The Financial Times reports of a case where a taxpayer lost a £3.1m dispute after a judge said that HM Revenue & Customs (HMRC) could challenge tax calculations that relied on its own algorithms. The tribunal ruled that users of tax computation software could not rely on its results, even though its technical specifications had been provided by HMRC.
The case, Andrew Scott and the Commissioners for Her Majesty’s Revenue and Customs [2017] UKFTT 385 TC05851, related to two closure notices, both dated 13 February 2015, one for the tax year 2006/07 and the other for the tax year 2007/08. They concerned a taxpayer who had used a scheme involving insurance policies to produce a deduction which was then offset against other gains.
Part of the argument related to an appeal against HMRC’s decision that the rate of capital gains tax (CGT) applicable to gains accruing in each of those tax years was 40%, rather than 20% as the taxpayer contended, based on the taxation regime which prevailed at the time.
The other element in dispute turned on the way the tax was calculated and assessed. The returns for the relevant tax years were submitted incorporating calculations of the tax due made using software based on HMRC’s specifications. Those calculations showed tax payable on capital gains at the lower rate.
Scott argued HMRC was responsible for the way in which his tax liability was calculated in the relevant years and it was not open to HMRC to ‘enquire’ into a calculation which HMRC had itself performed.
The FTT heard evidence that HMRC accepted that third party software developed to its specifications could still throw up potential errors because it was not possible to test it against all potential fact patterns.
The FTT disagreed with Scott’s argument that HMRC could not enquire into what were, effectively, its own calculations.
The judge said: ‘The wording of section 9A of the Taxes Management Act 1970 (TMA) is clear. HMRC is entitled to enquire into “anything contained in the return”.
On that basis HMRC was entitled under section 9A TMA to enquire into the calculations of tax due for the tax years in question and so the amendments made by the closure notices were valid.
The FTT disagreed with Scott’s argument that HMRC could not enquire into what were, effectively, its own calculations.
This dispute is the latest example of the difficulties experienced by software in coping with the complexity of the tax system. It follows recent software glitches that put thousands of people at risk of paying hundreds of pounds more tax than they owed for the 2016-17 tax year.
Andrew Hubbard of RSM, a professional services firm, told the FT the ruling had implications for the tax authority’s ambitious plans to digitise the tax system through the “Making Tax Digital” programme which requires quarterly online updates.
He said that similar problems might occur again, since the “making tax digital” initiative would require businesses and landlords with turnover above £10,000 to rely on third party software, using specifications provided by HMRC.
