Scottish court HMRC decision ‘puts taxpayers in difficult position’

The decision by the Outer House of the Court of Session of Scotland (26 pages / 711 KB) found that HMRC can rely on its own manuals to set out details of what a taxpayer must include in a notice seeking to amend a tax return. It means that taxpayers “not only have to maintain knowledge of the law but must also check HMRC’s manual where the relevant legislation refers to the requirements for something being as a HMRC officer might reasonably require,” said tax expert Jake Landman of Pinsent Masons.

In this case, the court refused a taxpayer’s application for review of HMRC’s decision to refuse to consider a Research and Development Expenditure Credit (RDEC) based on lateness. RDEC is a tax incentive designed to encourage companies to invest in research and development in the UK allowing firms to reduce their tax bill or claim proportionate payable cash benefits. It was argued that the submission of the amended return without a corporation tax calculation still constituted a valid claim, and therefore the claim had been submitted before the deadline. As a secondary argument, the taxpayer also said that HMRC’s decision making on whether to accept a late claim was unreasonable.  

The debate centred on whether there was an obligation on the taxpayer to include the tax calculation with the amended return. The legislation on amending company tax returns is set out in the Finance Act 1998 (FA 1998) (359 pages / 10.9 MB). Schedule 18 of the act requires that amendments to corporation tax return may be made “by notice” to HMRC, “must be in such form as an officer of HMRC might require” and “must contain such information and be accompanied by such statements as an officer of HMRC might reasonably require”.

The court found that there was no formal mechanism set out in the legislation with which HMRC had to comply to impose requirements. It meant that the court considered it sufficient that HMRC had set out requirements in manuals and had communicated to agents that the requirements were to be set out in those manuals via its Agent Update 70, published on 21 February 2019. The court noted that HMRC manuals are internal guidance or handbooks for HMRC staff, but stated that because they are published, they can “constitute a public record of the requirements which HMRC has imposed.”

The decision means that taxpayers may be obliged to consider HMRC guidance, along with the legislation, in terms of tax return amendments. Landman said: “HMRC’s manuals contain HMRC’s interpretation and view of the law, but they are not, in most circumstances, considered to have the force of law. There are specific HMRC public notices that are clearly labelled as having the force of law, but that is not stated in relation to these parts of the relevant HMRC manuals. Manuals are also updated frequently and without notice.”

Regarding the second argument, HMRC had a statutory discretion under the FA 1998 to allow a claim which was submitted after the deadline. However, in this case, HMRC concluded that the claim was not delayed by any circumstances beyond the company’s control, and it was more likely that the cause was an oversight or negligence on the part of the company. The taxpayer raised several factors for the court to take into account, including that HMRC had all the information on which to make a decision, even if not in the documents and format that were required. The taxpayer also claimed the failure to lodge the calculation was caused by a system problem, either within the agent’s software or HMRC’s software and was therefore out with the company’s control, as well as asking the court to consider that the lateness was only a period of 20 days and that HMRC cannot have reasonably expected the claim to have been resolved by the initial cut-off date in any event. The court rejected all these arguments and found even though HMRC may have been able to work out the calculations from information submitted, this did not make HMRC’s refusal to allow the late claim unreasonable. It was held that HMRC are under no obligation to work out for itself what information was or to draw up the calculations which a taxpayer fails to provide.

“This part of the decision is perhaps to be expected given some elements of the fact pattern, in particular the fact that the agent in question clearly knew what the requirements for amendment were because on the same day they had successfully submitted the correct documentation for the same company in relation to a different accounting period,” Landman added.