Time to abandon 'fairness'?
In recent years the word 'fair' has become a common feature of HMRC's lexicon. It is often connected with claims by HMRC that a taxpayer is not paying his or her "fair share of tax". It is disseminated with predictable regularity across HMRC press releases, guidance notes and spokesperson's quotes.
The notion that HMRC operates as some kind of moral-guardian sits awkwardly with its core function of administering the collection of tax. It is difficult to avoid the conclusion that its particular view of 'fairness' is little more than a justification to legitimise certain policies and the enthusiasm with which such policies are pursued, in order to maximise the tax take for the Exchequer.
The concept of 'fairness' featured a great deal in HMRC's justification for the introduction of accelerated payment notices (APNs) which were introduced in the Finance Act 20141 and yet the effect of the legislation was a race to obtain as much money from those affected in as short a period of time as possible. APNs have created significant hardship for many taxpayers who often had heard nothing from HMRC for many years after receiving an initial letter from HMRC opening an enquiry into technical tax issues. There is of course no right of appeal against an APN.
Many thousands of taxpayers are about to be hit by the 2019 loan charge2. HMRC has gone to some lengths to argue that the 2019 loan charge is not retrospective. Whether the legislation is retrospective or retroactive matters not as the effect is the same. HMRC justify the 2019 loan charge by returning to its mantra that people must pay their 'fair share' of tax. There has been a great deal of criticism that the 2019 loan charge will apply to all loans made since 6 April 1999. Such a 20 year time period is usually reserved for cases involving deliberate conduct on the part of a taxpayer, in other words, fraud. HMRC has failed to adequately explain what it has (or has not) been doing during that intervening 20 year period to deal with arrangements it considers to be objectionable. Many taxpayers who will be affected by the 2019 loan charge had no idea when they entered into loan arrangements that many years later HMRC would impose a charge on them in relation to their outstanding loans. Taxpayers have a right to certainty and finality in their tax affairs. Ordinarily, the limitation period is 4 years and 6 years if the taxpayer has been careless. HMRC can only rely on a 20 year limitation period when a taxpayer has acted fraudulently. The overwhelming majority of those affected by the 2019 loan charge have not acted fraudulently and yet HMRC are treating them as if they have. Many of those taxpayers are on modest incomes, working in a variety of industries from public sector nurses to IT contractors. Only last week there were reports in the Financial Times of a number of suicides apparently caused by the stress caused by the 2019 loan charge3.
The effect of all this 'fairness', dispatched on a macro level, will be felt at the individual level by ordinary taxpayers and their families, in homes across the UK. It will lead not just to financial hardship, but personal suffering, strained relationships and, as reported in the Financial Times last week, even worse.
In recent years there have been a number of cases which have found their way to the First-tier Tribunal which typify the apparent difficulty HMRC has in dealing with issues at a micro-level. The most recent case is Krzysztof Pokorowski v HMRC  UKFTT 0086 (TC). Unusually, for a tax case (at least one not concerning a famous person or the VAT classification of confectionary), it was reported in the mainstream news4.
Mr Pokorowski appealed against the penalty notices which HMRC had issued to him for the non-filing of tax returns. The circumstances were that Mr Pokorowski was a self-employed electrician who lived in a house-share. He lost his job and having exhausted all of his savings, was evicted from his house whereupon his belongings were thrown into the street and were lost or stolen. During the time he was living on the streets, he had not received any notifications from HMRC and had failed to file his returns on time. HMRC decided to issue penalty notices to him.
HMRC refused to afford relief to Mr Pokorowski on account of "special circumstances" or "reasonable excuse", under Schedule 55, Finance Act 2009. HMRC's position was that it was Mr Pokorowski's responsibility to inform it if his address changed; that he had an obligation to file a return; and, that a reasonably prudent taxpayer would have done so. Accordingly, in HMRC's view, his circumstances were not "special" nor did he have a "reasonable excuse".
