Mr G's complaint about HM Revenue & Customs
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Overlooking the fact that Mr G had paid the VAT in question, HM Revenue & Customs made him bankrupt for a debt he did not owe. Their reckless disregard for his rights and the consequences of their mistake contributed to the failure of his business and ‘had a devastating effect’.
Background
Mr G ran an employment agency. In early 2002 a serious problem with his computerised accounting system affected his ability to produce accounting records. In May, in the absence of Mr G’s VAT return, HM Revenue & Customs (HMRC) issued an assessment totalling £37,423.05 for the quarter ended March 2002, and began civil proceedings to recover the debt. In August HMRC issued an assessment totalling £41,475.50 for the quarter ended June 2002. Mr G sent HMRC a payment in September and asked for it to be allocated to the March quarter. HMRC’s solicitors told Mr G that unless payment for the June quarter was received within seven days, they would start civil proceedings to recover the debt.
In October 2002 an HMRC officer (Officer T) carried out a VAT assurance visit at Mr G’s premises. She noted that accounting system problems had prevented Mr G from submitting his VAT returns; that he had recently paid the March quarter assessment; and that payment for the June quarter would follow shortly. On 5 November HMRC received a payment from Mr G which cleared the debt for which they had begun legal action. (By this stage Mr G had paid the quarters ending March and June 2002.)
On 15 November 2002 HMRC issued an assessment for the quarter ended September 2002. On 22 November Officer T collected Mr G’s VAT returns for the March, June and September quarters, and wrote to tell him that the returns had been sent for processing. Officer T also noted that Mr G had agreed to contact HMRC to discuss payment of the amounts due, and that she had identified underdeclared VAT for earlier periods amounting to £45,374. Officer T said that if Mr G did not provide evidence to dispute the assessment within 21 days, she would issue an assessment. (However, HMRC did not ask Mr G to pay that sum then or issue an assessment.) On 29 November HMRC’s solicitors raised a new action in respect of the June quarter and in December the court served a writ on Mr G. His office manager asked HMRC why the writ had been served when the debt in question had already been paid. She was told that HMRC would look into the matter and call back, but it appears no action was taken.
In February 2003 the court served a Charge for Payment at Mr G’s business premises, and HMRC issued an assessment for the quarter ended December 2002. On 21 February 2003 HMRC received a payment from Mr G for £37,705. On 5 March Officer T wrote to Mr G, further to her letter of 22 November 2002, saying that an assessment for £45,374 plus interest would be issued and she enclosed a schedule of the amounts involved. The assessment was issued on 11 March 2003. On 31 March the court served a Sequestration Petition at Mr G’s business premises. In his absence, the petition was left with a temporary employee who did not bring the matter to Mr G’s attention. An Award of Sequestration was granted against Mr G in April, and a Trustee appointed, but Mr G only became aware of the sequestration when the Trustee’s office telephoned him on 17 April. The same day the Trustee took control of Mr G’s business and financial affairs. A week later Mr G told HMRC that he had been looking to recall the sequestration, but he had been unable to do so because further debts had accrued. He said he would not be applying for a recall and would have to remedy the whole debt before doing so.
In May 2003 Mr G’s Member of Parliament asked HMRC for details of his debt and for copies of their correspondence to Mr G about the sequestration, while Mr G wrote to ask Officer T for a meeting to discuss the events leading to his sequestration. On 3 July HMRC sent Mr G a breakdown of his outstanding VAT liability. On 14 July he told HMRC that he had still not seen the Sequestration Petition, but that the court had said the amount under action had been £37,000. Mr G said that he believed he had already paid that sum, but that, in any case, there had been sufficient funds available at the date of sequestration to cover that debt. He said the £255,266.68 that HMRC had claimed at the time of the sequestration was ‘grossly out of order’ and that neither he nor his accountant could make sense of their figures. Mr G said he had made several attempts to contact Officer T without reply.
On 5 August 2003 HMRC sent Mr G another breakdown of his outstanding VAT liability, and apologised that he had been unable to contact Officer T. HMRC told Mr G that they had referred his case to their solicitors and a further response would follow once they had received their solicitors’ advice. On 24 August Mr G asked HMRC why, instead of arranging the meeting he wanted with Officer T, they had simply apologised for the fact he had been unable to contact her. He commented that neither he nor his Member of Parliament had yet received a substantive response from HMRC. The same day Mr G wrote again to Officer T, saying he had been trying to contact her because she was the only person who could clarify matters, having known about his computer problems and having been aware that he would be paying the amount demanded by HMRC.
