Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

Replies to Queries - 1 - A potential enquiry?

03 October 2001
Issue: 3827 / Categories:

Some eighteen months ago we were approached by a couple who had received a letter from the compliance unit of one of the tax offices requesting a meeting with them to discuss their activities as cat breeders and their apparent failure to notify chargeability of this source.

Some eighteen months ago we were approached by a couple who had received a letter from the compliance unit of one of the tax offices requesting a meeting with them to discuss their activities as cat breeders and their apparent failure to notify chargeability of this source.

Partnership and individual returns were issued for 1996-97, 1997-98, 1998-99 and 1999-2000 and these were filed denying the existence of a trade. The matter dragged on and we referred the case to the Regional Director only for him to refer it back to the District Inspector. We again referred it back to the Regional Director with which we forwarded hobby accounts reflecting the extent of the 'losses' arising over a period of four years.

In April 2001 the Inspector announced that he was going to enquire into the partnership tax returns; a meeting took place between the Inspector and the writer from which it became apparent that the Revenue really had no in depth knowledge of the subject. Eventually we referred the matter to the Adjudicator after which the Inspector has concluded his enquiry with the statement that 'The losses claimed in returns are not allowable and in view of this there is effectively a no profit, no loss situation arising in the year'. As stated above, losses were never claimed in the partnership returns.

In view of the above, is there any way in which our clients can recover costs from the Revenue?

(Query T15,884) – Charlemagne.


'Charlemagne' needs to consult the Revenue Code of Practice COP1 (Mistakes by the Inland Revenue), available from Revenue offices and also on the Revenue website. It goes through in some detail the circumstances in which a taxpayer may claim compensation, the amounts and categories of compensation that may be paid, and the procedure for claiming.

In summary, this appears to fall under the heading of 'persistent error' rather than 'serious error' – the Revenue has not demanded an excessive amount of tax or acted in a heavy-handed manner, but it has spun out an argument long after it should have resolved it, and appears to have caused the taxpayer to suffer unnecessary expense. The final comment from the Inspector – disallowing losses that have never been claimed – is the 'icing on the cake', well calculated to make the accountant's blood boil.

COP1 states that additional professional fees, together with identifiable postage and telephone costs and wasted wages (if an employee had to deal with the matter) may be claimed. A claim should apportion the total costs between claimable and non-claimable: the taxpayer cannot recover those costs which would have been incurred if the Revenue had arrived at its final conclusion when it should have done – the question may have been a reasonable one in the first place, and the costs of dealing with reasonable questions fall only to the taxpayer.

COP1 also raises the possibility of a 'consolatory payment' for the stress and inconvenience to the taxpayer. Given that the taxpayer's own time and effort is not a 'cost' which can be reimbursed in the same way as professional fees, this is the only true compensation to the taxpayer personally. The leaflet states that this might be in the range £50 to £250, but in exceptional cases might rise to £1,000. 'It is unlikely to exceed £2,000' – presumably that would be for the very worst and most harmful Revenue mistakes.

The first step, then, is to identify what should be claimed, and make a complaint accordingly. Any complaint should set out exactly what is sought – an apology, perhaps an explanation, an assurance that it will not happen again, and an itemised request for compensation and consolation. This goes first to the Officer in Charge of the taxpayer's own tax office; if the response is not satisfactory, it should be sent to the Director responsible for that tax office; and finally, if still not satisfied, to the Revenue Adjudicator, whose address appears in COP1.

Of course, further time and expense may be incurred in making the complaint, and it is not entirely clear whether this can itself be claimed. But there is a certain satisfaction both in making the complaint and receiving something back from the Revenue, and those who have carried out their duties in such a slipshod manner should not be allowed to get away with it. – Leyborne.


I think, as in most cases, the Revenue will plead 'we have only been doing our job'. However, it is how it has been (and still is) doing its job that always seems to cause more problems than it is worth!

The course of events that 'Charlemagne' describes falls in line with what is mentioned in the Revenue leaflet IR120 'You and the Inland Revenue' (Tax, Collection, National Insurance contributions and Accounts Office). The complaint was first directed at the District Inspector and then to the Regional Director, who earns a black mark for palming it straight back to the District Inspector. However, there is no mention as to whether the Regional Director dealt with the hobby accounts forwarded to him. Also, that the Inspector only initiated the enquiry in April 2001 means a black mark for him.

Looking at the Revenue manuals Redress Handbook, we find a fairly accurate summary of what has occurred:

'Investigations unnecessarily prolonged

3.7.7. Claims of this type are the most difficult to deal with and generally take the most time to review. Usually the taxpayer claims that the investigation was badly handled and unnecessarily prolonged by either the Inspector's lack of knowledge or unwillingness to accept explanations which had been provided earlier. The accounts submitted may well have been discredited and, at that point, revised figures offered by the taxpayer which eventually proved to be realistic. If they were rejected, with higher figures proposed by the Inspector in turn being discredited by the taxpayer, we have the makings of a justified compensation claim.

3.7.8. If the Inspector agreed the taxpayer's revised figures as soon as any error in assumptions was pointed out, or if the basis on which the Inspector's alternative computations were made was defensible in the light of the information available at the time, it should be possible to maintain that there was not a serious error. But if the Inspector persists with alternative figures to an unreasonable extent, that is more likely to be a pardonable error which has become serious through repetition. The additional costs to the taxpayer, beyond the point at which the case should have been settled have then to be considered for reimbursement.

3.7.9. If there have been delays in working the case within the limits set out in the Code of Practice then once again a compensation payment will need to be considered.

3.7.10. Every case has to be considered on its merits against the underlying principles of serious error; pardonable error which has become serious by virtue of repetition or persistence; or repeated but different errors which, by their number and impact on the taxpayer's compliance costs, amount to serious error.'

It is therefore suggested that the clients' claim for costs should be initiated by writing to the Inspector concerned, with reference to the above paragraphs and wait for his reply.

If this is not in the clients' favour, then the Regional Director should once again be contacted, with the thought of involving the Adjudicator or even Member of Parliament not to be overlooked. – NK.


Extract from reply by 'GJF':

With the clients' permission, photocopy the whole file and seek an urgent meeting with the Member of Parliament, with a view to referral to the Parliamentary Commissioner (Ombudsman). I have always found MPs very helpful in resolving disputes with the Revenue, where the latter has acted unreasonably. Normally, the MP's secretary will write a letter to the local office saying that the case is being considered for referral to the Ombudsman, and that often results in compensation and/or apologies being authorised with surprisingly little delay!


Editorial note. 'GJF', in his full reply, describes a similar case to that of the querist, where the behaviour of the Revenue was decidedly worse than that encountered by 'Charlemagne'. However, 'GJF's' client did not wish to 'prolong the agony' by taking the matter beyond Regional Head Office.

Issue: 3827 / Categories:
back to top icon