Home >  Publications > Selected cases — Parliamentary > Selected Cases and Summaries of Completed Investigations - November 1997 - April 1998 > C.664/95

Full Text of Selected Cases

INLAND REVENUE

Case No. C.664/95

Changes to the taxation of actors' incomes

5.1 Ms T complained that, following a decision by the Special Commissioners of Income Tax that actors employed on what were known as Equity standard contracts should be taxed as self-employed, the Revenue delayed excessively in implementing that decision, including in her case.

5.2 My investigation began in October 1995 after the Parliamentary Commissioner's predecessor had received the comments of the then Chairman of the Board of Inland Revenue, after the Member had referred the complaint. I have not put into the report every detail investigated by the Parliamentary Commissioner's staff, but I am satisfied that no matter of significance has been overlooked. An Appendix to this report lists the main abbreviations used and their meanings.

Background

5.3 There is no statutory definition for taxation purposes either of ‘employment' (income from which is assessable under Schedule E) or ‘self-employment' (income from which is assessable under Schedule D). The Revenue rely on case law to determine whether a taxpayer is employed under a contract of service and is to be taxed as an employee, or is engaged under a contract for services and is to be taxed as a self-employed person. Usually assessment under Schedule D is more beneficial to the taxpayer in that different and generally less restrictive rules apply, for example which permit larger deductions for expenses when arriving at the amount that is assessable. Until 5 April 1990 the income of actors was normally assessed under Schedule D. The Revenue decided that from that date actors employed under Equity standard contracts should more properly be assessed under Schedule E in respect of their theatrical income. However, actors who had a sufficiently long established record of paying tax under Schedule D, and who satisfied certain criteria, were allowed to retain their self employment status indefinitely under Extra Statutory Concession (ESC) A75. That was known as ‘reserved Schedule D status'. With that exception, with effect from 6 April 1990, all theatre managers were told to operate Pay As You Earn (PAYE) (a method of tax collection used only where the taxpayer is assessable under Schedule E) on all payments made under standard contracts. Advice to Revenue staff on these matters was provided in District Memorandum TS221/1989. That memorandum noted that representative bodies in the acting profession and the theatre industry had not accepted the Revenue's view that actors' income should be assessed under Schedule E and were looking to test the issue in the courts.

Back to top

5.4 Notwithstanding the Revenue's pre-1990 practices, for National Insurance contributions (NIC) purposes actors have been treated as employees by the Department of Social Security (DSS) and have paid class 1 contributions.

5.5 Decisions in two court cases, Cenlon Finance Co Ltd v Ellwood and Scorer v Olin Energy Systems Ltd, restrict the Revenue's ability further to assess a taxpayer's income once liability for a given tax year has been considered on appeal and has become final. The Revenue have extended that principle (the Olin principle) in a Statement of Practice SP8/91 which says that where a taxpayer's liability has been settled and the particular point at issue was, or can be said to have been, the subject of an agreement, no further assessment should be made.

5.6 Section 824 of the Income and Corporation Taxes Act 1988 provides for payment of interest (repayment supplement) on repayments of income tax where a repayment is made more than 12 months after the year of assessment to which it relates.

5.7 The Revenue publish a booklet called Code of Practice 1 ‘Mistakes by the Inland Revenue' (COP1). Under COP1 the Revenue do not, as a rule, reimburse a taxpayer for his or her costs, but an exception may be made where the Revenue have delayed dealing with correspondence, for no good reason, for a period in excess of six months (beyond the 28 days they allow themselves to reply.)

Back to top

Jurisdiction

5.8 Assessing a person's liability to tax is the responsibility in the first instance of an Inspector of Taxes. A taxpayer who is dissatisfied with the assessment can appeal to the General or Special Commissioners of Income Tax. Under section 5(2)(a) of the Parliamentary Commissioner Act 1967 the Parliamentary Commissioner is normally debarred from investigating any matter in respect of which an aggrieved person has, or had, a right of appeal to an independent tribunal such as the General or Special Commissioners (and he is absolutely debarred where that right has been exercised). My investigation has been confined to the Revenue's administrative handling of the dispute concerning actors' employment status and the effect that that and the tax consequences thereof have had on the Revenue's handling of Ms T's tax affairs.

