Article on two ways in which the costs borne by the client could be reduced without any reduction in the services provided or the level of fees earned by John Cassidy, Senior Manager in the tax investigations unit of PKF in London. This was published in the April 2001 issue of "Tax Adviser".
Recovering the costs Many years ago, on my first day as a trainee chartered accountant, my audit senior asked me to ‘cast’ the client’s cash book. At first I thought I must have misheard as I couldn’t understand why he wanted me to hurl the client’s records across the room! Since then I have heard many new words and phrases, one of them being another four letter word … COST.
Most clients wish to contain overheads if feasible and practitioners know it is important that the client appreciates their services and can see real value in the work undertaken. It is not acceptable to merely go through the motions. This article concentrates on two ways in which the costs borne by the client could be reduced without any reduction in the services provided or the level of fees earned. If the professional costs can be claimed as a business deduction or, better still, recovered directly from the Revenue, there is a tangible benefit which can be seen by the client. I believe that such possibilities ought to be considered in every case.
Enquiry cases
Most practitioners are aware of the increasing workload in this field. A full enquiry is often very time consuming and the consequent additional fees may be difficult to recover. Fee problems can arise even where the client has taken the precaution of paying for suitable cover. If the terms of the policy are not properly reviewed and work commences before appropriate clearance has been obtained, cover may be lost.
Given the 30-day deadline for providing information, prompt contact with the insurer is vital. It has often been said that the (substantial) costs of a full enquiry are not tax deductible; that is not the case as a careful reading of Statement of Practice 16/91 reveals. This pre-dates self assessment and therefore makes reference only to ‘investigations’, and specifically allows the additional costs where ‘… the investigation results in no addition to profits, or an adjustment to profits for the year of review only without a charge to interest or penalties …’.
Readers may, understandably, conclude that most investigation cases do yield interest or penalties and hence scope to claim a deduction is limited. However, even where additions to profit are made, Revenue Interpretation IRInt. 183 confirms that the wording of SP16/91 is deficient because it fails to explain that, in practice, the Revenue will allow extra accountancy costs unless the investigation results in profits arising ‘… out of fraudulent or negligent conduct’. If there is no fraud or negligence, adjustments may still be needed as a result, say, of human error. Provided that only interest is charged with no penalties being levied, thus suggesting no fraud or negligence, any extra accountancy costs are deductible. IRInt. 183 goes on to discuss self-assessment enquiries and confirms that additional accountancy costs incurred will be allowable in the absence of fraudulent or negligent conduct.
It may be that a dispute instigated by an enquiry will need resolution by the appeal commissioners. The general commissioners cannot award costs; only the special commissioners have that power under s. 21(1) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994. It is therefore important to consider, at an early stage, to which body the appeal should be lodged, otherwise it will automatically default to the general commissioners.
Whilst it is possible, in limited circumstances, to obtain a change in jurisdiction, this will take time and further professional costs will be incurred. Costs that can be awarded by the special commissioner are restricted to those of, or incidental to, the appeal hearing itself and will not cover the full costs of work undertaken during the enquiry as a whole. In addition it must be demonstrated to the special commissioner’s satisfaction that the Revenue has acted ‘wholly unreasonably’. This is a very difficult criterion to establish and is likely to involve behaviour so bizarre, unprofessional and prejudicial that it amounts to an abuse of power. It is, however, possible to recover further, perhaps all, costs by other means – such as a direct complaint to an MP as discussed later in this article.
Direct recovery of costs
In professional practice it is not unusual to contact the Revenue about unacceptable delays or to put right its administrative and technical errors. It seems odd, therefore, that only 37,000 complaints were made in the year 1998–99 (according to the Inland Revenue’s Annual Report; that for 1999–2000 is not available at the time of writing). This suggests only one complaint per 811 taxpayers and implies that the other 810 are dealt with satisfactorily. The same Annual Report also mentions a self-assessment problem in January 1999 when about 850,000 statements were issued containing potentially misleading information. If the Revenue’s statistics are correct, perhaps not enough formal complaints were lodged.
