RSM UK's George Bull considers how HMRC is developing an appetite for retrospective taxation.
The UK has been paying taxes since well before electrically powered computers arrived on the scene. Come to think of it, the UK has been paying taxes since way before electricity was discovered.
A legacy of this is that much of the legislation relating to the management of our tax system goes back to 1970. As a result, many important pieces of tax legislation are framed in terms requiring decisions to be made by a real person who is an employee of HMRC.
Without a doubt, the future administration of the tax system will be largely digital. While HMRC has been up there with the best of them when it comes to using IT, regular readers of Weekly Tax Brief will be familiar with our view that the underlying legislation must work properly in a digital environment.
HMRC’s position is that it uses large-scale automated processes to carry out routine tasks such as to give statutory notices, where making individual decisions on individual cases would be impractical, resource-intensive, or simply unnecessary in the light of published guidance or underlying legislation.
Nevertheless, as the existing analogue rules are not fully fit for purpose in a digital environment, HMRC has suffered a number of damaging defeats at tax tribunals who have objected to computers taking over the role of humans in a way not authorised by legislation.
With widespread recognition that the nature and operation of HMRC’s powers will need to reflect the transition to digital, there have been calls for a consultation to work out the practical implications of the necessary changes. On 31 October 2019 HMRC, believing that its current practices are supported by legislation, disregarded these calls by announcing its intention to introduce legislation in the next Finance Bill to affirm its practice of using automated processes.
The legislation will apply both retrospectively and prospectively and will cover the following functions:
- giving notice to file a return in relation to individuals, trustees, partnerships and corporate bodies;
- correction of a personal or trustee return by HMRC; and
- imposing a penalty under any provisions of the Taxes Acts and in respect of Stamp Duty Land Tax.
This means that both the automated processes themselves and anything done subsequent or pursuant to the automated process will be covered by this legislation prospectively and retrospectively. The only exception relates to taxpayers who have received a settled judgement from a court or tribunal regarding the use of automation by HMRC before 31 October 2019. They will not be subject to the retrospective application of this legislation in respect of the issues covered by that judgment.
Lack of Consultation
The government’s decision to press ahead unilaterally and without consultation has disappointed many in the professions who recognise the benefits of an open and participative approach. Consultation can be used to iron out practical problems, to ensure that the rights and obligations both of taxpayers and of HMRC are kept in balance and that the changes do not lead to unforeseen consequences. As it stands, HMRC’s approach leaves a large question mark hanging over tax cases which are due to be heard after the 31 October 2019 announcement but before the new legislation is passed in 2020. That of itself violates another important principle of UK taxation – certainty. It also emphasises the importance that MPs should adequately scrutinise the draft legislation before they vote it onto the Statute Book. That may be a vain hope: the legislative pressure on the new Parliament will be such that much new and important legislation is likely to be passed ‘on the nod’.