Back to top

Investigation of main events

5.9 1992: During 1992 discussions took place between representatives of the Revenue and representatives of the theatrical profession, including the Theatres' National Committee (TNC) and the British Actors Equity Association (Equity), about the Revenue's decision to change the basis on which actors were taxed (paragraph 5.3). The representative bodies did not agree with the Revenue's approach and two test cases were appealed to the Special Commissioners

5.10 1993: The Special Commissioners' decisions given orally on 29 July were that the income of the appellants from engagements under Equity standard contracts (paragraph 5.3) was chargeable under Schedule D. In August the Revenue, who were considering an appeal to the High Court, wrote to the Clerk to the Special Commissioners to ask for a stated case.

5.11 The solicitors who had represented the appellants in the test cases suggested on 5 August that they and the Revenue might consider what steps should be taken on the assumption that the Special Commissioners' decision would stand. They sent a typed version of the Special Commissioners' decisions to the Revenue on 13 August. On 18 October the Revenue sought counsel's advice. They also began to give internal consideration to the instructions that they would need to issue to staff in tax offices arising from those decisions, in the light of enquiries from tax offices and Equity advice to its members that they should appeal against any Schedule E assessments made on them.

5.12 On 2 November TNC sent the Revenue for their comments draft letters which they intended to send to their members and those of Equity. The drafts advised theatre managers to cease operating PAYE and advised members of Equity to request Schedule E assessments for 1990/91 onwards and to lodge appeals against them on the basis that the income should have been assessed under Schedule D. Although a reply was drafted I have seen no evidence it was ever sent. On 20 December the Special Commissioners issued the draft stated cases.

5.13 1994: On 13 January 1994 a memorandum was sent to all tax offices advising them of the decisions of the Special Commissioners and saying that requests from actors for Schedule E assessments and appeals against them should be accepted but that any requests to re-open settled liabilities should be referred to the Personal Tax Division (PTD) at Revenue Headquarters. Where early settlement was sought the taxpayer was to be told that the Revenue were still considering the implications of the test case decisions and that there would be little point in pressing for the hearing of the appeals by the General or Special Commissioners.

5.14 On 21 January the Revenue Solicitor's Office advised PTD that the idea of appealing to the High Court should be dropped immediately as the prospects of a successful appeal were negligible.

5.15 That advice was accepted. On 8 February PTD wrote to specialists at the Revenue's Business Profits Division (BPD) about the implications of assessing actors under Schedule D. They said that a perceived problem was that because of the Olin principle (paragraph 5.5) a situation could arise in which a taxpayer might receive a full refund of Schedule E tax paid without the Revenue being able to make a Schedule D assessment on income which had previously been assessed under Schedule E. A technical advisor at BPD replied on 11 February confirming that there could be circumstances in which the Olin principle would prevent the issue of Schedule D further assessments; nor did subsequent internal Revenue consideration of the issue bring to light any clear way of avoiding the difficulties.

Back to top

5.16 On 17 February the Revenue Solicitor's Office wrote to the Clerk to the Special Commissioners to say that the Revenue would not seek to take the test cases further. A copy of that letter was sent to the solicitors acting for the appellants. TNC replied on 23 February, expressing their pleasure that the Revenue were not to pursue the appeals and asking for a meeting as soon as possible to enable a statement to be made to their members about how the consequences of the decisions in the test cases were to be implemented.

5.17 On 6 April a meeting took place between the Revenue, who had been giving further thought to the way the situation could best be regularised, and TNC and Equity representatives. The Revenue said that they were aware of the need to issue guidance on the employment status of actors but that a number of technical issues relating to the re-opening of assessments for earlier years needed to be resolved. At an internal Revenue meeting, attended by PTD, BPD and the Revenue's solicitors, later that day it was decided that the various technical issues needed to be explored further.

5.18 On 25 April a representative from Equity asked PTD if any information about the tax treatment of actors would be available for inclusion in a forthcoming edition of their journal (the deadline for which was 10 May). On 17 May, after further deliberations within the Revenue, the draft guidance that they proposed to issue to tax offices was sent to representative bodies for theatrical performers and other interested parties for their comments. At that stage the Revenue were no clearer than they had been before how the assessment difficulties they perceived might be overcome, although they thought that the Olin principle should not affect the majority of cases. On 24 May a Revenue solicitor gave PTD a detailed analysis of possible scenarios and their legal consequences for the collection of the tax due computed on a Schedule D basis including the set-off of the repayments of Schedule E tax that would be due to be made on that basis.