Code of Practice 1 (Mistakes by the Inland Revenue) sets out the circumstances in which costs, including professional fees, may be paid by, or recovered from the Revenue. COP 1 is not, however, a comprehensive document and contains little guidance as to what constitutes Revenue error. For example, whether an error is ‘serious’ will ‘depend on the facts of each case’. Of more use is the Revenue’s internal manual, the Redress Handbook (RH) which provides a guide for staff on the operation of the department’s policy on financial redress. RH is several times the size of the publicly available COP 1 and helpfully states that ‘it is departmental policy to recompense taxpayers in full for any redress which is justified’ (para. 1.1.6) regardless of budget constraints. A claim ought to be considered and made, therefore, if the circumstances permit.
There are two sets of commonly encountered situations where a complaint and request for costs may be appropriate namely,
(a) delays by the Revenue and
(b) errors.
Delays
COP 1 states that the Revenue aims to reply to all enquiries or letters within 28 days. The above Annual Report states that that was achieved in only 80 per cent of cases (which may TA April 2001 (pages) 27/3/01 6:38 AM Page 10 11 Tax Adviser April 2001 seem low to practitioners with client pressures for a quick response but is actually above their target of 75 per cent). However, the Revenue have built in a huge leeway in that there is no qualifying delay unless the 28-day target has been missed by SIX MONTHS! Situations are known where holding letters acknowledging receipt of earlier correspondence are despatched just a few days short of this deadline. It must be right to regard such non-substantive letters as not constituting ‘replies’ and any costs caused by the delay ought to be claimed.
Beware the wording of COP 1, however, which applies only where ‘there is no good reason for a delay’ on the part of the Revenue. In one instance the Revenue took over a year to answer but the inspector initially contested that there was a good reason for the delay because the original correspondence had been incorrectly forwarded by the Revenue to another tax office. Paragraph 2.1.3 of the RH, however, advises that the six-month buffer provides leeway for dealing with such administrative errors before the deadline is reached. Of course, such cases may also be argued on the grounds of error by the Revenue. Examples of delay cases in RH include:
- Letter received from tax agent requesting repayment. Twelve months (and three reminders) later a complaint was made and costs were reimbursed (paragraph 2.1.5).
- Estimated assessments issued for 1992–93 to 1994–95. Two year delay in utilising information supplied to settle 1992–93, and seven-month delay for the other two years (para. 2.1.5).
Errors
Both COP 1 and RH refer to ‘serious’ or ‘persistent’ errors. A serious error is defined only in RH at para. 3.1.2, as ‘something which no responsible person, acting in good faith and with proper care, could reasonably have done’. An example of a case encountered in practice concerns a director of a well known plc who was given telephone advice that his shares, on the exercise of share options, could be transferred to his children and the gain held over. On submission of his tax return he was told that this was incorrect and he owed £40,000 in CGT. A suitable report led to the recovery of all professional fees and, by concession, the gain was held over until the children disposed of the shares. Of great help was the fact that the taxpayer was able to find a note in his papers recording the name and extension number of the official who had given the incorrect telephone advice.
RH itself includes numerous examples of actions considered to be serious errors, including:
- Inspector took up legitimate enquiries into whether expenditure qualified for capital allowances, but misunderstood a phrase in a case which was totally irrelevant. The Inspector persisted with his view despite opposition from the accountant who had spent time researching the case (para. 3.2.4).
- Assessments intended to be raised on taxpayer A were raised on taxpayer B because two digits in the reference were transposed. The in-built check system highlighted the discrepancy but was overridden without further investigation (para. 3.3.3).
- Company owing tax moved registered office and the quest to find the new registered office misquoted the company’s registration number with the result that demands were issued to an innocent company and its directors (para. 3.3.4).
- Taxpayer wrote to advise the district of his new address and ask what effect his recent separation would have on his tax affairs; the district replied to his old address and the reply was opened by his ex wife (para. 3.4.4).
