Tax returns are such an ingrained part of the tax system that it is hard to believe that there can be any doubt about how they work. But recently the tax tribunals have started to look at what the legislation actually says and have reached some surprising conclusions.
In the first place they have decided that just because a return 'looks like a return, swims like a return and quacks like a return' doesn’t mean that it actually is a return.
The taxes acts give HMRC power to issue a tax return for the 'purposes of establishing the amounts in which a person is chargeable to income tax and capital gains tax…'.
Why else you may ask would HMRC issue a return? One reason is to enable it to collect underpayments of PAYE. Where PAYE arrears cannot be coded out HMRC practice has been to ask individuals to make a voluntary payment and if this is not forthcoming to issue a tax return.
Once a return has been issued HMRC then can enforce collection. But a series of recent tribunal decisions has shown that this is not lawful. HMRC already knows the amount of tax which is due and therefore the return has not been issued for the purpose of establishing what it is.
As a consequence, a return issued in these circumstances is not a valid return and penalties cannot be charged if it is filed late.
But there is more. Most people who are within self-assessment will automatically file a return, perhaps using commercial software or an agent. But if those 'returns' are submitted without HMRC having issued a notice to file, then they are not technically returns within the meaning of the act and therefore cannot attract penalties if they are submitted late. I hasten to add that I don’t advise people to deliberately refrain from filing if they haven’t received a notice, but it is extraordinary that it is taken until now for this important issue to come to light.
But that is not the end of the problems. For a return to be valid it has to have been issued 'by a notice given… by an officer of the Board of HMRC'.
Have a look at your last notice to file a return: can you see the name of the officer who gave the notice? If there anything to indicate that a decision was made by a specific officer of HMRC to issue the return? Almost certainly not. It is far more likely that it will simply come under some sort of generic HMRC letterhead. A tribunal judge has recently overturned a late filing penalty on the basis that there was no evidence that an officer of the board had issued the notice to file – the HMRC computer simply churned out notices to file with no human intervention.
Our tax system has its roots in Victorian time when the number of taxpayers was tiny and you can imagine individual civil servants writing individual letters to taxpayers. (In fact when income tax was first introduced it was sufficient for a notice to file to be attached to the door of the local church to remind those few local residents who paid tax that they had to file!).
While there is no excuse for HMRC not following the letter of the law it does seen archaic that the current rules do require an officer to issue a notice to file. We have said many times in this briefing that there is an urgent need for a complete overhaul of the current Taxes Management Act, which dates from 1970 but has its roots in legislation going back at least a century. Judgments like this only hasten the day when HMRC accepts that it is in its own interest to start that process.