Back to top

5.19 During June various recipients of the draft guidance replied commenting that they were content with it. When TNC replied on 6 June they asked that the guidance be issued to tax offices as soon as possible. On 25 July Equity also wrote asking if the guidance could be issued soon. Another edition of their journal was soon to be printed for which the deadline was 8 August.

5.20 Equity next wrote to the Revenue on 15 August to say that they had had to delay publication of the next issue of their journal. The revised deadline for copy was 31 August and they would appreciate receiving the guidance before then. The Revenue remained undecided about how to handle the potential problems they foresaw but on 18 August sent a copy of the guidance which was to be issued to tax offices to representative bodies for theatrical performers and other interested parties outside the Revenue. On 31 August a memorandum was sent to all tax offices. It said that a letter, a draft of which was provided, should be sent to theatrical employers asking them to consider the current terms of the engagement of their actors and, if those amounted to self-employment and PAYE had previously been operated, to cease to operate PAYE with effect from the next pay day and to send a form P45 (a form used to notify tax offices that an employee had ceased employment) to the tax offices dealing with those employees. On receipt of such a P45 the tax office concerned was to send a letter, a draft of which was also provided, to the ex-employee notifying him or her of the situation. The letter asked the ex-employee, if he or she was not already registered as self-employed, to become so. The memorandum also said that instructions would be sent later to tax offices regarding the tax treatment of earlier years.

5.21 In August and September, articles appeared in various publications about the Revenue's acceptance that the income of actors was assessable under Schedule D.

Back to top

5.22 In November the Revenue returned to the problem of dealing with the earlier years and identifying possible ways forward. One additional problem which was foreseen was the NIC liability which arises on income from self-employment (called class 4 NIC) and whether that should be re-couped from the tax repayments that were expected to arise as a result of the reversion from a Schedule E to a Schedule D basis for tax assessment. DSS were said still not to have decided how they would treat the income of actors for NIC purposes.

5.23 1995: On 4 January 1995 after still further internal Revenue consideration a memorandum was sent to tax offices about the transfer of taxpayer records of those actors whose income had previously been subject to PAYE from the Schedule E to the Schedule D sections of tax offices.

5.24 On 16 January Equity wrote to PTD asking what progress had been made on the question of the treatment of earlier years and whether a streamlined way of allowing expenses for those earlier years had been devised, as receipts or invoices for expenses incurred might not have been retained. The Revenue replied on 24 January saying that matters had still not been resolved although the need to do so was regarded as urgent.

5.25 After further deliberations within the Revenue on 31 March counsel's advice about the treatment of earlier years and the implications of the Olin principle was sought. Equity wrote to the Revenue on 28 April saying that they were receiving enquiries from their members about the delays in making repayments and that it was unsatisfactory that there was still no guidance about the treatment of earlier years. There was evidence that some Inspectors were settling matters without waiting for formal instructions whereas others were awaiting those instructions. Pending receipt of counsel's advice the Revenue's internal deliberations continued, an officer noting that it was likely to be some time before DSS could make a decision about the NIC implications of the matter. On 19 May a meeting took place with counsel following which, on 23 May, counsel's opinion was given. It acknowledged that there were difficulties – particularly where Schedule D assessments had already been made and properly determined. He opined however that there was sufficient justification for the Revenue to adopt the approach of repaying the difference between the tax paid under Schedule E and that due under Schedule D, and that that was the course of action which should be pursued. After comments were exchanged between the various interested parties within the Revenue it was decided on 27 June that provisional repayments of tax, where due, should be made as soon as possible.

Back to top

5.26 On 3 July it was agreed that an amount equivalent to the repayment supplement payable (paragraph 5.6) should be added to the repayments being made even in cases where it was not strictly legally due.

5.27 After Ministerial agreement to the course proposed had been obtained, a memorandum was sent to tax offices on 31 August telling them to settle actors' tax liabilities for earlier years by repaying the difference between the re-computed liability under Schedule D and the tax already deducted under Schedule E. An amount equivalent to repayment supplement, computed in the normal way, should be added to the net repayment arising. The memorandum said that if it was claimed that it was not possible (for example because of the Olin principle) to collect newly chargeable Schedule D tax from a PAYE repayment due the case should be submitted to PTD for advice.

