Special relief is a great relief to Mr Scott

Wed 16 Sep 2015

A taxpayer who had got seriously behind with his tax affairs has obtained last-ditch relief because the Tribunal decided it would have been unreasonable and excessive for HMRC to refuse to reduce assessments under the special relief rules.

The story began when Mr Scott failed to file his 2006/07 and 2007/08 self-assessment tax returns, so on 28 June 2010 HMRC issued determinations of tax for both years.

HMRC determinations are not appealable but at that point Mr Scott could still have filed the outstanding returns within three years of the relevant filing dates (31 January 2011 and 2012 respectively) and his self-assessments would have automatically displaced HMRC’s determinations (though HMRC would have been able to review and challenge the returns themselves).

When Mr Scott finally filed the returns in November 2012 they showed much lower tax than HMRC’s determinations but Mr Scott could not rely on the tax determinations being overridden automatically.

Into the last chance saloon

Instead he could only claim special relief which is effectively a taxpayer’s last resort when all other avenues of recovery of overpaid tax have failed.

In this case special relief could only apply if, broadly:

• it would be unconscionable (ie ‘completely unreasonable’ or ‘unreasonably excessive’) for the amount to be recovered or repayment to be withheld;
• the taxpayer’s affairs were otherwise up to date or were being brought up to date; and
•  the taxpayer had not relied upon this paragraph previously, or there were exceptional circumstances as to why he had.

Mr Scott’s argument was that the determinations were excessive and that the returns were late due to the serious illness and subsequent death of his accountant, compounded by his own matrimonial difficulties. His representatives had pointed out to HMRC the great disparity between the tax determined by HMRC (circa £11,250) and the actual liability based on the returns eventually submitted (circa £3,750) but HMRC denied the claim for special relief on the basis that Mr Scott had a poor previous compliance record and had been subject to legal proceedings by HMRC. This would not have been a bar under the second condition above if Mr Scott’s affairs were otherwise up to date and as HMRC did not use that condition to deny relief it must be assumed that he had brought his tax affairs up to date.

HMRC refused special relief, so Mr Scott appealed to the First-tier tax Tribunal. The Tribunal approached the case on the basis that their role was to consider whether HMRC’s decision-making process was correct in its approach and whether they had genuinely applied the test of unconscionableness.

On this basis, the Tribunal found that because HMRC had not taken proper account of the disparity between the liabilities in the determinations and the value of the actual liabilities eventually reported, their approach in making the decision was unreasonable.

The Tribunal found that HMRC had failed to take account of this material factor in arriving at their decision as to whether it was unconscionable to recover the tax. In the words of the Judge ‘HMRC did not engage with the argument in any genuine sense and instead chose to focus on Mr Scott’s tax history’.

Even though the Tribunal commented that Mr Scott’s approach to his tax affairs was ‘most unimpressive’, this was not to be taken into account in arriving at the decision whether special relief was available as his affairs had been brought up to date.

HMRC’s decision making process in refusing special relief was flawed in that they did not take proper account of all the facts put before them. The result might have been different if HMRC had given proper consideration to the disparity in the amounts of tax contended for: they might then have been able to argue the punitively high determination was reasonable in the light of Mr Scott’s past history but they did not.

This was only an FTT decision which does not set any precedent, though it may be persuasive in future cases. It is also potentially open to appeal since the decision about conscionableness is one of law, not fact, and so may be susceptible to being overturned should HMRC appeal.