HMRC chose Halloween to sneak out an announcement that the government will be changing the law retrospectively to ‘affirm’ that HMRC can use automated processes to issue notices to file returns and to assess penalties (see the technical note). The announcement is innocuously described as a ‘technical clarification’ to ‘provide fairness across all taxpayer groups and provide certainty regarding the statutory basis for the existing policy and practice which have been in place for many years’. However, what the government is actually doing is changing the law retrospectively. The only people who will not be affected by the change will be those who have received a ‘settled’ judgment (whatever that means) from a court or tribunal before 31 October 2019 regarding the use of automation. It is intended that legislation will be enacted in the 2020 Finance Act, but draft legislation has not yet been published.
Computer generated notices
Over recent years we have seen HMRC automating some of its more routine processes, such as the issuing of notices to file returns and imposing penalties. This has resulted in challenges in the tribunals and courts as to whether computer generated notices satisfy the statutory requirements.
In 2016, the Court of Appeal decided in the case of Donaldson v HMRC [2016] STC 2511 that late filing penalties issued by HMRC under FA 2009 Sch 55 were valid, even though HMRC had not individually considered the taxpayer’s case but HMRC’s computer had generated a penalty notice in accordance with a policy decision taken by HMRC that anyone three months late in filing a return would be subject to a daily penalty. The court said that HMRC’s policy decision was enough to satisfy the condition in Sch 55 para 4(1)(b) that ‘HMRC decide that such a penalty should be payable’. The Court of Appeal did not have to decide on HMRC’s alternative argument that para 4(1)(b) was satisfied by HMRC’s computer, programmed in accordance with their policy decision, automatically issuing a penalty notice, although Lord Dyson commented; ‘I must confess to having considerable doubts as to whether [this] is correct.’
Later decisions have considered whether the requirements of TMA 1970 s 100(1) can be satisfied where a notice is issued by way of an automated process. Section 100 does not just refer to ‘HMRC’, it provides that ‘an officer of the Board… may make a determination imposing a penalty under any provision of the Taxes Acts and setting it at such amount as, in his opinion, is correct or appropriate’.
In the case of Khan Properties Ltd v HMRC [2017] UKFTT 830 (TC) Judge Thomas said: ‘In my view the requirement in s 100(1) TMA is for a flesh and blood human being who is an officer of HMRC to make the assessment, that is to decide to impose the penalty and give instructions which may be executed by a computer.’ That case was dealing with penalties arising under FA 1998 Sch 18 which were levied under TMA 1970 s 100 and the judge made it clear that his decision was limited to Sch 18 and should not be read as applying to FA 2009 Schs 55 and 56.
In the cases of C Shaw v HMRC [2018] UKFTT 0381 (TC) and N Rogers v HMRC [2018] UKFTT 312 (TC), Judge Popplewell decided that notices to deliver tax returns, which under TMA 1970 s 8 ‘may be required by a notice given to him by an officer of the Board’, required involvement of a named HMRC officer. He said: ‘The phrase “given to him by an officer of the Board” means what it says. I would expect any such notice to be signed by a named officer and evidence provided which shows that to be the case. The officer giving the notice needs to be identified in the notice because the return must be made and delivered to that officer. In other words, there must be evidence that the named officer has signed the notice or it must be otherwise made clear that he is “giving” it’. Appeals in these cases have just been heard by the Upper Tribunal.
Change in law
HMRC’s technical note says that the proposed new legislation will provide that in relation to specific provisions in the legislation ‘anything capable of being done by an officer may be done instead by HMRC through the use of a computer or other electronic means, whether automatically or not’.
The provisions covered are:
What these provisions all have in common is that they refer to ‘an officer’ of HMRC doing something. This suggests that the government is satisfied that there is no doubt that provisions which refer to ‘HMRC’ doing something, rather than an HMRC officer, are satisfied if HMRC uses an automated process. This view is backed up by the decision in Gilbert v HMRC [2018] UKFTT 437 where Judge Hellier decided that the requirement in Sch 55 para 18(1)(a) that HMRC assess the penalty did not require the action of a specific named officer.
The technical note says that both the automated processes themselves, and anything done subsequent or pursuant to the automated processes, will be covered by the new legislation prospectively and retrospectively. It gives the example of a notice to file an income tax self assessment return being issued under TMA 1970 s 8 by HMRC using an automated process. In that case it says anything done by HMRC related or pursuant to the issuance of that notice, such as charging a late filing penalty, or enquiring into any return received pursuant to the notice, will be covered by the legislation.
