HMRC and Fairness

The issue of Fairness is one which HMRC in recent times has used repeatedly as a way to justify an unjustifiable degree of scrutiny of taxpayers. HMRC have regularly chanted the mantra that operating within the letter of the law is not sufficient, that taxpayers should be bound by a moral compass and therefore must pay an amount of tax that is deemed to be ‘fair’..

It may come as a surprise to many readers then to learn about the recent case of Julian Martin v HMRC [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][2013] UKFTT 040 (TC). The details of the case were that Mr Martin had commenced employment under a contract which entitled him to a £250,000 golden handshake payment, which he was taxed on accordingly upon receipt.  The employment contract which he signed included a clause stating that, if Mr Martin were to leave the company within five years of his start date, a proportion of his initial payment would have to be repaid.

It turned out that Mr Martin did leave within the five year window, which resulted in him making a repayment to the company of £162,500. This was in fact an amount greater than he had physically received, after tax, in the first place.  He had therefore incurred an effective tax charge at this point of more than 100% on this income!

It is not unreasonable to assume at this point that most people would think it was fair for Mr Martin to claim tax relief for this additional payment, so as to not incur being taxed on income which he had in essence not received. HMRC did not however, fall in the ‘most people’ category and their view was that any taxpayer’s liability should be determined purely by the law that was enacted by parliament, irrespective of fairness.

If you read the above paragraph and had to check back to the opening paragraph to confirm that you had read it correctly and that HMRC’s view of fairness had changed to the polar opposite, we doubt you are alone.

This was another classic case of HMRC changing their stance to suit the point in hand. The case was therefore taken to the First Tier Tribunal to look at the strict legal position. Thankfully, the Tribunal found in favour of Mr Martin and his claim for tax relief was allowed.

It is rather disconcerting however, that a taxpayer should have to go to through the Tribunal system in order to claim a relief for something that is so obviously unfair whilst HMRC continually use ‘fairness’ as their go to stand point.

Furthermore, it would appear that this result was only achieved because Mr Martin was someone who had the means to allow him to fund an appeal. If he had not been, this may well have ended as a case of HMRC imposing a tax treatment on a taxpayer that could not afford the appeal process and would have been left in an utterly unfair position.

Whilst this case again highlights the true nature of HMRC, it does show that HMRC’s position is that the strict application of the law is the valid test of a taxpayer’s liability, not a subjective moral test which simply makes good headlines for the tabloids.

Those who seek to legally manage their taxation affairs efficiently and within the law should contact C3 Tax for advice. Call us for details.

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