How an HMRC letter turned into a £275,000 tax bill

As tempting as it may be to stuff unopened HM Revenue & Customs (HMRC) envelopes down the sofa or behind the clock, details of a recent tax tribunal decision may change your mind.

This is a real horror story of HMRC turning a £3,000 initial risk into a £275,000 problem and the possibility of bankruptcy.

The tax tribunal published the outcome of a hearing at the end of 2010 that may send shivers down the spine of anyone putting off their correspondence from HMRC.

This case was heard in Manchester and the taxpayer, Robert Legg (tax tribunals are not held in private), appeared in person without any professional adviser. He had applied to the tribunal for permission to appeal out of time against an HMRC assessment issued in November 2008 and a tax investigation enquiry closure notice issued in June 2009. His appeals to HMRC were submitted in May 2010 and rejected for being out of time.

That may sound very ordinary on the surface, but HMRC had turned the information that he was party to a bank account, which had interest credited of about £3,000, into a £274,355.73 tax problem.

It was only when Legg received a statutory demand for this amount in October 2009 that he was prompted to do anything. Initially he tried to get this set aside and bankruptcy proceedings were ultimately stopped pending the outcome of the tribunal’s decision.

How did £3,000 bank interest become a £0.275 million tax problem?

After opening an enquiry in March 2007 into Legg’s 2003-04 tax return HMRC sent him five or six letters asking for details of the source of the £3,000 funds – but he failed to reply. HMRC then made various assumptions based on that figure.

HMRC assumed that Mr Legg must have had funds of £250,000 to generate £3,000 interest. That £250,000 was regarded by HMRC as further undisclosed income and the tax due on this extra income came to £96,725 for one tax year. HMRC appears to have estimated a similar amount for the year after and together with interest and penalties the amount due mushroomed to £274,355.73. But it could have been even worse.

HMRC could have used its formal powers to allege fraud and raise further assessments going back up to 20 tax years.

Surely it was just a joke?

During initial telephone calls to HMRC Mr Legg claimed that the information had been supplied to HMRC maliciously. He made allegations against his former wife’s solicitor and even the Inspector of Taxes but he failed to explain anything about the original source of the funds. He also contended that he took no action against the original assessments because he felt he didn’t owe any money and that it was all a ‘Jeremy Beadle’ type joke. He claimed that he didn’t have any bank accounts after the year 2000 and didn’t know if his wife’s account was the source of the £3,000.

Tribunal’s decision

The standard time limit to make an appeal is 30 days, but Legg waited 17 months after the original assessment was issued by HMRC before making an appeal. In the absence of any convincing answers and his poor credibility at the tribunal, the judge decided that the tribunal could not allow the late appeals. It is not known whether or not Legg has sought permission to appeal against this decision so we may yet hear more from this in the Upper Tribunal.

It is a salutary reminder that HMRC’s powers and case law means that taxpayers could be deemed guilty before proven innocent. It is vitally important not to ignore any HMRC correspondence, ensure that deadlines, particularly for appeals, are not missed and to seek professional guidance if you are unsure of your rights.