Investigation into the handling of Ms T’s particular tax affairs
 
5.28   1988-1990: Ms T started her career as an actress in August 1988. Tax office X were responsible for dealing with her tax affairs and they assessed her income as an actress for the years 1988/89 and 1989/90 under Schedule D. On 9 August 1990 Ms T telephoned office X to ask for a letter to be sent to another tax office (office Y) confirming her Schedule D status so that PAYE was not operated against her income from a theatre company whose tax affairs were dealt with by that tax office. Office X explained to Ms T that, because she had not started her self-employment as an actress before 6 April 1987, she did not satisfy the criteria for reserved Schedule D status (paragraph 5.3). On 2 November the accountants dealing with Ms T’s tax affairs at that time (whom I call accountants A) wrote to office X saying that, in accordance with the change in approach relating to the employment status of actors, Ms T had ceased to be self-employed. Office Y then assumed responsibility for dealing with Ms T’s tax affairs.
 
5.29   1991: On 21 June 1991, following requests by Ms T, office Y reviewed her liability to income tax for the year 1990/91. On office X’s instructions they took into account the balance of her personal tax allowances – that part which had not already been used against her Schedule D income as an actress – and repaid to her tax over-deducted from her income from employment.
 
5.30   1992-1993: During this period PAYE deductions were made from Ms T’s income as an actress.
 
5.31   1994: In March 1994 Ms T appointed new accountants (whom I call accountants B) to act on her behalf. On 17 April they wrote to office X saying that Ms T had not ‘ceased to trade’; she had continued throughout in her career as an actress and had therefore continued to be assessable under Schedule D. They asked for copies of her Schedule D assessments for the years 1988/89 to 1991/92. On 26 April, because office X no longer had responsibility for dealing with Ms T’s tax affairs (and because her tax affairs were by then being dealt with at a third tax office (office Z) they forwarded the accountants’ letter to office Z. Office Z replied to accountants B on 3 June, with copies of the Schedule D assessments for 1988/89 and 1989/90. They said that no Schedule D assessment had been issued for 1990/91. No Schedule E assessment had been made for 1990/91 or for subsequent years, although a repayment had been made for 1990/91 (paragraph 5.29). On 9 June office Z transferred Ms T’s tax records back to office Y, because she had recommenced employment with an employer for whom office Y took responsibility.

Back to top
 
5.32   On 6 July accountants B wrote to office X, referring to their letter of 17 April, to which office Z had replied; they asked for confirmation that office X still held Ms T’s Schedule D tax records. Referring to the Special Commissioners’ decisions in the test cases, they said that they would be appealing against the Schedule E assessments and submitting accounts under Schedule D. On the same day they wrote to office Y asking for copies of Ms T’s Schedule E assessments for the years 1990/91 to 1993/94. Office Y replied on 9 August enclosing a copy of the repayment computation for 1990/91. They said that no Schedule E assessments had been issued. Accountants B wrote to the District Inspector at office X on 5 September complaining that they had had no response to their letters of 17 April and 6 July. They said that as a result of the Special Commissioners’ decision they wished to submit Schedule D accounts to bring Ms T’s tax affairs up to date. On 12 September accountants B telephoned office X who, when returning that call, said that Ms T’s tax records had been transferred to office Y but that they would arrange for their return.
 
5.33   On 29 September accountants B sent office X details of Ms T’s income for 1990/91 to 1993/94, which had suffered deductions under PAYE. They said that in the near future they intended to send in accounts for Ms T’s income as an actress. Following receipt of that letter the officer dealing with Ms T’s tax affairs sought advice from her manager on 27 October on whether Ms T could be assessed under Schedule D. Referring to the memorandum sent out in August (paragraph 5.20) the manager replied saying that the accountants should be told that no action could be taken about the earlier years until further instructions had been received from Revenue headquarters. Accountants B next wrote to office X on 4 November with their revised tax computations for 1988/89 to 1991/92 and saying that they hoped that office X had all the information needed to issue revised assessments for those years. Accountants B submitted Ms T’s accounts for the years ended 31 July 1991, 1992 and 1993 on 23 November. They asked office X if they were yet in a position to deal with the appeals against the Schedule E assessments for the years 1990/91 to 1993/94, and to issue Schedule D assessments for the same period. On 2 December office X telephoned accountants B saying that they had drafted a letter explaining that no Schedule E assessments had been issued for Ms T and that instructions from Revenue headquarters were awaited about how to deal with the years 1990/91 onwards. Once those instructions were received they would let accountants B know what they intended to do regarding the earlier years.

