The furore about Mr Zahawi’s tax affairs certainly has some lessons to teach – including lessons which have not been much discussed in the media but which are fundamental to the operation of our tax system.
Mr Zahawi had a penalty imposed for an error which was, within the terms of the relevant legislation, not deliberate but careless. Our tax system is now so complex, and our tax legislation is now so imprecisely drafted, that taxpayers often find it impossible to determine their tax liabilities with certainty even with the benefit of the best professional advice. HMRC has a vested interest in this situation continuing because it gives it, in effect, a discretionary power to tax and the opportunity to impose large monetary penalties. In recent years, governments of all political shades have conferred on HMRC enormous additional powers to investigate taxpayers’ affairs. Such investigations impose burdensome costs, in time and money, on those investigated. The burden of proving an assessment by HMRC to be incorrect falls on the taxpayer.
HMRC can, and does, assess tax based on highly dubious constructions of the relevant law and facts and, in effect, dares the taxpayer to prove it wrong and to risk financial disaster, even bankruptcy, if he fails. It is not surprising, therefore, that taxpayers, sometimes find themselves advised to pay tax which is very probably not due under the law because the risks in proving that it is not due are simply too great.
Mr Zahawi’s explanation of why he paid the amount demanded by HMRC was, if the press have reported the matter accurately, not that he was advised that the amount assessed was correct but because the burden of dealing with the investigation was preventing his properly exercising his political role. He was reported as saying:
“So that I could focus on my life as a public servant, I chose to settle the matter and pay what …[HMRC]… said was due…’.
Mr Harra, First Secretary and Chief Executive of HMRC, gave evidence to the Commons Public Accounts Committee on Thursday in which he stated, without mentioning Mr Zahawi specifically, that ‘there are no penalties for innocent errors’. This was, at the least, disingenuous. The legislation does not use the words ‘innocent’ or ‘guilty’ but refers to errors which are ‘careless’ or ‘deliberate’ and to taking ‘reasonable care’. Penalties are certainly imposed for acts which are unintentional but careless.
What is more, HMRC often alleges in the course of investigations that taxpayers’ errors are deliberate when they are clearly neither deliberate nor careless. A client came to us a few years ago who had adopted in his returns an incorrect treatment of certain types of income in respect of which the relevant legislation was particularly obscure having been advised on the matter by no less than three highly respectable firms of solicitors. He placed a high value on his well-deserved reputation for honesty and financial probity. When he became aware of his omissions he made, with our advice, a complete and substantial disclosure to HMRC. HMRC’s response was to allege that his error was deliberate despite the weight of evidence demonstrating that it was not even careless. Two years later, after the investment of an enormous amount of his time, having incurred substantial professional fees and after a review under TMA 1970 s49A HMRC concluded that our client’s errors were indeed neither deliberate nor careless, that no penalties were exigible and that some of its assessments must be vacated because, the errors being neither deliberate nor careless, the assessments were out of time.
Other taxpayers in such situations, cowed by HMRC’s overwhelming resources, often acquiesce in the payment of the penalties imposed,.
The costs and distortions this situation imposes on the national economy are significant. One might hope that Mr Zahawi’s travails will persuade the Government that reform is necessary – but one would be naïve to do so. For another aspect of the storm over Mr Zahawi’s tax affairs is relevant to the probability of reform. How did knowledge of those affairs leak into the public domain?
HMRC is under a strict duty of confidentiality in respect of taxpayers’ affairs. So much so that in a recent case, the First Tier Tribunal found that its duty of confidentiality prevented HMRC from giving, in response to a Freedom of Information Act request, the name of a taxpayer who was a party to a tax case the decision in which, including the taxpayer’s name, had already been published. One would imagine that the only persons with knowledge of Mr Zahawi’s tax affairs were Mr Zahawi himself, his taxation agents and members of HMRC’s staff. Yet not only the fact that Mr Zahawi had reached a settlement with HMRC but also the monetary amount of the settlement, the amount of the related penalty and a, somewhat garbled, account of the issues at stake have all been reported in the press.
On Tuesday the Independent newspaper even revealed the identity of the HMRC staff member, a Tom Gardiner OBE, who, it claimed, led the investigation into Mr Zahawi’s affairs. It described him, rather breathlessly, as an ‘international tax detective’ whose ‘forensic financial and sleuthing skills’ have ‘saved British taxpayers “tens of millions of pounds” …’ and quoted an unnamed ‘former colleague’ as saying that he is ‘hugely respected, self-effacing and determined’ and ‘a cross between Martin Lewis and Sherlock Holmes’.
With cheerleaders such as this, Mr Gardiner can clearly afford to efface himself.
The question remains, however, ‘how did such detailed information leak to the press’? It is an important question. All taxpayers, including politicians, should be able to expect that their tax affairs will be kept confidential. Without that assurance, any politician who is concerned for the proper operation of our fiscal system and who contemplates restraining HMRC’s power to extract ‘tax’ from taxpayers which is not due under the law, to launch unnecessary, disproportionate and intrusive investigations and to require the payment of agreed ‘penalties’ as the price of going away might well fear his private tax affairs finding their way into the public domain.