The Office of Tax Simplification’s recent report on HMRC’s guidance raises some important issues. One of them is the extent to which a taxpayer can rely on HMRC guidance. This can easily turn into an academic question, so let’s instead take a real-life example. Suppose I am selling my house and I want to know whether I will have to pay tax on the profit I make. Rather than just rely on advice from the man in the pub and look online.
A Google search on the question ‘do I have to pay tax when I sell my house?’ gives over 74m results, but luckily the links to gov.uk are high up on the first page, so with luck I will follow them and I get (at http://bit.ly/2S9e4HL):
You don’t pay capital gains tax when you sell (or ‘dispose of’) your home if all of the following apply:
If you don’t meet all these criteria you may have to pay some capital gains tax .
So, I conclude that there is nothing else to do. But if I had clicked instead on the very next link on the first page of the search, which is to a different part of the gov.uk site (bit.ly/2OGvTzP) I would have found:
You don’t pay capital gains tax when you sell (or ‘dispose of’) your home if all of the following apply:
If you don’t meet all these criteria you may have to pay some capital gains tax.
This is subtly different. This second example tells me for relief to apply automatically I can only have had one home, and also that relief is not available if I purchased the property to make a gain, things that are not covered in the first guidance. This second example also gives me a link to further details, whereas the first doesn’t. In fact, the link takes me to an interactive page where I am asked a number of questions. If I say, for example, that my home was rented out for part of the time I am taken to a page where I’m told I need to take further advice, which might involve ringing HMRC or appointing a tax adviser. But if I say that I only had one house, I never let it out and it didn’t have more than 5,000 square metres of grounds then I am told I am entitled to full relief and I don’t have to notify HMRC or pay any tax. One question that I am not asked is whether I purchased the property just to make a gain.
So, let’s suppose that I did purchase the property just to make a gain and HMRC subsequently enquires into my return and concludes that relief is not available. Can I say, ‘but I relied on your guidance and so it is unfair to tax me?’. In theory you do have a defence, but in practice it is very difficult to succeed.
For a start, can you actually prove which guidance you actually followed? Do you have a print-out on your file? And what about the differences noted above. Do you have a defence if you happened to click on the version which doesn’t mention buying to make a gain? After all both pages are current on the official gov.UK site. And then what happens if you did follow the link and worked though the questions to be presented with a page which says unambiguously that you are entitled to full relief?
This is just a microcosm of what is an exceedingly difficult issue. As the OTS report acknowledges there is a huge range of guidance on HMRC’s website, and it is often very difficult for the user to know what level it is aimed at and the extent to which he/she is obliged to trawl though pages of guidance just in case there is something of relevance.
There are two distinct aspects to this. The first is whether or not a taxpayer has a reasonable excuse defence against a penalty for an incorrect return if he/she has followed HMRC guidance. This is certainly possible but HMRC’s view of how far taxpayers should go in obtaining guidance on transactions is far removed from what most taxpayers would regard as reasonable. Much more difficult is being let off the tax itself because of reliance on HMRC guidance. As might be expected this is much harder to achieve. The courts will only allow this in the most exceptional circumstances: taxpayers must not only have followed incorrect guidance, but they must have acted to their detriment in doing so. It is not enough to say, ‘The guidance told me that I would pay no tax when I sold my house, so I shouldn’t have to pay it’. You would have to say and prove ‘had I known that I would have had to pay tax when I sold my house then I would not have sold it’.
The OTS has done a valuable job in drawing attention to these issues. We wait to see how the government will respond. There is no doubt that a comprehensive plan to tackle it would take a huge amount of time and money. In the current climate it is hard to see that it will sit high on the chancellor’s priority list, but it ought to. Taxpayers need to know where they stand.
The Office of Tax Simplification’s recent report on HMRC’s guidance raises some important issues. One of them is the extent to which a taxpayer can rely on HMRC guidance. This can easily turn into an academic question, so let’s instead take a real-life example. Suppose I am selling my house and I want to know whether I will have to pay tax on the profit I make. Rather than just rely on advice from the man in the pub and look online.
A Google search on the question ‘do I have to pay tax when I sell my house?’ gives over 74m results, but luckily the links to gov.uk are high up on the first page, so with luck I will follow them and I get (at http://bit.ly/2S9e4HL):
You don’t pay capital gains tax when you sell (or ‘dispose of’) your home if all of the following apply:
If you don’t meet all these criteria you may have to pay some capital gains tax .
So, I conclude that there is nothing else to do. But if I had clicked instead on the very next link on the first page of the search, which is to a different part of the gov.uk site (bit.ly/2OGvTzP) I would have found:
You don’t pay capital gains tax when you sell (or ‘dispose of’) your home if all of the following apply:
If you don’t meet all these criteria you may have to pay some capital gains tax.
This is subtly different. This second example tells me for relief to apply automatically I can only have had one home, and also that relief is not available if I purchased the property to make a gain, things that are not covered in the first guidance. This second example also gives me a link to further details, whereas the first doesn’t. In fact, the link takes me to an interactive page where I am asked a number of questions. If I say, for example, that my home was rented out for part of the time I am taken to a page where I’m told I need to take further advice, which might involve ringing HMRC or appointing a tax adviser. But if I say that I only had one house, I never let it out and it didn’t have more than 5,000 square metres of grounds then I am told I am entitled to full relief and I don’t have to notify HMRC or pay any tax. One question that I am not asked is whether I purchased the property just to make a gain.
So, let’s suppose that I did purchase the property just to make a gain and HMRC subsequently enquires into my return and concludes that relief is not available. Can I say, ‘but I relied on your guidance and so it is unfair to tax me?’. In theory you do have a defence, but in practice it is very difficult to succeed.
For a start, can you actually prove which guidance you actually followed? Do you have a print-out on your file? And what about the differences noted above. Do you have a defence if you happened to click on the version which doesn’t mention buying to make a gain? After all both pages are current on the official gov.UK site. And then what happens if you did follow the link and worked though the questions to be presented with a page which says unambiguously that you are entitled to full relief?
This is just a microcosm of what is an exceedingly difficult issue. As the OTS report acknowledges there is a huge range of guidance on HMRC’s website, and it is often very difficult for the user to know what level it is aimed at and the extent to which he/she is obliged to trawl though pages of guidance just in case there is something of relevance.
There are two distinct aspects to this. The first is whether or not a taxpayer has a reasonable excuse defence against a penalty for an incorrect return if he/she has followed HMRC guidance. This is certainly possible but HMRC’s view of how far taxpayers should go in obtaining guidance on transactions is far removed from what most taxpayers would regard as reasonable. Much more difficult is being let off the tax itself because of reliance on HMRC guidance. As might be expected this is much harder to achieve. The courts will only allow this in the most exceptional circumstances: taxpayers must not only have followed incorrect guidance, but they must have acted to their detriment in doing so. It is not enough to say, ‘The guidance told me that I would pay no tax when I sold my house, so I shouldn’t have to pay it’. You would have to say and prove ‘had I known that I would have had to pay tax when I sold my house then I would not have sold it’.
The OTS has done a valuable job in drawing attention to these issues. We wait to see how the government will respond. There is no doubt that a comprehensive plan to tackle it would take a huge amount of time and money. In the current climate it is hard to see that it will sit high on the chancellor’s priority list, but it ought to. Taxpayers need to know where they stand.
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