Back to top
 
5.34   1995: On 27 March 1995 office X returned a telephone call from accountants B. Office X said that instructions were still awaited. Accountants B commented that it was taking rather a long time for them to arrive. On 20 June an Inspector at office X reviewed Ms T’s tax records and contacted PTD about the Revenue’s delay, as he was anticipating a complaint from accountants B. He was told that, although matters had not been agreed, in the event of a complaint it would be appropriate to accept the Schedule D position provisionally and to repay any excess Schedule E tax collected over and above the Schedule D liability (and liability for class 4 NICs). The Inspector wrote to accountants B on 20 June explaining that, exceptionally, a repayment could be made but that he would need clarification of some of the figures shown in the accounts. Accountants B replied on 27 June providing a breakdown of Ms T’s engagements. On 30 June the Inspector raised some further queries on the accounts with accountants B who on 3 July provided the information requested. On 25 July the Inspector agreed Ms T’s assessable income under Schedule D for the years 1989/90 to 1994/95. At the same time he told the officer responsible for dealing with Ms T’s tax affairs to proceed with the repayment of tax overpaid on a provisional basis. The officer recomputed Ms T’s liability on 17 August but found there was some information about the receipt of unemployment benefit missing. The officer contacted accountants B about that the same day.
 
5.35   On 22 August PTD telephoned office X. They said that accountants B had complained to them about the delay in finalising the treatment for earlier years. They needed to borrow Ms T’s tax records. On 23 August accountants B telephoned office X. The officer there explained that the outstanding unemployment benefit details were still awaited, but that Ms T’s tax papers had been sent, that day, to PTD. On 14 September PTD returned Ms T’s tax records to office X and told them to review the case in accordance with their latest memorandum (paragraph 5.27). On 19 September office X sent accountants B a computation of the repayment which would be made to Ms T, taking account of repayment supplement (paragraph 5.6) and the set off of an underpayment for 1992/93. The amount which would be repaid was £2,045.51, that amount including an amount equivalent to repayment supplement. Payment was eventually made on 18 September 1995.

Back to top
 
Comments from the Revenue
 
5.36   In giving the Parliamentary Commissioner’s predecessor his comments on the complaint the then Chairman of the Board of Inland Revenue acknowledged that it had taken much longer than he would have liked to issue guidance to local offices about how to deal with the earlier years and he offered his apologies to Ms T and the other taxpayers concerned. He said that difficult technical and legal issues had been raised which had had to be considered, but there had been times when other pressures had caused them to be put to one side. However, once guidance had been issued strict time limits had been set for contacting those affected and Inspectors responsible for looking at accounts had been asked to deal with the affected cases as quickly as possible. Although in some cases there was no statutory basis for paying repayment supplement, under the circumstances it had been agreed that an amount equivalent to repayment supplement would be paid in all cases.
 
5.37   The then Chairman explained that although the issue of the tax treatment of the earlier years had first been raised (within the Revenue) in October 1993 the Revenue had still been considering at that time whether to appeal against the Special Commissioners’ decision. The decision not to appeal had been made promptly once the draft stated case had been received (paragraph 5.12). Considerable internal discussion within the Revenue had then followed, mainly about the implications of the olin principle and the problems thereby thrown up. Following legal advice the options had appeared to be either to proceed with making repayments of Schedule E tax net of Schedule D liability (despite uncertainties about whether and on what basis the repayment would be made) or to seek a legislative solution. The latter was a proposal which would only be considered were it beyond doubt that there was a risk that for earlier years tax deducted under PAYE would have to be repaid without the Revenue having the power to recover the tax that would have been due under Schedule D. At the same time the question had had to be addressed of the future treatment of actors’ incomes, on which guidance had been issued in August 1994 (paragraph 5.20). Having resolved that problem about the future treatment of actors’ income it had still remained to resolve the problems brought about by the perceived inability to recover, in all cases, the Schedule D liability from the repayment of the PAYE tax. Advice had been sought from the Revenue’s solicitors and, ultimately, from counsel (paragraph 5.25). That advice had not been received until May 1995 following which, after further discussion, the view had been taken that the Revenue could properly rely on the common law of restitution to enable them to argue that they need only repay the difference between tax deducted under PAYE or Schedule E tax paid and the revised liability computed on a Schedule D basis.

Back to top
 
5.38   The then Chairman also said that the Revenue’s aim throughout had been to achieve an outcome within the law which properly reflected the Special Commissioners’ decision and which gave the actors concerned the benefit of Schedule D treatment. The Revenue had sought to achieve equitable treatment as between actors, taxpayers in general and the Exchequer. The greatest difficulty they had had to overcome had been to give effect to the approach sought whilst recognising the significance of the Olin principle.
 
