The title of this article may seem somewhat harsh and strong but in this particular case I think if anything it is an understatement.  My blog post today comes back to the recent Arctic Systems case involving the husband and wife Mr and Mrs Jones which HM Revenue & Customs lost at the House of Lords in July 2007.

A brief summary of this case history is that HM Revenue & Customs raised assessments to tax dividends received my Mrs Jones on her husband Mr Jones who was the fee earner for the company. The amount of tax involved was approximately £7000. After years of battling and the stress caused to this particular taxpayer over such a small amount of money the whole sorry saga is a public disgrace.The House of Lords ruled in favour of the taxpayer clearly as HM Revenue & Customs were wrong in their interpretation of the law (which is not at all uncommon these days) and yet HM Revenue & Customs further heaped shame on themselves and demonstrated total arrogance with an immediate announcement "we will now change the law", as I have said before it strikes of a baby throwing it's dummy out of the pram.

I read an article in Tax Adviser the Chartered Institute of Taxation's monthly magazine that in a joint meeting between tax advisers and HMRC one adviser referred to the relationship of tax advisers and HMRC like two warring parties throwing rocks at each other across a ravine. It is no wonder why when you look at this and a host of other cases.

So why a "hypocritical public disgrace". For anyone reading this article that has been involved with a case in detail that has gone to tribunal or court, as I have representing a client within the last year, you will know that even after costs have been awarded against HMRC, as they have in the Arctic Systems case, HMRC will try and wiggle out of paying the full costs. A case I was involved in HMRC did everything they could to avoid paying the costs even after they had agreed as the door to the tribunal to allow our claim if we dropped our appeal. We made that withdrawal of our appeal conditional on HMRC paying full costs. I was frankly shocked and dismayed by what then followed as HMRC tried to find any way they could to back track on that agreement. Eventually HMRC did pay costs but not full costs. HMRC have now confirmed that they do not have records of the time and costs HMRC incurred in the Arctic Systems case. Why is this a total disgrace well I have absolutely no doubt from personal experience that HMRC will be fully expecting Arctic Systems lawyers to have detailed accurate and lengthy details of every minute they are claiming costs for.  So if the taxpayer has to do this in legal cases what makes HM  Revenue & Customs exempt from justifying their time? I cannot express in words just how shocking this is. "Research" time reviewing other cases that may be quoted for instance can be difficult to claim by the taxpayer as you are expected to a degree to know all the law (which is constantly changing and shifting) without having to spend too much time reviewing cases. Bearing in mind that just four other cases to review could be a ream of A4 paper (a bit like reading a Harry Potter book two to three times over) this is ridiculous.So for HMRC to expect taxpayers and their advisers to fully justify the time they incur in a legal argument in details but HMRC keep no records of their time at all? Is this really a fair way to "do battle"? I think not.

What’s more, and many ways worse is that the taxpayer will know that Arctic Systems lawyer’s time and costs are justified as there will be detailed records. However we will never know what resources HMRC spent on the Arctic Systems case. The reality is that HMRC have some idea but are simply too embarrassed to say what that might be as the costs could be two to three times to costs incurred by the taxpayer taking into account the overheads, staff and other costs of HMRC staff involved in the case.

In Parliament Mark Prisk MP made the following comments:

“While hundreds of thousands of small family businesses struggle under the weight of red tape imposed by the tax man, the very same organisation appears to be incapable of the most basic record keeping."

"One can’t help but wonder if this case and its associated costs starkly illustrate the gap between the Revenue and people who are trying to run businesses properly and efficiently.”

You wonder why tax advisers have lost respect for HMRC?

Arctic Systems costs are in the region of £500,000 which are to be paid by HMRC (and therefore taxpayers as a whole) and all over £7000. HMRC had already said they were not planning to treat the case as a test case so exactly what was the point of incurring what must be easily in excess of £1,000,000 costs including HMRC time and resources all over £7000? What I find particularly shocking about this example of HMRC behaviour is that the case I am involved in, and which has been partly settled by HMRC (i.e the VAT and simple interest) was for a claim of £213,000 (including simple interest) and the taxpayers costs were legitimately £150,000 which represented the costs of two detailed, technical hearings preparation of detailed trial bundles and preparation and argument of the case, numberous meetings including with HMRC to try and settle the case out of Court over a three year period. HMRC paid approximately a third of costs, as they thought this was the reasonable fee costs, despite agreeing to settle full costs at the door to the Tribunal. The client was left with little choice than to agree as the cost of going to a further Costs Hearing would have simply added to the cost for the client so he decided to cut his losses and accept. I certainly hope the client succeeds with the Compound Interest Claim as for that particular client that would mean justice in more ways than one after HMRC's behaviour in that particular case. One of the key documents in the trail bundle had even been changed by HMRC in the case I have been involved with recently. It is one of the most shocking of the many shocking examples of dealing with the taxman I have had in my 20 years as a tax adviser.

One thing about the Arctic Systems case that potentially it could help taxpayers with future arguments with HMRC about the level of costs. If HMRC are prepared to incur a total of around £1,000,000 or more costs all over an amount of tax of £7000 then surely the level of costs in tax cases from now on have nothing to do with the level of costs involved. In the case I was involved in HMRC was using this as one of it's arguments i.e. that costs were out of proportion to amount of tax at stake? Surely this type of argument is not totally flawed after Arctic Systems? It is I believe quite a common argument HMRC like to put forward. What starts a reasonable costs in a claim against HMRC can often spiral due to the way HMRC like to handle disputes. Often they try and corner taxpayers to the point that they hope taxpayer will backdown for fear of the potential costs involved. We would see many more cases before the courts if taxpayers could afford to argue their point in court.

There has been talk of someone taking responsibility in the Police for the Jean Charles de Menezes shooting and public dismay that after the recent rulings that no management officers of the police will be. It seems that increasing public authority figures are reluctant to take responsibility for major errors of judgment or management. Should heads roll over the Arctic Systems case which is an extreme example of wasted public funds? The point I think here is that if HMRC are not accountable for their behaviour and actions won't they just continue in the same vain and will we not see a repeat of this waste over and over again? Have any senior HMRC staff been quizzed in parliament committees over how much public funds have been wasted on this tax case and other recent tax cases HMRC has lost? I doubt it. This is because waste is easy in public organisations as they are not spending their own hard earned money, they are spending the taxes paid by citizens of this country.

When HMRC are publically accountable for their behaviour, and this can be seen, is the time Tax Advisers and members of the public may gain some respect for HM Revenue & Customs but until then I personally only expect matters to get worse. As a Government department this is something that MPs as representatives of the citizens of the UK need to deal with and take some responsibility for and until then the Government is also culpable for the waste. 

On a happier note in the last few minutes of writing this blog post it has been announced that Glasgow has won it's bid to host the 2014 Commonwealth Games. Well done Scotland! Add this to a London 2012 Olympic Games and who knows maybe a Football World Cup in the UK and the next decade looks to have some exciting Sporting times ahead. A great example of the UK getting things right...