Retrospective effect
The change will apply retrospectively and prospectively. Only those with a ‘settled’ judgment by 31 October from a court or tribunal regarding the use of automation by HMRC will not be caught. However, it is not clear what this means: the follower notices rules use the different concept of a ‘final ruling’. In Shaw and Rogers, Upper Tribunal hearing HMRC’s counsel said that HMRC ‘intend and expect the Respondents to be included in the legislative carve out however final decisions on the content of the Finance Bill will be for the new government to decide, post-election’.
We are familiar with anti-avoidance provisions taking effect from the date they were announced, rather than the date when the Finance Act legislation becomes law. Some practitioners will remember the furore surrounding the statement made in December 2004 by Dawn Primarolo, the then paymaster general, when she gave notice of the government’s intention to ‘deal with any arrangements that emerge in future designed to frustrate our intention that employers and employees should pay the proper amount of tax and National Insurance contributions (NICs) on the rewards of employment’. This was felt by many to fall short of the required standard of certainty set out in the so-called ‘Rees rule’ – the guidelines agreed by the government in 1978 for tax changes which take effect from the date they were announced, even though the legislation is not enacted until later. One condition of the Rees rule is that a warning must be given in precise form.
There are also a number of examples of situations where although the legislation is not expressed to be retrospective in that it does not state that it will have effect from an earlier date, it effectively adversely changes the position for taxpayers who have already entered into arrangements. Examples of this are the introduction of accelerated payment notices (APNs) and the loan charge.
Changes favourable to taxpayers that are meant to make sure new legislation operates as intended sometimes specifically have retrospective effect.
Examples of truly retrospective legislation, expressly backdated to a date prior to the legislation being announced which has adverse consequences for taxpayers, are (thankfully) rare. One example in 1992 was a change to clarify the rate of composite rate tax to be charged on building society accounts. Stephen Dorrell, then financial secretary to the Treasury said: ‘Where it is discovered that the tax law does not have the effect that the government and taxpayers generally thought it had, there are circumstances in which it is right to introduce legislation to restore the position retrospectively to what it was thought to be. This is done only in exceptional circumstances and where the government consider such action is necessary to protect the interests of the general body of taxpayers.’
The current change has some similarities with the 1992 change in that it is expressed to be to preserve the status quo, and this is presumably why the government would argue it is justified. In the case of automated processes, Financial Secretary to the Treasury Jesse Norman said in a written ministerial statement which announced the change:
‘The government introduces legislation with retrospective effect only where necessary. In this case retrospective effect is necessary to close off the exchequer and operational risks presented by judicial challenges to HMRC’s ability to automate certain functions. It will protect very substantial sums of tax and penalties already legitimately paid. It will preserve the status quo for taxpayers and HMRC, merely confirming the validity of HMRC’s longstanding and widely accepted operational practice. Taking this action will help to guarantee the integrity of the tax base, provide certainty to taxpayers, and allow the government to continue to administer the tax system efficiently’.
However, the legislative change in relation to automated processes is not really a change which restores the legislation to what everyone thought it meant. The provisions affected by this change date back to the introduction of self assessment in the 1990s. However, when the legislation was amended for self assessment it was drafted in a similar way to the original 1970 version of the TMA which required notices to be given ‘by an inspector or other officer of the Board’. At these times, Parliament would not be contemplating notices being issued by an automated process. It makes sense for HMRC to make use of computers to carry out its routine tasks more efficiently and cost effectively, but it is a bit rich to suggest that everyone thought the term ‘an officer of HMRC’ meant HMRC’s computer.
What could the future look like?
HMRC already makes extensive use of artificial intelligence. Its 2018/19 annual report sets out HMRC’s ambition to become one of the most digitally advanced tax administrations in the world and says that HMRC is leading the way in government in its use of robotic process automation with 78 robotic automations conducting 15.7m transactions in 2018/19.
There are many places in the tax legislation where HMRC officers have to make decisions about whether to instigate procedures, such as opening enquiries, making discovery assessments and issuing APNs. We know that HMRC uses its Connect computer system to ‘join the dots’ between different knowledge sources and computers play a part in risk assessment. But where could increased automation lead? In the future, could we see HMRC computer systems being programmed to gather together data, carry out risk assessments, decide to open an enquiry and then actually open the enquiry all without human intervention? Some of HMRC’s powers can have very serious consequences for taxpayers and the fact that a human being has to decide to exercise them is an important safeguard. It would be very concerning if this safeguard was further eroded.
The authors’ firm acted on a pro bono basis for Craig Shaw and Nigel Rogers in the recent Upper Tribunal hearings.