Findings
 
5.39   Once the Special Commissioners had given their decisions in the test cases (paragraph 5.10) the Revenue needed to consider whether to appeal and what the implications would be were the decisions to stand. They could not do that on a fully informed basis until December 1993 when they received the draft stated cases (paragraph 5.12). In February 1994 they told the Clerk to the Special Commissioners and the solicitors representing the appellants in the test cases that they would not seek to take matters to the High Court. There was no avoidable delay on the part of the Revenue in making that decision or in advising the profession of it.
 
5.40   As the Revenue had announced that they accepted the decisions in the test cases, the profession no doubt expected that the Revenue would give prompt instructions to their staff to ensure that actors were once more taxed on a Schedule D basis with a recomputation of their liability for the earlier years. However the Revenue had no contingency plan for making the necessary changes. The instructions sent to Revenue staff in January 1994 (paragraph 5.13) (admittedly before the Revenue decided not to refer the test case decisions to the High Court) said that, although appeals against assessments should be accepted, it should be suggested to taxpayers that there was little point in pursing the matter before the Tax Commissioners. While I can understand that the Revenue would wish to defer consideration by the Commissioners of individual cases until they had formulated their position, their position became increasingly untenable as time dragged on.

Back to top
 
5.41   I sympathise with the Revenue’s desire to deal with the implications of the change of the taxation basis for both the then current and the earlier years as one complete transaction. However, it should have become clear very early on that the problems were too great to adopt that approach. The Revenue found themselves unable to deal with the matter in its entirety and, at the end of August 1994, instructed theatrical employers to stop making deductions under PAYE (paragraph 5.20). There had by then been a delay of over four months from the date of the meeting at which the Revenue had agreed to send out that guidance (paragraph 5.17), seven months from the date of their decision not to appeal against the Commissioners’ decision (paragraph 5.16) and just over a year from the date of that decision (paragraph 5.12). That delay was excessive, for the Revenue were not constrained by the technical difficulties in changing the basis of assessment for the then current year, and I criticise the Revenue for it.
 
5.42   I acknowledge that one of the problems the Revenue saw in changing back the basis of the tax assessment of actors was the implications for the collection of NICs. However the situation in that respect was no different from what it had been before 1990/91. The Revenue were also concerned at the divergence in the interpretation of the employment status of actors as between the Revenue (who, by and large were treating them as self-employed) and DSS (who treated them as employed). However it is a fact that that divergency has not prevented each of the departments from continuing to adopt their own approach up to and including the date of issue of this report. I do not accept that the perceived problem over the difference in approach between DSS and the Revenue was a reasonable excuse for delaying the cessation of deductions under PAYE, or for the time taken to resolve matters overall.
 
5.43   I turn next to the Revenue’s consideration of the most difficult of the consequences of the decisions in the test cases – the problem of the ‘earlier years’ (paragraph 5.15). It is clear to me that the Revenue sought to pay due regard to the difficulties whilst, as the then Chairman has observed, seeking to achieve equitable treatment among actors, taxpayers in general and the Exchequer. What the Revenue sought a means of doing from the outset (and what they felt they had achieved eventually) was to find a sustainable basis on which to authorise tax offices to recompute under the Schedule D rules the liability of the affected actors for the earlier years and to repay the difference between that and Schedule E tax deducted. Their difficulty lay with the potential significance of the Olin principle for they wished to avoid a position where, as a result of the application of that principle, they might be obliged to repay all the Schedule E tax collected without having the power to raise a charge to tax under Schedule D. I accept, as the then Chairman has said, that the Revenue’s constant aim was to achieve a result within the law which properly reflected the Special Commissioners’ decision and that the problem with which the Revenue was faced was a serious and technically and legally difficult one. In the event it was not until 23 May 1995 at the earliest (paragraph 5.25) that the Revenue felt that they had found a sustainable solution.