The tribunal had little difficulty in allowing Mr Pokorowski's appeal. It described HMRC's position as "a scandal", commenting: "for HMRC to expect a homeless person to keep HMRC up-to date with their address is ridiculous – and just needs to be stated to show its absurdity".
Reports in the press were similarly scathing of HMRC's collective lack of compassion. It is regrettable that the case ended up at the tribunal, no doubt at considerable cost to the public purse.
The case of John Clark v HMRC  UKFTT 324 (TC) is no less concerning. Mr Clark suffered from severe learning difficulties and dyslexia. In a report compiled for the tribunal hearing, an educational psychologist stated that Mr Clark's intellectual level was that "of a primary school child".
Again, the case involved non-submission of returns and in this case Mr Clark relied on paragraph 3A, Schedule 1AB, Taxes Management Act 1970 – relief is available where it would be "unconscionable for the Commissioners to seek to recover the amount" due.
Mr Clark had been subject to estimated assessments which had not been appealed and they had therefore become final. Mr Clark had not worked and no tax was due. Mr Clark found it difficult to read and write and during the appeal hearing he had to be helped in the witness box with the documents which were put to him. HMRC argued that dyslexia was a condition of "varying degree" and that it did not absolve a sufferer of his tax obligations.
The tribunal considered the meaning of "unconscionable" in this context to be "completely unreasonable, unreasonably excessive" or "inordinate, or outrageous" and allowed Mr Clark's appeal.
A third case which is worthy of mention is The Appellant v HMRC  UKFTT 0839 (TC), a case with the startling head note: "whether mental illness is a reasonable excuse for long-term non-compliance – yes".
The Appellant was a paranoid schizophrenic. HMRC did not dispute the diagnosis, rather it disputed that this left the Appellant incapable of managing her tax affairs. Once again the case concerned penalties and surcharges for non-compliance. One of the complicating issues in this case was the fact that the Appellant's condition had deteriorated over time.
Indicative of the disconnection between the important issues and HMRC's lack of appreciation of them, was the fact that in preparing the appeal hearing bundle, HMRC had decided to exclude a detailed report containing information from a psychiatrist on when the Appellant's illness had begun. It did so because it considered the report to be irrelevant. Fortunately, the Appellant happened to have a copy of the report with her when she attended the appeal hearing and the tribunal was able to review it. The Appellant's appeal was allowed.
It would appear that despite encouraging us all to pay our 'fair' share of tax and relying on the concept of 'fairness' to justify the introduction of the likes of APNs and the 2019 loan charge, HMRC itself has difficulty in acting 'fairly' when faced with cases such as those discussed above. If HMRC is going to continue to invoke the concept of 'fairness' to justify certain policy objectives and to influence taxpayer behaviours, it needs to start to practice what it preaches. Of course, therein lies the dilemma for HMRC. There is no objective definition of 'fairness'. What is considered fair by one person will not necessarily be considered fair by another. Perhaps it is time for HMRC to abandon its mantra that taxpayers should pay their 'fair' share of tax and accept that taxpayers should pay tax that is lawfully due in accordance with the law as enacted by Parliament. When there is a legitimate difference of opinion as to the correct interpretation of the law, the independent tax tribunals and courts can determine whose interpretation is to be preferred!
1. An APN requires payment of an amount to HMRC on account of tax or National Insurance Contributions before an independent tribunal or court has determined that there is any such liability. There is no right of appeal against an APN.
2. A charge on certain outstanding loans which HMRC consider to be disguised remuneration, known as the 2019 loan charge, was announced at Budget 2016 and was introduced in the Finance Act (No 2) 2017. The 2019 loan charge will apply to all loans made since 6 April 1999 if they are still outstanding on 5 April 2019.
3. See the report by Emma Agyemang, Financial Times, 15 March 2019.
4. See, for example, the report by Sam Meadows, Daily Telegraph, 13 February 2019.