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Computer says no?

View profile for Paul Thompson
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Whilst some of us were spending Halloween ‘trick or treating’, HM Revenue & Customs (HMRC) were carving out a Technical Note which sought the introduction of legislation to confirm the legitimacy of using automated processes for serving notices – a measure which may have scary consequences for taxpayers.

The thought of a brown envelope from HMRC dropping through the letterbox can send chills up the spine.  Whilst it might contain something innocuous, such as an annual summary showing how your taxes have been spent, sometimes the contents might have potentially nasty side effects.  This is especially true where the correspondence is a notice to file a tax return or a penalty determination notice.

Where a tax return is not submitted by the prescribed due date, the Revenue will issue automatic penalty notices, as they will also do when taxes are paid late.  Under the current legislation – TMA 1970 – any such notices must be issued by an “officer” of HMRC.  This therefore means that the penalty notice must have been issued by a specific individual working for the Revenue as opposed to having been issued automatically by computer without the intervention of an individual.

However, the Revenue have increasingly been using automated processes to issue statutory notices and this has led to their validity being challenged by the affected taxpayers.  In a recent case heard before the First-Tier Tribunal (Tax), the taxpayer, Craig Shaw, won his appeal that a notice to file a tax return was invalid as it had not been issued by an officer but instead automatically - in this particular case digitally via HMRC’s self-assessment digital service.  The tax return in question was submitted late and therefore the effect of the taxpayer’s successful appeal was that the late filing penalties had to be cancelled since they could only be levied where a valid notice to file had been issued.

Other tax tribunal judges involved with similar cases regarding the validity of the issue of formal notices have taken issue if HMRC could not confirm which particular Revenue officer had made the decision to issue the notice, and have also found in favour of the taxpayer.  As a result of this stance, HMRC were potentially looking at losing more cases and the attendant penalties - despite their view that their automated processes for the issue of notices were supported by legislation.  Therefore, they had a pressing need to ensure that computer generated notices were recognised as lawful and hence the Technical Note was released stating that “making individual decisions on individual cases would be impractical, resource intensive, or simply unnecessary”.

The Technical Note goes on to advise that the validity of automatic processes will be confirmed in the next Finance Bill.  Whilst there is no dispute that the provisions of TMA 1970 should be reviewed to ensure they are appropriate for a digital age, it is disturbing that HMRC appear to be imposing revisions to the legislation surrounding the issue of notices without any consultation.  This seems to fly in the face of recent practice whereby the Revenue have frequently launched consultations in order to gather opinions to help them develop new legislation or make changes to existing rules.    

Even more unsettling is the fact that the Technical Note also states that the legislation will apply retrospectively.  As a result, any notices that have already been issued by computer will be valid - with no appeal available to the taxpayer. 

HMRC have lodged an appeal against the First-Tier Tribunal decision in the Craig Shaw case and it is due to be heard before the Upper Tribunal (Tax and Chancery) later this month.  It will, therefore, remain to be seen whether the prospect of this new legislation will affect the judgement.

If HMRC get their way and their automated processes become specifically supported by legislation, then it would appear that the computers are really starting to take over – or at least in so far as the issuing of HMRC notices is concerned!