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HM Revenue & Customs has come under fire for its compliance capabilities after a case it was pursuing collapsed because it failed to submit required documents on time, the latest legal setback for the UK tax authority.
Last week, a judge threw out a tax evasion case brought by HMRC after its lawyers missed a deadline for filing paperwork by two hours. HMRC is seeking to have the case reinstated.
Another case HMRC was pursuing – seeking to impose a £14m fine on an individual for failing to provide tax-related information – was dismissed last year, also as a result of problems with its procedures, according to a judgment published in June.
Several tax lawyers and accountants said both episodes were a sign of deeper problems with the agency’s enforcement. Those the agency wanted to go after were capable of “making a mess of things,” said Dan Neidle, a former attorney at Clifford Chance and founder of the Tax Policy Associates think tank.
“There is a consensus across the profession that HMRC’s litigation strategy is broken,” he added.
Ray McCann, a former senior tax investigator at HMRC and now a consultant at Charter Tax, said: “All organisations make mistakes from time to time, but HMRC has shown in recent years that it makes costly mistakes.”
In the case dismissed by the Tax Division of the Court of First Instance last week, HMRC wanted the judge to find that a particular type of financial arrangement – an “enhanced umbrella scheme” – constituted a tax avoidance scheme whose details must be disclosed to the authority.
HMRC lawyers told the court it would be “completely disproportionate” to throw out the case “simply because it had missed a deadline by two hours”.
However, court judge Nigel Popplewell said the case should be thrown out as a result of the late filing, “as night follows day”.
HMRC said in a statement: “We take the court’s directions very seriously and always do our best to comply with them fully. There is a procedure in place to reinstate the case.”
In his judgment, Popplewell stressed that if HMRC wished to reinstate the case it would need to meet another deadline: submitting the application within 28 days of the judgment.
Neidle said it was “just astonishing” that the legal documents had been served late. “Deadlines are the most basic thing. If you get that wrong, you will get a lot of other things wrong,” he said. “HMRC has completely lost control.”
In the other case, HMRC wanted the High Court to impose a £14m fine against an individual for failing to disclose information the authority had requested.
The reasons for the court’s dismissal were more complex than in the umbrella scheme case, but related to the time HMRC gave the individual to respond.
HMRC said: “We have safeguards in place to ensure that future penalties are imposed within the prescribed timeframes.”
Criticism of HMRC’s enforcement of the rules comes at a time when its customer service is also coming under scrutiny. A damning report in May by spending watchdog the National Audit Office concluded it was failing the public.
“HMRC simply does not have enough resources to do its job,” said tax professor and accountant Rebecca Benneyworth. That “manifests itself not just in long waits for the phone or letters to be answered, but more fundamentally in process errors like these, whether through understaffing or inadequate training,” she added.
