It seems like every few days that I hear of someone taking dodgy advice from a mate down the pub, rather than talking to a qualified accountant, with this week’s Blog being typical of a number of similar cases that have come to my attention recently.
Today’s tale of woe involved an NHS nurse who foolishly allowed a ‘friend’ to claim a tax refund, on her behalf. Unfortunately, the nurse’s ‘mate from down the pub’ fraudulently inflated the claim, which was in effect, facilitated by HMRC’s much-maligned ‘process now, check later’ system.
Background
On this occasion, an NHS Nurse, who was employed on a agency basis (known as ‘Bank’) was persuaded by a trusted friend and colleague to make bloated travel expense claims, which resulted in significant tax repayments. As is all-too-often the case, the nurse agreed that her ‘mate from down the pub’ could keep 20% of the tax refund as a thank you for helping her.
The nurse had previously only claimed the legitimate employment expense for the fixed-rate uniform allowance available to NHS staff. However, in 2021 a colleague suggested going for a glass of wine to have a chat on how she could claim for additional employment expenses relating to travel between home and work, which she was told that just about everyone ‘in the know’ was doing.
What happened
The nurse handed over a significant amount of personal information to her colleague, including her National Insurance number, date of birth, Government Gateway ID and password, plus the multi-factor authentication code needed to access her HMRC account.
Armed with these details, the colleague logged in as the taxpayer and submitted self-assessment tax returns on her behalf, including claims for travel expenses for the 2019/20, 2020/21, 2021/22 and 2022/23 tax years. The claims generated significant tax repayments, of which the colleague retained 20% as their agreed payment for the many hours spent in preparing and submitting the repayment claims.
As the claims had not been challenged by HMRC because of their ‘process now, check later’ system, the nurse naively thought that her claims were legitimate. Crucially in this case, the nurse had not been told by her trusted friend what figures had been entered on the tax returns that gave rise to the refunds.
Six months after receiving the refund and handing over the 20% fee to her friend, she was surprised when her tax returns were selected for a tax enquiry. She was then devasted to be told by HMRC that all of her travel expense claims were invalid and that not only would she have to repay the refunded tax, but that HMRC were also imposing heavy penalties for her deemed extremely careless conduct.
Appeal to the Tax Tribunal (FTT)
The FTT had minimal difficulty in establishing that the repayments were not due and that the tax had to be repaid, based on the 2003 Income Tax Act, specifically Sections 337 and 338, which allow a deduction for travel attributable to an employee’s necessary attendance at a workplace, but it specifically excludes ordinary commuting. In simple terms, travel between home and a permanent workplace is not deductible.
The FTT then examined the significant penalties imposed by HMRC and whether or not their high level was justified by the facts of the case.
Were the penalties too harsh?
The FTT accepted that the nurse was an honest and straightforward individual who had not personally prepared or submitted the tax returns. Nonetheless, it agreed with HMRC that she had been careless by handing over her Government Gateway credentials and security information. The judge commented that by allowing her ‘mate’ to submit tax returns in her name without giving her any opportunities to review or verify their contents, amounted to a failure to take reasonable care and therefore justified penalties.
This, however, was not the end of the matter, as the judge also recognised that the taxpayer had been manipulated by someone she trusted. The colleague had taken advantage of her naivety and vulnerability and had personally profited from the arrangement by retaining 20% of the tax refunds.
After taking these circumstances into account, the judge exercised the tribunal’s discretion to grant a special reduction in the penalties. This was so substantial that it effectively eliminated them altogether, but it wasn’t all good news, as the taxpayer still had to repay the tax
Whilst the nurse had escaped any financial penalty beyond the money already lost to the colleague, who incidentally had refused to attend the Tribunal, unless her former friend repaid the 20% commission, which was highly unlikely, she had effectively been fined 20% of the refund.
Tribunal judge criticises HMRC
The judge commented that HMRC was “partly to blame” for operating a repayment system that authorised these repayments when, as the tribunal put it, “even a cursory review ought to have raised alarm bells”. The case serves as a reminder that taxpayers remain responsible for returns submitted in their name, even when someone else prepares them.
It also highlights the dangers of sharing Government Gateway credentials and personal tax information with third parties. At the same time, it demonstrates that tribunals are willing to take a compassionate approach where a taxpayer has clearly been the victim of manipulation or exploitation.
Accountant’s view
I have very little doubt that within days of the FTT’s decision, HMRC will start a full-blown tax investigation into the nurse’s ‘mate from down the pub’ and woe betide that person, if her tax affairs aren’t squeaky clean, because if they’re not, she could well face prosecution for tax fraud.