HMRC chose Halloween to sneak out an announcement that the government will be changing the law retrospectively to ‘affirm’ that HMRC can use automated processes to issue notices to file returns and to assess penalties (see the technical note). The announcement is innocuously described as a ‘technical clarification’ to ‘provide fairness across all taxpayer groups and provide certainty regarding the statutory basis for the existing policy and practice which have been in place for many years’. However, what the government is actually doing is changing the law retrospectively. The only people who will not be affected by the change will be those who have received a ‘settled’ judgment (whatever that means) from a court or tribunal before 31 October 2019 regarding the use of automation. It is intended that legislation will be enacted in the 2020 Finance Act, but draft legislation has not yet been published.
Computer generated notices
Over recent years we have seen HMRC automating some of its more routine processes, such as the issuing of notices to file returns and imposing penalties. This has resulted in challenges in the tribunals and courts as to whether computer generated notices satisfy the statutory requirements.
In 2016, the Court of Appeal decided in the case of Donaldson v HMRC [2016] STC 2511 that late filing penalties issued by HMRC under FA 2009 Sch 55 were valid, even though HMRC had not individually considered the taxpayer’s case but HMRC’s computer had generated a penalty notice in accordance with a policy decision taken by HMRC that anyone three months late in filing a return would be subject to a daily penalty. The court said that HMRC’s policy decision was enough to satisfy the condition in Sch 55 para 4(1)(b) that ‘HMRC decide that such a penalty should be payable’. The Court of Appeal did not have to decide on HMRC’s alternative argument that para 4(1)(b) was satisfied by HMRC’s computer, programmed in accordance with their policy decision, automatically issuing a penalty notice, although Lord Dyson commented; ‘I must confess to having considerable doubts as to whether [this] is correct.’
Later decisions have considered whether the requirements of TMA 1970 s 100(1) can be satisfied where a notice is issued by way of an automated process. Section 100 does not just refer to ‘HMRC’, it provides that ‘an officer of the Board… may make a determination imposing a penalty under any provision of the Taxes Acts and setting it at such amount as, in his opinion, is correct or appropriate’.
In the case of Khan Properties Ltd v HMRC [2017] UKFTT 830 (TC) Judge Thomas said: ‘In my view the requirement in s 100(1) TMA is for a flesh and blood human being who is an officer of HMRC to make the assessment, that is to decide to impose the penalty and give instructions which may be executed by a computer.’ That case was dealing with penalties arising under FA 1998 Sch 18 which were levied under TMA 1970 s 100 and the judge made it clear that his decision was limited to Sch 18 and should not be read as applying to FA 2009 Schs 55 and 56.
In the cases of C Shaw v HMRC [2018] UKFTT 0381 (TC) and N Rogers v HMRC [2018] UKFTT 312 (TC), Judge Popplewell decided that notices to deliver tax returns, which under TMA 1970 s 8 ‘may be required by a notice given to him by an officer of the Board’, required involvement of a named HMRC officer. He said: ‘The phrase “given to him by an officer of the Board” means what it says. I would expect any such notice to be signed by a named officer and evidence provided which shows that to be the case. The officer giving the notice needs to be identified in the notice because the return must be made and delivered to that officer. In other words, there must be evidence that the named officer has signed the notice or it must be otherwise made clear that he is “giving” it’. Appeals in these cases have just been heard by the Upper Tribunal.
Change in law
HMRC’s technical note says that the proposed new legislation will provide that in relation to specific provisions in the legislation ‘anything capable of being done by an officer may be done instead by HMRC through the use of a computer or other electronic means, whether automatically or not’.
The provisions covered are:
What these provisions all have in common is that they refer to ‘an officer’ of HMRC doing something. This suggests that the government is satisfied that there is no doubt that provisions which refer to ‘HMRC’ doing something, rather than an HMRC officer, are satisfied if HMRC uses an automated process. This view is backed up by the decision in Gilbert v HMRC [2018] UKFTT 437 where Judge Hellier decided that the requirement in Sch 55 para 18(1)(a) that HMRC assess the penalty did not require the action of a specific named officer.
The technical note says that both the automated processes themselves, and anything done subsequent or pursuant to the automated processes, will be covered by the new legislation prospectively and retrospectively. It gives the example of a notice to file an income tax self assessment return being issued under TMA 1970 s 8 by HMRC using an automated process. In that case it says anything done by HMRC related or pursuant to the issuance of that notice, such as charging a late filing penalty, or enquiring into any return received pursuant to the notice, will be covered by the legislation.
