The Court of Appeal has found that HM Revenue and Customs do have a duty of care to a taxpayer if HMRC makes mistakes. The recent decision is Neil Martin v Commissioners for HMRC [2007] EWCA Civ 1041, which held that the taxpayer could sue HMRC for damages obviously as always with tax cases in certain circumstances.

Mr Martin, a builder, had suffered severe business disruption and losses as a result of a string of errors made by HMRC when it processed his company CIS application in 1999In addition to the processing errors by HMRC which included helping him complete an Individuals Application for a CIS Certificate instead of a Company Application there were also delays in processing his application. The icing in the cake so to speak was HMRC sending out documents to the wrong address.

Mr Martin’s claims under Code Of Practice (COP) 1 were rejected as was an appeal to the Revenue Adjudicator. In 2000, he appealed to the Parliamentary Ombudsman whose investigation led to what was described in court as "a striking and important letter" from the Deputy Chairman of the Inland Revenue (as it was at the time). This confirmed that the delays and errors could be classified as “persistent errors” under COP 1.

Mr Martin claimed damages from HMRC either of a statutory duty under the CIS legislation or under a common law duty of care owed to the taxpayer. The Court did not agree with the former, but found unanimously in favour of the common law argument.

An HMRC employee had taken it upon himself to complete the declaration for a sub-contractors registration card, instead of a company exemption for Mr Martin. Lord Justice Chadwick, presiding at the Court of Appeal commented that he was ”not processing an application which had been made: he was assuming an authority to make an application which had not been made.”

As a result, Lord Justice Chadwick could see no reason why, in assuming that authority, that the HMRC employee should not be taken to have assumed a responsibility to the taxpayer now the applicant in this case. In those circumstances it seemed to be fair, just and reasonable that the common law should recognise that a duty of care exists. The decision was unanimous.

The case has significant implications for HMRC staff who often assist taxpayers in making various returns, applications and claims.  Any tax adviser that has strood in a tax enquiry room que at HMRC in the old fashioned days of hand delivering piles of tax returns on 31 January before the days of internet filing may have seen this in action. I have to my total dismay that I can still remember it now. A few times actually I was taken aback completely by some of the advise given. "Oh just stick this in the box (on the tax return) that'll do". Taxpayer "But what if I don't have any expense receipts" says the taxpayer... "Oh don't worry about that we only prosecute people in extreme cases" 

Bearing in mind HMRC may yet seek leave to make an appeal to the House of Lords this victory may be subject to more legal wranglings yet.

Furthermore Mr Martin must have be a determined character to pursue this quite possibly largely himself due to costs no doubt. Would many taxpayers pursue HMRC with such vigour over such an issue? Would be lovely to think so but the reality is that you can quote this case at HMRC but if you think there are going to listen before you also take them all the way to Court I have my doubts. HMRC are not good at listening. Anyway having lost this case a bit like in Arctic Systems can we now expect a statement from HMRC that they are going to change the Law? 

The ironic thing is that the more complicated that Tax Law is made the worse HMRC are at understanding it themselves it seems. Personally I can only see this getting worse at the moment with the next round of major changes now due following the pre budget speech recently. It would be a great balancing position for taxpayers being able to sue HMRC for errors and incompetance. A very good thing. Just maybe it might help to bring an once of sence into some situations. Partcularly where HMRC won't hesitate in fining a taxpayer if there is a mistake in his tax affairs.