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TW Ed warns that neither HMRC, nor the taxpaying public, will learn from its mistakes unless HMRC admits to them.

It may be said that “no publicity is bad publicity”, but HMRC seems to disagree. HMRC has a duty to the taxpaying public to recognise – and to publicise – when it is wrong, since those are the people whom, ultimately, HMRC exists to serve.

While it may be true that HMRC wins more tax cases than it loses, the number of losses which HMRC actually acknowledges is vanishingly small. This runs the risk of encouraging taxpayers to believe that it is not worth challenging HMRC – particularly given the disparity in resources. This in turn means that some taxpayers will end up paying more tax than the law intended.

What may be worse, is that this approach also encourages HMRC itself to believe that it is never wrong. Such self-delusion may become self-fulfilling, with self-regulation proving woefully inadequate until it results in catastrophic failure.

One might argue that we are pretty much there already.

We wrote about the issues with self-delusion becoming self-fulfilling when we observed several years ago that HMRC was so sure that it was NOT responsible for certain Tax Credits errors that it didn’t even bother to count them, much to the amazement of MPs whose in-trays were piled high with ample evidence to the contrary.

We have also written at some length about how HMRC’s understanding of the taxpayer’s defence of “reasonable excuse” is so tenuous that its severe and lengthy criticism has been a regular feature of tax cases. HMRC appears incapable of acknowledging that there is even a problem, let alone of addressing it.

We have also written more recently about HMRC’s appalling attitude to NRCGT returns and the penalties it has charged to ignorant (innocent?) non-residents disposing of UK property – a new tax regime whose claim to fame, other than its penalty rate, is that HMRC appears genuinely to believe that 4 missives from its Twitter account are sufficient to warn the 7billion people on planet Earth (who are not otherwise taxable in the UK) that the UK is now taxing foreigners. It is losing case after case at Tribunal, but seems happy to press on regardless.

If another example were needed, we might also consider the fiasco that is IR35. Many readers will already be aware that this regime effectively taxes people operating as director/shareholder of their own company as if they were employed directly by whoever engages their company, where the relationship is one that would be employment if the first individual (contractor) were engaged directly.

What is particularly troubling about the “reform” of this legislation in FA 2017 Sch 1 is that Public Sector Bodies (PSBs) now have to decide how to categorise contractors. A lack of clear guidance from HMRC to those PSBs meant that the NHS, among others, turned round and told its hospitals that ALL individual contractors should be put on the payroll and subjected to PAYE. This was wrong, and not at all what the legislation required. Unfortunately, it fell to third parties to advise the NHS where it “appeared to have misunderstood” the new regime, and that it did actually have to consider each engagement on a case-by-case basis. The NHS later retracted its original guidance. Yet the damage appears already to have been done. ContractorCalculator is warning that thousands of contractors are now overpaying tax, thanks mainly to PSBs deciding to apply PAYE “to be on the safe side”.

We have previously written about how Contractor Calculator had found that HMRC’s online test tool was not fit for purpose; we all laughed at how HMRC’s decision to re-categorise its own IT sub-contractors meant its online tools and other projects would not get finished because the contractors had all gone off to work elsewhere. Some might find that indicative of a lack of Mutuality of Obligations that might in turn undermine HMRC’s judgment. The joke is not funny any more, as even HMRC has had to admit. RSM’s Andrew Hubbard has also written that HMRC has decided to postpone some of the more useful aspects of its Digital Transformation programme, because resources will not meet demand in the run-up to Brexit.

But my greatest concern is that HMRC’s comprehensive misapprehension is feeding back to misinform government policy, such as the desire to roll out the new IR35 regime for PSBs, to contractor companies in general.

The government seems confident in the new and ‘improved’ IR35 regime, because “initial evidence suggests that it has been successful in improving compliance”, which is seemingly down to an increase in tax take from the NHS through payroll returns. If so, it is fearsome strange that the government did not add “…although we cannot really tell at this stage whether or not that is down instead to the NHS’s initial decision incorrectly to advise everyone to re-categorise all contractors en masse, or to PSBs using HMRC’s online employment status tool, which we [should] know to be unfit for purpose”.

If Contractor Calculator’s assessment is accurate, and many PSBs are incorrectly treating contractors as PAYE employees for an easy life, then they are NOT actually being compliant, and in fact compliance with the legislation will have WORSENED as a result of the new regime’s implementation. Will HMRC take PSBs to task for effectively paying over too much of someone else’s tax, or will they not even check for such errors, just as the National Audit Office found HMRC failing to check for its own errors against Tax Credits claimants?

We have also queried the OBR’s grasp of maths when it warned of the damage done to tax receipts as a result of incorporating one’s business, but note that page 121 of its Economic and Fiscal Outlook report for November 2016 (which appears to have influenced the government’s appreciation of the tax consequences of incorporation in both the 2016 Autumn Statement and the 2017 Spring Budget) reveals that the OBR’s modelling on incorporation was undertaken with HMRC’s assistance. So perhaps it’s not the OBR’s sums that are wrong. Whichever is responsible, anyone armed with a decent appreciation of how the tax regime actually works could have demolished the figures in the report in a matter of minutes.

One of the more interesting revelations from HMRC’s service quality review referred to in RSM’s piece mentioned above was that the new trial of issuing returns pre-populated with a taxpayer’s known pay and tax information actually resulted in a lower tax take. And yet, as per a previous article, we have heard HMRC assuring the Public Accounts Committee that the new Making Tax Digital regime would close or significantly narrow the tax gap by increasing accuracy in tax returns. Now that increasing accuracy by pre-populating tax returns has resulted in a lower tax yield to the Treasury, HMRC’s appetite for the pre-populated returns part of its “digital transformation” programme has suddenly… waned.

I strongly suspect that we will, eventually, “discover” that MTD will not significantly increase the tax yield* after all. But I reckon this will become clear to HMRC only once MTD has been introduced, and it has to explain why receipts have not dramatically risen as promised. By then, the damage, the inconvenience, and the immense cost and upheaval, will have been done – not to HMRC, of course, but to businesses.

I cannot wait.

*While it is true that the HMRC representative referred to in the previous article did not explicitly state that tax yield would increase as a result of MTD, it was clear that his assurance that MTD would close the tax gap meant an increase in tax yield. The alternative would be HMRC’s discovering that its estimate of the tax gap was significantly over-egged, and as I think this article makes abundantly clear, HMRC doesn’t make mistakes.