable loan 700m

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By johnjenkins
17th Jan 2024 09:40

No doubt Fujitsu will make up the shortfall (if any).

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Replying to johnjenkins:
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By moneymanager
17th Jan 2024 10:42

Quite, why don't we chase systems suppliers who's products fail, vaccine manufacturers whose products were never even tested for efficacy let alone undisclosed harms etc, baffles, but then to do so would highlight the failings, or culpability , of those in charge.

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By vstrad
17th Jan 2024 09:55

"One can only imagine the public outcry that would ensue if the government stepped in to bail out the Post Office."
Come on, Amy, keep up. The Government has already bailed out the PO, which is effectively, if not technically, broke already.
https://www.computerweekly.com/news/252498087/Government-to-bail-out-Pos...

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By SuperAccountingSteve
17th Jan 2024 10:01

Is it whether it's willful or not, e.g. if due to a mistake a business buys the wrong material, and it cannot be returned, and it's disposed of, the material cost will reduce taxable profits, or is even that wrong? If the post office mistakenly pursues its employees for fraud, for the purposes of trade (i.e. to reduce costs from further fraud), and it was mistaken with consequent blowback, on a similar premise to incorrectly buying material, can it not be claimed?

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By David MacBean
17th Jan 2024 10:04

I would have thought part of the compensation would be taxable deductible as it represents cash deficits which appear now to have never existed. As was said in the last of the programme episodes ‘where did those payments from prosecuted PM go’ the reply from the forensic accountant was ‘they would probably have sat around in a suspense account for a couple of years then get written off & appear in PO’s profits’. For me this is a straight forward accounting correction or PYA certainly for losses of income that never existed

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Replying to David MacBean:
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By GDavidson
17th Jan 2024 14:42

What's the double entry for cash entries that never existed? (Genuine question!)

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Replying to GDavidson:
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By kirstiej
17th Jan 2024 15:14

DR P&L
CR postmasters.

However they owe the postmasters much, much more than the cash balances now.

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Replying to David MacBean:
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By kirstiej
17th Jan 2024 15:19

I think ‘compensation’ means the additional money they need to pay for the damage done, not repayment of the debt.

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By AndrewV12
17th Jan 2024 10:07

'some shocking conclusions drawn, including a potential £100m+'

the 100m is probably worst case scenario, but when you add in legal fees who knows.

The post office has been appallingly run and in decline for years. Ironically everybody said emails and the internet would kill of the post office, who would have thought it would have been taxes, compensation and legal fees that led to the final death of the post office.

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Replying to AndrewV12:
7om
By Tom 7000
17th Jan 2024 10:16

I thought emails killed Royal Mail..... not the P.O.. ... ;)

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Replying to Tom 7000:
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By FactChecker
17th Jan 2024 14:20

Actually, when email came along, both companies were still one company.

Established in England in the 17th century, the General Post Office (GPO) was the state postal system and telecommunications carrier of the United Kingdom until 1969 - as per the phone-boxes and letter-boxes of my youth.
There were then further splits mergers in 1969, 1980 and 1981 (when Royal Mail was created).

The two companies (Royal Mail and Post Office) were part of the same group until 2012, when the Post Office was split out into a separate business, as part of the privatisation of Royal Mail led by the then business secretary, Vince Cable.

If you're interested there's a readable history at https://en.wikipedia.org/wiki/General_Post_Office

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Replying to AndrewV12:
Pile of Stones
By Beach Accountancy
17th Jan 2024 20:14

The Post Office and Al Capone - insert gangster jokes here...

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Replying to Beach Accountancy:
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By johnjenkins
18th Jan 2024 08:46

At least with Al Capone there was a chance of survival, with the PO zilch.

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By petestar1969
17th Jan 2024 10:10

Hmm and Fujitsu are behind the MTD software, aren't they? Retirement beckons, methinks.

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By KIKISROSSIDES
17th Jan 2024 10:36

A client of mine was tried, sent to prison and died as a result of this fiasco. Do I have any sympathy for the Post Office or do I care what happens to it? The answer should be obvious to all!!!

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Replying to KIKISROSSIDES:
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By kirstiej
17th Jan 2024 15:36

I want to be able to deposit cash and post parcels at the village shop, but there is no reason why that has to involve a company called ‘Post Office Ltd’. The good will belongs to the post masters, not the organisation. The reputation of the brand has been destroyed.

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By BryanS1958
17th Jan 2024 10:37

When you say "One can only imagine the public outcry that would ensue if the government stepped in to bail out the Post Office.", it isn't the government that will be paying, it will be the taxpayers of this country that will be paying.

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Replying to BryanS1958:
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By petestar1969
17th Jan 2024 11:35

Yes, that would be the basis of the "outcry".

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By [email protected]
17th Jan 2024 10:38

We need to be careful what we wish for. One of the authorities quoted is a hotelier paying out for an injured guest, the other for undisclosed energy commissions. In an highly competitive and increasingly litigious and legally aware world, making mistakes, is pretty much part and parcel of trading as, pending the takeover of computer we are all human. If such damages are not deductible, then presumably insurance for the same, which is really just an advance payment of those damages ought not to be deductible either but as far as I know public liability and D&O policies etc are never challenged. May be the distinction is you wouldn’t get a responsible business/director etc to carry on business without appropriate insurance cover but it seems a rather fine distinction to make.

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Mark R
By oneclickapplications
17th Jan 2024 11:03

Guess who will pick up the cost for this...the UK tax payer.

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By evildrome
17th Jan 2024 12:03

"Can they justify having claimed deductions for all the expenses of the prosecutions, and subsequent legal cover-ups?"

Yes... that was something I was wondering about myself.

How many millions does that run to?

Quite a few, one imagines.

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By Mr J Andrews
17th Jan 2024 12:19

Vennells must be trembling in the pulpit at the thought of insolvency of her former mess. I wonder if she has the gall to recite Proverbs 19.9 , 21.6 and 21.8 to the parishioners of Bedfordshire. More likely to suggest hiking up postage charges .

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Replying to Mr J Andrews:
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By SuperAccountingSteve
17th Jan 2024 16:29

A rich man has more chance of squeezing through the eye of a needle than entering into heaven.

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By JamesDS
24th Jan 2024 16:35

An HMRC spokesperson said: “We collect the tax due under the law, creating a level playing field for everyone and funding public services.”

HRMC do not "collect the tax under the law". They will "take a view" on what they think is due, invite to to argue in a court, then send in a KC against you, funded by the unlimited public purse. Often they are judged incorrect, but at FTT no precedent is set and they gleefully drag the next poor sod in and run the same fight again and again, and again. Judge routinely use expressions like "disingenuous", "simply untrue" and "unreliable" when referring to HMRC evidence - a polite way of telling us they lie.

HMRC do not create "a level playing field for everyone". If they did, retrospective taxation would be illegal. The Loan Charge, IR35, the VAT domestic reverse charge scheme, and a host of other sector-targeting nasty would not exist, They would be agressively chasing down bounceback loan fraud, and you would not need a lawyer and an instructing accountant to prevent them making you backrupt as a result of their own crass incompetency (refer Debra Elizabeth Adjei). Finally, the once-vaunted charter and LSS would both still be relevant, instead of being consigned to ignominy.

HMRC do not "fund public services". We do.

One sentence containing 3 lies. Not bad by their standards - I've had multi-page letters from them containing more commas than truthful statements.

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Replying to JamesDS:
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By C Graham
24th Jan 2024 16:41

so true.

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