I wrote about Arctic Systems and the economics of small business tax yesterday.
The Professional Contractor's Group who represent the UK's contracting community, who are big users of small limited companies, has argued back after Arctic Systems. They undertaken a survey which is also reported here. It shows:
- 43% say biggest concern is complexity of the tax law
- 41% say HMRC assessed their liability incorrectly
- 42.3% say HMRC approaches you as 'guilty until proven innocent'
- 33.5% say they experienced vexatious behaviour from inspectors
These stats are telling in themselves. For example, 41% might say HMRC calculate their tax liability incorrectly but since the contractor has the responsibility under self assessment to do this that's unlikely to be true.
And it's actually true that 100% of HMRC approaches are on the basis of 'guilty until proven innocent'. That is where the onus of proof lies in tax.
Regrettably though there is evidence to support their last claim, and that's not to HMRC's credit.
But neither is calling for solutions that are unworkable of any benefit to the PCG. They have said:
Freelancers and other small businesses have very little trust in HMRC so it's high time that HMRC was put under a legal obligation not to harm peoples' commercial interests. [M]any PCG members have had costly and distressing experiences of dealing with HMRC - even when they did not owe any tax - and insisted that it is "quite wrong that HMRC can just walk away.
They added:
There's currently no mechanism for compensation for the stress and loss of earnings that a lengthy Revenue investigation can bring. PCG believes that must change.
That is unworkable. The right to investigate is essential to ensuring the right tax is paid in the UK. Like it or not, people do evade tax in this country. Contractors will be amongst those doing so. It is not possible to always identify accurately in advance who is and is not telling the truth. This takes time to establish. HMRC must have the right to establish that, and most tax payers could considerably help themselves in my experience as an accountant who has worked on many tax investigations if they were willing to give full disclosure and straight answers from the outset on accounts that were honestly prepared to HMRC. When that is done I have dealt with investigations from open to close in very short periods of time indeed.
So this cuts two ways. The taxpayer who is open, transparent, honest, keeps good records and deals with enquiries promptly should get exceptionally good treatment. And there should be processes to decide to close these case quickly. I agree with that. But expect the rest to have a rough time then. Because that is the corollary.
HMRC are going for a risk based approach for large business. This is what it would mean for small business. Will the PCG say yes?
And in the meantime, will the support wholesale change in the system of tax of small businesses?
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Hi Richard,
Under UK law a suspected criminal is innocent until proven guilty. Surely HMRC should behave the same way.
Yes, taxpayers do evade tax. But taxpayers do also make honest mistakes. I would say that given the complexity of UK tax law, taxpayers – who, let us remember, are laymen, not trained tax personnel – can hardly avoid making the odd mistake.
HMRC aren’t exempt from making mistakes either. I once worked with a client who was presented with a bill for almost £12,000 of tax because HMRC messed up his tax code.
So I would say that HMRC should follow the legal principle of “innocent until proven guilty”. Otherwise, aren’t they breaking the law?
And shouldn’t both sides, taxpayers and HMRC, follow the Quaker principle, “Think it possible that you may be mistaken”?
Not everyone who pays the wrong amount of tax is a thief.
M
M
Actually, under UK tax law a person is guilty until proven innocent. That has to be the case. They’ve already made a declaration on their tax return that they have been honest, so any enquiry must inevitably start on the hypothesis that this is wrong.
But, that said, I agree with you: there is an obligation to establish their intent if an error occurred. If it was innocent (and some are) then no penalty should be due. If it was not then I think penalties should be high. The current fudge where too often penalties of between 20% and 30% are paid irrespective of intent is unacceptable. That’s too high for the innocent, too low for the guilty.
This is an issue our forthcoming Code of Conduct addresses.
Richard
Hi Richard,
I stand corrected. I hadn’t realised there was a difference between tax law and the rest of UK law on this issue – apologies.
But that just shows how easy it is to make an honest mistake where UK tax law is concerned 🙂
M