On 7 November 2003 HMRC told Mr G that they accepted that an error had led to the sequestration, but had decided not to apply for its recall. HMRC said that Mr G’s ‘apparent insolvency’ had been established when the Charge for Payment had been served. In their view that position had continued as he had not paid his debts in full when they fell due and he had incurred additional VAT debts of about £180,000. HMRC commented that for the court to grant a recall of a sequestration it would have to be ‘satisfied that in all the circumstances of the case (including those arising after the date of the award of sequestration) it is appropriate for it to do so’. HMRC said that the Trustee had established that they (HMRC) were not the only creditors and that Mr G was clearly insolvent. HMRC suggested that Mr G consider applying to the court himself for a recall, but added that they would oppose any such application.
On 11 November 2003 HMRC told the Member of Parliament that their legal advice was that there were no legal grounds for recalling a sequestration that had been granted in error. Courts would consider all the circumstances before and after sequestration, but a recall would not automatically be granted where an error had been made.
HMRC said that Mr G was clearly insolvent and they would not try to recall the sequestration. In reply, Mr G’s solicitors told HMRC that they considered the grant of sequestration to be ‘incompetent’
and were applying for legal aid with a view to seeking its recall.
In March 2004 HMRC’s solicitors formally registered HMRC’s objections to Mr G’s legal aid application. The solicitors said that, although Mr G had paid the petition debt in February 2003 (it had actually been cleared in November 2002), a further significant debt had accrued by then. HMRC’s solicitors argued that a sequestration could still be competently awarded where a further debt had arisen that was not mentioned in the original sequestration petition. Furthermore, the Trustee had told them that Mr G had significant other debts and was insolvent at the time of his sequestration. Mr G’s application for legal aid was refused, and his Member of Parliament subsequently referred a complaint to the Ombudsman.
What we investigated
We investigated Mr G’s complaint that HMRC obtained his sequestration through a procedural error and without his knowledge; took no remedial action once their error had come to light; and frustrated his efforts to have the sequestration recalled.
Mr G said that, as a result of HMRC’s error, he had lost his business and his share of the marital home, his health had suffered and he needed counselling. He also claimed that he had been unable to work, and his reputation had been destroyed.
In the course of our investigation we engaged independent accountants to consider the available business records and give their view on the viability of Mr G’s business at the time of sequestration.
What our investigation found
When Mr G made his VAT payment in November 2002, he was actually in credit, so HMRC should not have started recovery action in respect of the June 2002 assessment. HMRC failed to realise that Mr G had paid the debt before they started their action. They then compounded that error by failing to act on a further payment that he made, and by not responding appropriately when told that the debt had been paid. HMRC did not exercise any effective control over Mr G’s case and their actions bore no relation to good administration.
We found that following Mr G’s sequestration HMRC took seven months to tell him of their error. Despite there being a time limit to apply for a recall of the sequestration, HMRC sought policy and legal advice before admitting their error, and then actively frustrated Mr G’s attempts to recover the situation. They declined to apply to recall the sequestration themselves, and opposed Mr G’s application for legal aid, relying in part on the fact that his application for recall had not been made within the statutory time limit. Rather than taking responsibility for their actions and trying to put things right, HMRC offered an ill-informed defence of their actions, relying on the fact that further VAT debts and other creditors had been identified while they were taking action against Mr G.
Consequences
In the view of the independent accountants engaged by the Ombudsman, although Mr G’s business was profitable, his cash flow was not sufficient to meet his ongoing liabilities as well as the VAT debt that had built up unless he was able to introduce capital from another source in a relatively short period. Without knowing if that was a real possibility, in their view it was impossible to be certain whether his business could have continued to trade had HMRC not obtained his sequestration in error. So, while HMRC’s maladministration was a significant contributory factor in Mr G losing his business, we were unable to find that his business would certainly have survived, but for HMRC’s error.
Nevertheless, the impact of HMRC’s maladministration was serious. Mr G was incorrectly placed in sequestration and thereby denied any opportunity to try and save his business. He lost his business and his reputation, which led to considerable worry and distress for him and affected his family life and health. His wife also had to buy out his share of the marital home to avoid a forced sale. In Mr G’s own words, ‘I don’t think anyone could understand the impact on my family and my health’. HMRC’s considerable powers come with a responsibility to act proportionately, appropriately and fairly, and with due regard for the law and their own procedures. In their desire to defend their own position HMRC completely lost sight of the devastating impact their mistakes had on Mr G.
We upheld Mr G’s complaint.
Resolution
Although we could not determine what position Mr G would have been in but for HMRC’s errors, their serious and persistent failings caused him and his family considerable worry and distress. As a result of our recommendations HMRC:
- paid Mr G compensation of £50,000;
- apologised to him for their maladministration and failure neither to recognise the injustice they had caused him, nor to seek to remedy it;
- provided Mr G with a letter admitting that he had been sequestered in error, which he could show his creditors in an attempt to restore his reputation; and
- paid £971.75 to Mrs G to reimburse the costs she incurred in buying out Mr G’s share of the marital home, which she would not have incurred but for their error.
