New client came to us last month with a 2007-2008 problem.
She is an employed individual who following her mother's death invested £140,000 into an offshore fund. During 2007-2008 she withdrew £140,000 from the fund thinking that she was just taking out her original investment leaving the profit in the fund to grow further.
She was sent a letter, we now know, from the fund provider advising of a chargeable gain of £105,000 but did not really read the letter on the mistaken belief that she had no tax consequences of drawing out the original investment.
HMRC opened an enquiry in March this year and it has been accepted that she has a tax liability of circa £40k which should have been paid. On our advice she has already paid that amount to HMRC.
The Inspector is now insisting that a penalty must be charged and is suggesting 10%. I tried the suspended penalty argument, which would work for later years, but cannot be applied to the earlier year.
My arguments thus far for no penalty have been:
She is not a tax expert and has never submitted a tax return before
She felt the withdrawal was just her taking back the original investment
She therefore did not believe there was a chargeability to notify HMRC of
She was not seeking to avoid tax
As soon as HMRC contacted her she assisted fully
Due to her having never filed returns before, and believing she did not have to then, she had never had professional assistance such that it could have been spotted
That HMRC had not notified her until about 3 years after the event - had a return automatically been issued during the year then of course it may have been spotted
That overall it is fair to say that a prudent and reasonable person with no knowledge of tax having invested £140k and then a few years later withdrawn £140k would have believed they had no need to declare anything to HMRC.
The Inspector is saying that of course she was careless by not acting on the Chargeable Gain notice which of course she may have been but in the grand scheme of things this does seem harsh. Particularly as I am sure that had this happened more recently a suspension under FA07/SCH24/PARA14 (1) & (3) could have applied?
Any comments will be appreciated.
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Chargeable gain notification a problem
If the fund provider actually sent her a letter notifying her of the chargeable gain, I'm not sure you really have a basis for argument. The information was in her possession that she had a liability to tax. Failing to read the letter does sound a bit like carelessness. I agree that, without this letter, there could be a reasonable argument that she believed she was simply taking back the sum she had invested.