This blog and some published work which has emanated from it has focused upon what happens when HMRC gets it wrong – when the authority advises a taxpayer, but that advice turns out to be wrong for instance whether the advice is in the form of general guidance or in a more bespoke ruling issued directly to the taxpayer. In this blog, I will go one step further back to investigate and provide a theory behind HMRC’s power to get it wrong when it comes to collecting taxes.[1]

The starting point is that taxpayers have an obligation to comply with the tax code, just as citizens have an obligation to comply with the law generally: a citizen should not break the speed limit on a particular road for instance and a taxpayer should not fail to pay taxes that are due under the law. Compliance with the law is the responsibility of the person to whom the law is directed. Managing compliance with the law, on the other hand, will be the responsibility of the State, which in turn will be delegated to different public bodies and officials. Managing law and order is the responsibility of the police, local planning authorities manage planning, and managing compliance with the tax code is the responsibility of HMRC. Where there is a failure to comply with the law, the failure falls prima facie on the citizen (though enforcement in respect of that failure may not occur in the case where the public authority itself has led the citizen into non-compliance). The essential point is that there is a distinction between the responsibility for compliance (being on the taxpayer) and the responsibility for managing compliance (being on HMRC).

That distinction is what ultimately allows HMRC to sometimes “get it wrong”. To explain this, it is necessary to visit the Commissioners for Revenue and Customs Act 2005 which sets out HMRC’s primary responsibilities. Section 5 of the Act provides that HMRC is “responsible for the collection and management” of taxes. How that phrase should be interpreted is a matter of public law. A strict interpretation would lead to an absurdity – namely that HMRC would be regularly and involuntarily acting beyond its powers by failing to ensure that every single penny of tax due is paid (which in practice too is impossible to perfectly quantify). A different interpretation which looks to the purpose of the Act then should be adopted and for that reason the highest court in the UK has very occasionally explained what the purpose of the provision is: it is to allow HMRC to decide upon the “best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection” (IRC v National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617, 637 (Lord Diplock)). It seems utilitarian – obtaining the most amount of tax from the most amount of taxing provisions. The courts then should defer to decisions that HMRC makes in respect of the collection of tax – if HMRC decides that it is appropriate to offer advice to taxpayers whether in a generalised form or in a bespoke manner, that is a decision that the Court will generally respect as it helps in the efficient collection of tax (see for instance R (Davies) v HMRC; R (Gaines-Cooper) v HMRC [2010] EWCA Civ 83, (2010) STC 860 (Moses J) at para 12).

But that respect that the courts will give to HMRC decisions is not without limits. HMRC must not use the “collection and management of tax” for an improper purpose. HMRC should take into account relevant considerations, and disregard irrelevant considerations either for instance. Also, HMRC must not act in a way that is unreasonable in the Wednesbury sense. Thus, where HMRC, under the guise of collecting taxes, does something so outrageously stupid or unfair, then the body will be held to have acted beyond its powers (see R v Inland Revenue Commissioners, ex parte Unilever plc [1996] STC 681).

The result is that HMRC may provide advice to taxpayers as this assists in the collection of tax and the courts will generally respect that decision to do so, but the courts will intervene to find that HMRC has not acted in accordance with its responsibilities where it gets the advice “catastrophically wrong” as in the case of Al-Fayed v IRC [2004] ScotCS 112, [2004] STC 1703. There, HMRC had an agreement with several taxpayers that it would not investigate their tax affairs provided that they paid a lump sum in “tax” each year. That advice and agreement was “ultra vires”: it was the antithesis of the collection and management of taxes as it sanctioned future non-compliance with the law. Similarly, HMRC may not get the law so wrong as to provide a concession to a taxpayer which Parliament clearly did not grant (R (Wilkinson) v IRC [2005] UKHL 30, [2006] STC 270 [20] (Lord Hoffmann)). Where HMRC gets the law wrong in its advice and is advised of the error, then HMRC too will have a responsibility to correct this (see: HMRC v Hely-Hutchinson [2017] EWCA Civ 1075, [2017] WLR(D) 517).

But between those two points – where HMRC provides advice to taxpayers and it is not unreasonably incorrect and no other public law constraint applies – then HMRC will be said to be acting within its powers. That its advice to taxpayers is incorrect does not mean that the body has acted in breach of its responsibility to collect and manage tax. The taxpayer who followed the advice may have failed to comply with the law, but HMRC has not failed in its responsibility to manage compliance. Within certain limits then, HMRC has the right to get it wrong.

[1] The issues that arise in respect of HMRC’s other responsibilities such as administering tax credits will not be dealt with here