Retrospective effect
The change will apply retrospectively and prospectively. Only those with a ‘settled’ judgment by 31 October from a court or tribunal regarding the use of automation by HMRC will not be caught. However, it is not clear what this means: the follower notices rules use the different concept of a ‘final ruling’. In Shaw and Rogers, Upper Tribunal hearing HMRC’s counsel said that HMRC ‘intend and expect the Respondents to be included in the legislative carve out however final decisions on the content of the Finance Bill will be for the new government to decide, post-election’.
We are familiar with anti-avoidance provisions taking effect from the date they were announced, rather than the date when the Finance Act legislation becomes law. Some practitioners will remember the furore surrounding the statement made in December 2004 by Dawn Primarolo, the then paymaster general, when she gave notice of the government’s intention to ‘deal with any arrangements that emerge in future designed to frustrate our intention that employers and employees should pay the proper amount of tax and National Insurance contributions (NICs) on the rewards of employment’. This was felt by many to fall short of the required standard of certainty set out in the so-called ‘Rees rule’ – the guidelines agreed by the government in 1978 for tax changes which take effect from the date they were announced, even though the legislation is not enacted until later. One condition of the Rees rule is that a warning must be given in precise form.
There are also a number of examples of situations where although the legislation is not expressed to be retrospective in that it does not state that it will have effect from an earlier date, it effectively adversely changes the position for taxpayers who have already entered into arrangements. Examples of this are the introduction of accelerated payment notices (APNs) and the loan charge.
Changes favourable to taxpayers that are meant to make sure new legislation operates as intended sometimes specifically have retrospective effect.
Examples of truly retrospective legislation, expressly backdated to a date prior to the legislation being announced which has adverse consequences for taxpayers, are (thankfully) rare. One example in 1992 was a change to clarify the rate of composite rate tax to be charged on building society accounts. Stephen Dorrell, then financial secretary to the Treasury said: ‘Where it is discovered that the tax law does not have the effect that the government and taxpayers generally thought it had, there are circumstances in which it is right to introduce legislation to restore the position retrospectively to what it was thought to be. This is done only in exceptional circumstances and where the government consider such action is necessary to protect the interests of the general body of taxpayers.’
The current change has some similarities with the 1992 change in that it is expressed to be to preserve the status quo, and this is presumably why the government would argue it is justified. In the case of automated processes, Financial Secretary to the Treasury Jesse Norman said in a written ministerial statement which announced the change:
‘The government introduces legislation with retrospective effect only where necessary. In this case retrospective effect is necessary to close off the exchequer and operational risks presented by judicial challenges to HMRC’s ability to automate certain functions. It will protect very substantial sums of tax and penalties already legitimately paid. It will preserve the status quo for taxpayers and HMRC, merely confirming the validity of HMRC’s longstanding and widely accepted operational practice. Taking this action will help to guarantee the integrity of the tax base, provide certainty to taxpayers, and allow the government to continue to administer the tax system efficiently’.
However, the legislative change in relation to automated processes is not really a change which restores the legislation to what everyone thought it meant. The provisions affected by this change date back to the introduction of self assessment in the 1990s. However, when the legislation was amended for self assessment it was drafted in a similar way to the original 1970 version of the TMA which required notices to be given ‘by an inspector or other officer of the Board’. At these times, Parliament would not be contemplating notices being issued by an automated process. It makes sense for HMRC to make use of computers to carry out its routine tasks more efficiently and cost effectively, but it is a bit rich to suggest that everyone thought the term ‘an officer of HMRC’ meant HMRC’s computer.
What could the future look like?
HMRC already makes extensive use of artificial intelligence. Its 2018/19 annual report sets out HMRC’s ambition to become one of the most digitally advanced tax administrations in the world and says that HMRC is leading the way in government in its use of robotic process automation with 78 robotic automations conducting 15.7m transactions in 2018/19.
There are many places in the tax legislation where HMRC officers have to make decisions about whether to instigate procedures, such as opening enquiries, making discovery assessments and issuing APNs. We know that HMRC uses its Connect computer system to ‘join the dots’ between different knowledge sources and computers play a part in risk assessment. But where could increased automation lead? In the future, could we see HMRC computer systems being programmed to gather together data, carry out risk assessments, decide to open an enquiry and then actually open the enquiry all without human intervention? Some of HMRC’s powers can have very serious consequences for taxpayers and the fact that a human being has to decide to exercise them is an important safeguard. It would be very concerning if this safeguard was further eroded.
The authors’ firm acted on a pro bono basis for Craig Shaw and Nigel Rogers in the recent Upper Tribunal hearings.
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