Ensuring HMRC’s automated processes are valid
By Susan Cattell, Head of Tax Technical Policy
29 November 2019
Susan Cattell discusses the announcement of proposed legislation, to be included in the next Finance Bill, to confirm that HMRC’s use of large-scale automated processes is, and always has been, in line with the law. ICAS would like to see this act as a trigger for the government and HMRC to address the fundamental problems which lie behind the announcement.
Tax legislation is behind the (digital) times
The legislation relating to tax administration is currently scattered across the Taxes Management Act 1970, various Finance Acts and some regulations. It isn’t easy for taxpayers to access and apply to their own circumstances. It also hasn’t kept up with technological developments, so it is no longer fit for purpose.
ICAS has called for a consolidation of all tax management and administration provisions in a new Taxes Management Act (TMA). In producing this the opportunity should be taken to update the legislation to take account of digital developments and to rewrite it in the more user-friendly style which the Tax Law Rewrite project applied to other important tax statutes.
Any decision on whether to tackle the fundamental problems through a consolidated TMA will now have to wait for a new government; it would also take time to implement. In the meantime an unsatisfactory sticking plaster has been applied to address some immediate revenue-threatening issues, as set out in a Technical Note: Automated decisions published on 31 October 2019.
Why is the Technical Note needed and what does it say?
The note explains that HMRC uses large-scale automated processes to carry out routine tasks, such as giving statutory notices (for example, notices to file returns), where making individual decisions in individual cases would be ‘impractical, resource intensive, or simply unnecessary’.
However, taxpayers have been challenging the legal validity of HMRC’s approach. Two cases (Nigel Rogers and Craig Shaw) were scheduled to be heard by the Upper Tier Tax Tribunal (UT) in November - which may have triggered publication of the technical note ahead of the dissolution of parliament for the general election.
In both these cases the First Tier Tax Tribunal (FTT) decided that valid notices to file returns had not been given by HMRC and that therefore there could be no penalties for late filing. In the FTT’s view, HMRC’s automated processes for giving notices to file did not meet the requirement in the Taxes Management Act that notices to file should be given by ‘an officer of the Board’. UT decisions are binding, so judgments in favour of the taxpayers could have significant consequences for HMRC’s ability to impose penalties; it has been reported that numerous similar cases are awaiting hearing by the FTT.
The note states that the government’s view is that HMRC’s use of large-scale automated processes to serve certain statutory notices and to carry out certain functions is, and always has been, fully supported by legislation. However, in order to provide certainty and put the matter beyond doubt, the government plans to introduce legislation in the next Finance Bill to affirm that HMRC’s practice of using automated processes to help fulfil certain functions has a firm legal footing.
Which HMRC functions are affected?
The current proposal is that the new legislation will provide that, for the following functions, anything capable of being done by an officer may be done instead by HMRC through the use of a computer or other electronic means (whether automatically or not):
- The provisions contained in TMA 1970 at s8, s8A and s12AA which provide for giving notice to file a return in relation to individuals, trustees and partnerships.
- S9ZB TMA 1970, which provides for the correction of a personal or trustee’s return by HMRC.
- Paragraph 3 Schedule18 Finance Act 1998, the provisions for the issue of a notice to file to corporate bodies.
- S100 TMA 1970, the provisions for the making of a determination imposing a penalty under any provisions of the Taxes Acts.
- Schedule 14 Finance Act 2003, which contains provisions for the determination of penalties in respect of Stamp Duty Land Tax.
Retrospective and prospective application
In order to safeguard revenues, the legislation will apply retrospectively and prospectively – both to the automated processes themselves and to anything done subsequently which relates to the automated process in question. The technical note illustrates this with an example:
Where a notice to file an ITSA return was issued under section 8 TMA 1970 by HMRC using an automated process, anything done by HMRC related or pursuant to the issuance of that notice, such as charging a late filing penalty, or enquiring into any return received pursuant to the notice, will be covered by this legislation.
The only exclusion from retrospective application will be for taxpayers who have received a ‘settled judgement’ from a court or tribunal regarding the use of automation by HMRC, before 31 October 2019 (the date of the announcement).
Correction of tax returns by HMRC
The functions covered by the new legislation will include the correction of tax returns by HMRC. ICAS raised concerns with HMRC some time ago that corrections it has been issuing, where it has decided to reclassify a Scottish taxpayer as English (or vice versa), are not in line with the legislation or with HMRC’s own guidance in its self assessment manual. This would be of less practical significance if the corrections were always ‘correct’, but our members reported cases of 2017/18 returns where HMRC residence status corrections were not appropriate.
HMRC had agreed, early in 2019, to adopt a different approach to notification of residence reclassifications which would make clear that a correction was being made and why – and that the taxpayer has the right to reject the correction. However, we have already heard of a couple of 2018/19 residence status corrections where this does not seem to have happened. It isn’t clear if these are isolated errors or the result of a policy decision (perhaps linked to the announcement in the Technical Paper). ICAS is seeking clarification of HMRC’s policy on notifying corrections because we do not believe that it assists compliance if taxpayers cannot easily see that HMRC has ‘corrected’ their return, or why it has done so.
We would like to hear from members about any examples of HMRC corrections for 2018/19 (relating to residence status or to other issues), which do not clearly state that a correction is being made – and why. Please send us your comments.
What next?
It seems likely that any new government will wish to proceed with the legislation, due to the risk of revenue losses if it does not do so. There should therefore be an opportunity to comment on the details when the next Finance Bill is published in due course.
However, the fact that HMRC and the government have found it necessary to take this action should act as a trigger for action to address the fundamental problems with the legislation relating to tax administration. ICAS will continue to call for a new Taxes Management Act which brings together all the legislation in one place, takes account of developments in technology and is written in a user-friendly style.