A number of taxpayers with HICBC appeals awaiting the outcome of the forthcoming Court of Appeal in HMRC v Wilkes have recently contacted us about correspondence received from HMRC about their 2017/18 tax position.
Self-Assessment
In their letters, HMRC correctly notes that the Upper Tribunal mentioned the fact that, if HMRC act within the statutory 4-year tax filing deadline, they can require HICBC taxpayers to file a self-assessment tax return. This means that the tax years 2017/18 and following can be dealt with by HMRC serving affected taxpayers with a notice requiring them to file a return. Affected taxpayers are asked to confirm by 3 February 2022 whether they wish to continue the current appeal against the 2017/18 Discovery Assessment, in which case HMRC will send a notice to file a self-assessment tax return (making the Discovery Assessment and its appeal irrelevant, as the tax would be collected by a different mechanism), or whether they wish to settle the Discovery Assessment appeal by paying the tax now.
Taxpayers hoping to apply the Wilkes case to their own affairs should remember that Wilkes does not undermine the obligation to pay the HICBC in relevant years - only that for technical reasons the Discovery Assessment collection methodology used by HMRC was not available. It follows that where HMRC is within time to assess the HICBC by other means, it may do so. In fact, as HMRC's primary function is to collect lawfully imposed taxes, it would arguably be failing in its duty if it did not do so in these cases. We and others have long argued that the HICBC has been poorly designed and implemented, and many people hope for its abolition or substantive reform. However, that is no reason not to pay the HICBC when it is properly assessed. HMRC must protect its ability to receive these tax receipts and should use other appropriate collection methods where these are available. This is the case whether or not there is currently a Discovery Assessment for that year which is under appeal. However, the corollary of that is that HMRC should withdraw the Discovery Assessment if it seeks to collect the HICBC by other means.
Subject to the point below about Simple Assessments, taxpayers receiving these letters will have to decide whether they wish to pay the tax claimed under the Discovery Assessment now - irrespective of the fact that the First-tier Tribunal and the Upper Tribunal have both decided that HMRC did not have power to issue such Discovery Assessments. The alternative would be to complete a tax return, which is a more onerous task. The question is ultimately whether taxpayers wish to take a point of principle about the ineffectiveness of the HICBC Discovery Assessments, even if it is more costly and time-consuming to do so. Self-assessment tax returns must be submitted within three months of a notice to file. We expect most or all taxpayers will not wish to pursue pointless litigation on a point of principle however strongly they feel about HMRC's conduct.
Penalties
If taxpayers do wish HMRC to proceed with issuing a notice to file a 2017/18 self-assessment tax return, they should first ask HMRC to confirm that no additional penalties will be applied for the late filing of the return.
Further Appeal?
One interesting comment in HMRC's letter is that "[i]t is possible that the [Court of Appeal] decision may result in further appeals to the Supreme Court": HMRC clearly wants to give the impression that it has no intention of giving up these arguments unless and until all appeal options have been tried. Of course, even if the losing party in the Court of Appeal wishes to take the case to the Supreme Court, this can only be done with the permission of either the Court of Appeal or the Supreme Court, and permission would only be given if the point is considered to be one of "the greatest public... importance".
Simple Assessments
One disappointing feature of the HMRC correspondence we have seen is that HMRC only refers to a notice to file a self-assessment tax return in substitution for the existing Discovery Assessments. However, the Upper Tribunal in Wilkes specifically noted (at [101]-[102]) that so-called "Simple Assessments", which were introduced in 2017, "could appropriately be used" in these cases as a more cost-efficient and user-friendly alternative to filing a tax return. Simple Assessments would enable HMRC properly to assess taxpayers to HICBC but without forcing them to submit tax returns.
We were surprised when HMRC confirmed in the Upper Tribunal that they had not considered the use of Simple Assessments in HICBC cases, and it seems from their recent letters that they have still not done so, despite the Upper Tribunal's encouragement. HMRC have not explained their reluctance to use their relevant statutory powers.
Whilst we would encourage the use of Simple Assessments for tax years within the normal four-year assessment period, we consider that for legal reasons HMRC ought not to have recourse to them in most or all HICBC cases for 2016/17 (and they are not available for earlier years).
We should be interested to hear from any taxpayer who receives a Simple Assessment, whether for 2017/18 or later and/or for 2016/17.
Finally, the House of Lords Economic Affairs Committee's 2020 report, New powers for HMRC: fair and proportionate?, raised concerns that HMRC has for some time been arrogating to itself unwarranted powers. The Committee urged HMRC to make better use of existing powers before seeking new legislation. On the evidence of HMRC's failure to use Simple Assessments in clearly appropriate HICBC cases, the Committee's concerns seem especially well-founded.
25 January 2022The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