Back to top
 
5.44    While I accept that the Revenue needed to give careful consideration to the issues, the question remains whether that consideration proceeded with sufficient focus and urgency. The then Chairman later acknowledged that it had taken much longer than he would have wished for guidance to be issued to local offices on how to proceed for the earlier years (paragraph 5.36). The Revenue would, in my view, have been well advised, given the status of the Special Commissioners’ decisions as test cases, to have started to consider before the hearings the contingent consequences for the earlier years if they lost. It was not until October 1993 (paragraph 5.11) that serious consideration of the issues started. BPD and the Revenue’s solicitors did not comprehensively identify the potential problems until April 1994 (paragraph 5.17). Detailed advice was given by a Revenue solicitor the following month (paragraph 5.18) but it was not until March 1995 (paragraph 5.25) that advice about the most difficult issues was sought from counsel. I have the advantage of hindsight but I think it should have been apparent well before then that the Revenue would need counsel’s opinion. Once they had that opinion they were able to reach a decision quickly although there then followed another two months before the final memorandum was issued to tax offices. In my view the Revenue were slow off the mark, tardy in instructing counsel and should have driven matters forward with more urgency than they showed. The number of people involved in the Revenue’s internal consultation and the manner in which exchanges of information and opinions took place led to the decision-making process becoming prolonged and lacking cohesion. As time went on, the arguments became circuitous.
 
5.45   What of the Revenue’s actions in keeping the profession informed during that period? From the time of the Special Commissioners’ decision in July 1993 (paragraph 5.10), to the final dissemination to tax offices of the consequences of that decision in August 1995, some 25 months later, the Revenue met with the profession only once (paragraph 5.17) and corresponded with them infrequently. They did not adopt a proactive approach in keeping the profession informed and did little to help the representative organisations provide updates to their members, despite several requests. I appreciate that the Revenue would have been chary about the consequences of divulging their concerns about the possible implications of the Olin principle but, if they felt unable because of that to explain what was causing the delay, that should have spurred them in their efforts to find an approach that they felt they could disclose. Overall the Revenue failed in that regard and so did not, as they should have done, minimise delay and taxpayers’ costs of complying with the law.

Back to top
 
The effect on Ms T
 
5.46   As a result of delays I have described Ms T suffered deduction of PAYE from her income for a period longer than she should have done. Her liability was eventually recomputed on a Schedule D basis and a repayment was made on 18 September 1995, soon after instructions had been sent to tax offices authorising the recomputation of liabilities under Schedule D. That was largely as a result of pressure from accountants B. That the repayment was made late was due to circumstances beyond Ms T’s control but not the Revenue’s. I am pleased that in the circumstances the Revenue decided to add repayment supplement to the repayment due, in recognition of their part in delaying the application of Schedule D treatment.
 
5.47    COP1 (paragraph 5.7) provides for a taxpayer to be reimbursed costs caused by excessive avoidable Revenue delay. Accountants B had submitted Ms T’s accounts drawn up on Schedule D principles and details of tax deducted from her under PAYE (paragraph 5.33) to office X by November 1994. Subject to any queries the Inspector might have had, office X would at that time have been in a position to make a repayment to Ms T were it not that local tax offices had not been given authority to make repayments to those in Ms T’s position. In the event the Inspector at office X did have some queries on Ms T’s accounts and additionally some further information was needed before office X were in a position, in September 1995, to notify accountants B of the quantum of the repayment due to Ms T (paragraph 5.35). Even so in my view the Revenue should have so organised themselves as to have been able in November 1994 to proceed with repayments to those in Ms T’s position. Consequently I invited the Chairman to consider whether any costs incurred by Ms T arising from the delay should also be reimbursed to her. In reply he said that having done that, in accordance with COP1, he was willing to reimburse any reasonable costs which she had incurred as a direct result of the Revenue’s delay in making the repayment of the tax refund due.

Back to top
 
Conclusion
 
5.48   The Revenue implemented their initial decision to change the taxation basis of income arising from standard Equity contracts for actors from Schedule D to Schedule E in 1990. The test cases which were decided by Special Commissioners in 1993 reached a different conclusion. Although the Revenue had not lacked time in which to consider the implications of a reversal of their decision they seemed unprepared for it and were unable to issue the necessary instructions to tax offices until August 1995. I consider that the Revenue’s decision to pay repayment supplement, or an equivalent amount where no statutory basis for paying repayment supplement existed, on the tax refund they eventually gave, coupled with their apologies to Ms T for the delays involved, and the invitation to submit a claim for any reasonable costs which Ms T incurred as a direct result of the delay to be a satisfactory outcome to a justified complaint.
 
27 February 1998

Summary

Back to top

Previous < Contents > Next

Short text of this investigation

Last updated: 26 April 2006