HMRC wins £3.1m dispute over tax software

30 May 2017

The Financial Times has reported news of a case where a taxpayer lost a £3.1m dispute after a judge said that HM Revenue & Customs (HMRC) could challenge tax calculations that relied on its own algorithms. The tribunal ruled that users of tax computation software could not rely on its results, even though its technical specifications had been provided by HMRC.

The case involved a scheme that employed insurance policies to create a massive deduction that was used to reduce the taxpayer’s other tax liabilities. HMRC accepted that it reduced his income tax bill, but rejected his argument that it also reduced his capital gains tax (CGT) bill.

The report from the Financial Times says that this dispute is the latest example of the difficulties experienced by software in coping with the complexity of the tax system. It follows recent software glitches that put thousands of people at risk of paying hundreds of pounds more tax than they owed for the 2016-17 tax year.

The tax tribunal ruled that HMRC should not be stopped from making inquiries into aspects of tax returns that made use of information it provided. An adverse ruling would make HMRC “much more guarded about the assistance that it provides”, the judge said. “That could only be to the detriment of the majority of taxpayers who cannot afford to instruct professional advisers to complete their returns.”

Andrew Hubbard of RSM, a professional services firm, said the ruling had implications for the tax authority’s ambitious plans to digitise the tax system. He said that similar problems might occur again, since the “making tax digital” initiative would require businesses and landlords with turnover above £10,000 to rely on third party software, using specifications provided by HMRC.

Read more from the Financial Times.