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A contractor was subject to a Regulation 80 determination on sub-contractors who operated on his behalf on a self-employed basis. The contractor was visited by a solitary HMRC officer in the initial stages of the investigation without any contact being made with the authorised agent. At this visit, the taxpayer was told it was very likely that he would be liable for PAYE and NICs for the last six years on the pay of the sub-contractors because they should have been employees. He was invited to make a substantial payment on account there and then.
A contractor was subject to a Regulation 80 determination on sub-contractors who operated on his behalf on a self-employed basis. The contractor was visited by a solitary HMRC officer in the initial stages of the investigation without any contact being made with the authorised agent. At this visit, the taxpayer was told it was very likely that he would be liable for PAYE and NICs for the last six years on the pay of the sub-contractors because they should have been employees. He was invited to make a substantial payment on account there and then. The taxpayer was also told that other (named) individuals in his neighbourhood had been investigated by this officer and it would be in his best interests to co-operate. Neither would it be of help to contact his accountant.
The client made no payment on account and consulted his agents. Lengthy correspondence ensued and a barrister prepared a skeleton argument for the appeal to be heard before the General Commissioners. There were frequent delays by HMRC. Shortly before the hearing (listed at our request), HMRC stated it was not in the public interest to proceed and vacated the assessments.
Readers' guidance on the following points would be appreciated:
- First, was the officer within his rights to request a payment on account of a liability before the existence of that liability had been legally established? If not, are damages due?
- Secondly, how can proper compensation be obtained for the distress and worry over a considerable period, in view of the paltry amounts specified in HMRC's official literature about compensation for their own errors?
- Finally, what are the implications of the officer quoting action previously taken in respect of another taxpayer's affairs as an inducement to co-operate? This aspect of the initial meeting is denied by the officer, but these third parties can be contacted to confirm. Is there any obligation to advise them of the position?
Query T16,686 — Builder's Boy.
Reply by Persistent:
This case bears a striking similarity to a case I dealt with some years ago. The only main differences are that my clients were not involved in the construction industry and we briefed counsel with a view to taking an appeal before the Special Commissioners. Nevertheless, the case took years to resolve, and when the Revenue conceded, our clients had incurred thousands of pounds in professional fees.
It is well known that PAYE audit staff and Schedule E compliance officers can operate in a cavalier manner, and do not necessarily consider accepted law and practice in the conduct of their activities.
What is alleged to have been said at the initial meeting is nothing less than intimidation. In any type of tax enquiry, a payment on account of tax should only be made if the taxpayer accepts that he has defaulted, and the payment on account is made to limit interest and mitigate penalties. A request for a payment on account in the current case was simply quite outrageous, particularly at the opening meeting. It is a legal matter as to whether damages are due, but the facts should certainly be considered by the Adjudicator or the Ombudsman.
The horse had already bolted in terms of professional costs incurred. In retrospect, the contractor should have taken out professional fee protection insurance, and should consider it for the future. Existing insurance policy documents should be checked to ensure that household or other policies do not cover HMRC enquiries.
HMRC have every right to institute a tax enquiry and one cannot obtain any financial recompense from the department for the technical work involved in assisting the client. However, there is every reason for the client to make a claim for maladministration and a consolatory payment, as set out in HMRC's Redress Handbook.
In my view this case should be referred directly to the Adjudicator, and if satisfaction is not obtained from her office, the case could be referred (via the contractor's MP) to the Parliamentary Commissioner (the Ombudsman). The reverse process cannot be undertaken.
Normally I would recommend complainants to approach the officer in charge of the relevant tax office and then the HMRC area manager first, but the facts of this case appear to be so serious that in my view they should go direct to the Adjudicator.
The question of the HMRC officer using other taxpayers' cases as an inducement for the contractor to comply is more a legal issue than a tax issue. The contractor's solicitor should be asked to give advice on this aspect, and if necessary contact those parties to obtain confirmation that they had indeed been investigated by HMRC. This is in order to gain evidence to put before the Adjudicator or the Ombudsman.
In the final analysis, the Adjudicator or Ombudsman will have to decide whether she or he believes the contractor or the HMRC official. Whatever the final outcome of this case, full financial recompense will not be obtained for the time and money spent unless there is a legal case for damages, but some financial recompense should be recommended by the Adjudicator or Ombudsman.
Reply by Man of Kent:
HMRC documents, such as assessments, returns, and penalty notices, include injunctions to consult a professional adviser, and this advice is repeated in verbal contacts.
This is not merely altruism; it clearly eases the HMRC workload if taxpayers have the complete understanding of details that flows from professional assistance. The attempt by the visiting Revenue officer in this case to discourage contact with professional advisers fell well short of that standard and put everything he did in a bad light. Likewise, the fact that others were being questioned was irrelevant.
There is no right to ask for payment of any liability until it is properly established. No right to damages arises purely from the fact that a premature demand was made. It would be necessary to prove that actual and quantifiable damage arose from the act. If the scale of compensation published by HMRC is not adequate for damage actually caused, the only remedy is a civil action.
From the language of the query, it appears that reference to other cases was not to decisions by court or the Commissioners, which could be quoted as valid examples, but to challenges mounted (by the officer concerned) but not yet resolved. In other words, the references were simply hot air. The officer had no valid argument and was simply using scare tactics. The crime of demanding money with menaces springs to mind, and it is suggested that the client consult his lawyer to see whether the facts will support an action for damages.
