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Extended Time Limits For Assessments & Penalties ?

What's Logic of 4 , 6 & 20 Years For Inaccurate Returns V 20 Years Where No Return Submitted (FTN)

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A new client has been in receipt of rental profits (£3,000 pa) on her ex-home for the last 10 tax years since 5 October 2010. She was never registered for Self Assessment and HMRC have caught up with her due to HMRC checks in the local area.

Client went through a messy divorce some 12 years ago and ended up with the young kids with no support from the ex-husband. As a consequence, client has been on anti-depressants and anxiety medication for the last 12 years. Client reckons she was advised by the estate agent at outset that rents were exempt under rent-a-room rules. Client says she was in such a bad way she and her kids had to be taken in by her parents thus leaving her home empty for letting through an agent. It also appears that the net rents have always been paid across to client's parents as "board and lodgings" payment for them taking the client and her kids in to their large home.

HMRC Compliance have issued tax calculations for the 10 tax years 2010/11 to 2019/20. 

My first question is why is it HMRC can now go back and demand tax and penalties for those last 10 years due to "Failure to Notify", whereas if she had already been filling in Self Assessment tax returns for some other income then HMRC may have gone back just 6 years due to carelessness. Client reckons she would never have deliberately avoided disclosing the profits. It seems that the heady mix of divorce, medication, sloppy estate agent advice, being a single mother and not benefitting from the net rents resulted in client giving the tax position scant consideration.

The second question is, if tax is in fact payable for all ten years, is client in with a chance of no penalties for "reasonable excuse" based on the above information.

A route I have been reluctant to go down so far has been the "beneficial interest" avenue. This is probably because I do not have the stomach to argue this point, and I do not know where it will lead.

If client's parents have always received the net rents by standing order from the estate agent then maybe the parents have a beneficial interest in the rental property. The retired parents have spare personal allowances so it would be in the family's interest for the parents to be taxed on the income. However, the client pays the rental bills so maybe that "muddies the water" somewhat. The latent capital gain on the rental property is probably within a single annual CGT exemption, so CGT and beneficial interest from a CGT viewpoint is probably unimportant in this case.

Any helpful comments would be appreciated.


Replies (8)

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By Matrix
17th Jun 2021 07:10

I assume there is tax at 20% which will need to be paid. You could use the mitigating factors for the penalties. Although if she had a day job then more difficult to argue the sob story for 10 years if she could go to work.

It sounds as if she has been unlucky, there are so many like this I expect, happy to receive the income until they get found out. I wouldn’t spend too long on it unless you have been paid upfront.

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Replying to Matrix:
By penelope pitstop
17th Jun 2021 13:06

Yes. She had a day job. Not a bad one too, although it was in the arty side of things rather than the intellectual type of job. Don't know if that makes a difference.

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By Roland195
17th Jun 2021 09:22

I'd expect you have a good chance for arguing for negligible and/or suspended penalties given the well, sob story you have outlined particularly if she never actually received the rent (not clear if this is actually the case).

I don't see that any real attempt to argue the income isn't hers is worth having, other than to open the door for reducing the penalty load.

What is the ownership status of the house? Was the ex-husband bought out?

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By Justin Bryant
17th Jun 2021 10:13

To answer your question there is no logic in it (like most things in tax), as a taxpayer who takes a very aggressive CGT filing position based on a tax counsel opinion will be home & dry saving say £10m CGT after 4 years of no HMRC action simply due to him filing an SA100 (with no disclosure of the tax scheme or anything CGT related if that's what counsel says is OK e.g. re PPR). Whereas if he didn't file a SA100 (disclosing say just £10k income and no IT) HMRC would have another 16 years to get him on the CGT scheme.

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Replying to Justin Bryant:
By penelope pitstop
17th Jun 2021 13:04

Thanks. That was the confirmation I wanted.

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Replying to Justin Bryant:
By More unearned luck
17th Jun 2021 15:41

As Justin knows from an earlier thread, the contrast between no tax returns and inaccurate returns is not as stark as he says. Section 118(2) TMA 1970 provides that there is no FTN if there is an RE, in that case the time limit is 4 years. The difficulty is convincing HMRC or the FTT that the client has an RE. Even if HMRC accept the RE they might ask for voluntary restitution.

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By lionofludesch
17th Jun 2021 10:32

Logic ?

That's a strange concept to introduce into taxation.

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By David Ex
17th Jun 2021 11:05

Slightly off topic but was the client claiming benefits and was the property and rent disclosed (if required to be)?

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