- Taxpayer told there was no formal appeal procedure in respect of a particular tax relief when appeal could in fact have been put before the Commissioners (para. 3.8.16).
Persistent errors (which need not be serious) arise when the Revenue persisted in the mistake even after it had been pointed out; where the same type of mistake was made, for example issuing an incorrect assessment several times; or where a lot of unconnected mistakes were made in any 12-month period. The above is not intended to be a detailed analysis of COP 1 or RH; the examples are only intended to demonstrate that the circumstances in which it is appropriate to make a claim for professional fees are not uncommon. Possible claims may also lead to reimbursement of lost income, a waiver of tax or interest due, repayment interest where none is technically due, or a consolatory payment. RH contains many more examples of both successful and unsuccessful claims and it is useful to be aware of these so that an appropriate claim in a specific case may be formulated. It should be noted that only those professional fees arising as a direct consequence of the Revenue’s delays or errors will be reimbursed and the Revenue will need to be satisfied that any additional work undertaken was justified by reference to those mistakes (para. 7.4.2).
More serious situations
Many complaints concern technical and administrative errors or delays so action under COP 1 would be more appropriate than immediately approaching an MP. In more serious cases, practitioners should approach the head of the department if necessary. A degree of comfort may be taken from a pledge by Nick Montagu, the Chairman of the Board of Inland Revenue, that, where a serious complaint about a Revenue employee’s
behaviour is made, the complainant may request that his name is not disclosed to the officer concerned. Where a senior officer’s probity is the cause for concern, the complaint must be directed to Mr Montagu. Other possible avenues are:
Inland Revenue Adjudicator
The Adjudicator will only examine a complaint if the unit against whom the complaint has been made, and the regional director, have already had an opportunity to investigate it. If this process has not been followed the Adjudicator will refer the case back accordingly. In addition, the Adjudicator will only examine complaints concerning ‘handling’ matters, such as mistakes, poor/misleading advice, or staff attitude/behaviour and will not contemplate, for example, situations which are suitable for resolution by the commissioners. Generally, few cases are investigated by the Adjudicator and her awards are often disappointingly small. In 1998–99 for example, 2,565 complaints were received by her but only 427 were pursued. Of those, 424 were settled but only 39 per cent wholly or partly in favour of the taxpayer. The Adjudicator will not hear complaints that have already been investigated by the Ombudsman (see below).
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The Ombudsman
Taxpayers can ask an MP to refer a complaint to the Parliamentary Commissioner for Administration (the
Ombudsman) whose office is staffed by ex Special Compliance Office inspectors. It is not a requirement that referral has previously been made to the Adjudicator. However, if the taxpayer wishes to preserve all his options, he will complain to the Adjudicator first; if still dissatisfied, he may then approach the Ombudsman. As indicated earlier, the reverse process is not possible. Referrals to the Ombudsman are rare, only 13 new cases being taken up in 1998–99. The Ombudsman takes about two years to investigate a complaint because of the detailed nature and thoroughness of the enquiries. Reimbursement of costs can only be recommended; compliance cannot be enforced although the Revenue is unlikely to refuse to act in accordance with those recommendations.
Other complaint via MP
In some instances a formal complaint to an MP can be beneficial. In the case of Mr and Mrs Scott trading as Farthings Steak House [1996] Sp C 91, the Special Commissioners awarded costs within their power, i.e. those relating to the conduct of the appeal itself. It was, however, the subsequent intervention of the local MP, who raised the matter with the then Chancellor of the Exchequer, that led to the recovery of ALL of the substantial professional costs involved in the entire enquiry and appeal process. The Revenue has a healthy regard for the involvement of an MP, especially if the complaint is passed to it via the Chancellor’s office.
Conclusion
When dealing with the tax affairs of clients it is worth considering whether anything can be done about the costs incurred; perhaps they can be deducted in the tax computations or even reclaimed from the Revenue. When considering making a claim for costs, or a complaint against the Revenue, it is important to be armed with all the relevant facts and a full understanding of the rules.
Technical Department
020 7235 9381
April 2001 by
