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Prison ‘no excuse’ in rental income tax case

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An owner of multiple properties was found to still be responsible for paying rental income tax while serving time in prison, with his case going before the FTT.

9th May 2024
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Stanley Augustine Herrmann owned three properties, all of which were rented out at various times between 2000 and 2019.

HMRC issued discovery assessments and penalties in 2020 for the tax years 2002/03 and 2004/05 to 2017/18 on the basis that Herrmann had undeclared rental income. The total tax due (following review) was £21,937.64 with penalties of £5,113.05.

In his appeal to the First-tier Tribunal (FTT), Herrmann did not dispute that he had failed to notify HMRC of his liability to pay tax on his rental income.

However, he sought to appeal the penalties on the grounds that he did not believe he should be responsible for his taxes whilst in prison and that he was relying on an agent to deal with his affairs.

Serving time

From December 2002 to December 2012, Herrmann was serving time in prison. His initial argument was that, as he was unable to conduct business from behind bars, he should not be held responsible for the tax due on that business.

HMRC countered, and the FTT agreed, that there is no exemption in statute for persons in prison. Inmates are not restricted from being beneficially entitled to income whilst incarcerated and Herrmann's rental profits were paid into his bank account.

The judge noted that "the fact that Mr Herrmann may not have been permitted to access these funds whilst in prison does not mean that he was not beneficially entitled to the income as it arose".

No way out

When the prison argument hit a brick wall, Herrmann tried to get out of paying the penalties by persuading the FTT that he had a reasonable excuse for his failure to notify and pay his taxes. He argued that he should not have to pay the penalties because HMRC had not written to him in prison informing him of his liabilities.

The FTT dismissed this, stating that the law is clear that the obligation is on the taxpayer to notify.

The judge remarked: "There is no obligation on HMRC to locate non-compliant taxpayers in this context and so there can be no reduction in penalties for a non-compliant taxpayer simply because HMRC might have undertaken detective work to find them, or someone appointed as their estate agent, earlier."

Herrmann also tried to show that he had a reasonable excuse through his reliance on an agent.

It was true that he had appointed an agent, Mr Martin, to deal with everything to do with his properties whilst he was in prison. The gaping hole in this plot was that Martin was an estate agent, not an accountant or tax agent.

Indeed a review of correspondence showed that Herrmann had never asked Martin to deal with his tax affairs, nor ever discussed his tax position with the agent. Despite this, Herrmann insisted that he had presumed that Mr Martin would deal with tax matters on his behalf as part of "keeping the house afloat".

Other affairs in order

Herrmann attempted to bolster his reasonable excuse argument by claiming that he hadn't had time to get to grips with his tax obligations before going to prison. This was discredited as the first property had been purchased almost two years prior to his incarceration.

Further, the judge noted that he had managed to get his other affairs in order.

HMRC submitted that a person acting with reasonable care and due diligence would, on purchasing three rental properties, have taken appropriate steps to establish and comply with their tax obligations. The absence of any such action led HMRC to find that Herrmann's failure to notify was down to his own negligence.

This was particularly important for the years 2002/3 to 2008/09.

S36(1A)(c) TMA 1970 provides that, where a person is required to notify HMRC of a tax liability and does not do so, assessments may be raised at any time not more than 20 years after the end of the year under assessment.

The assessments were made in 2020, so within the 20-year window.

However, article 7 of SI 2009/403 provides that this does not apply to tax years 2008-09 or earlier, unless the assessment arises due to the taxpayer's negligence or the negligence of a person acting on his behalf.

As the FTT agreed with HMRC's conclusion on Herrmann's negligence, the assessments for the years 2002/03 to 2008/09, as well as the subsequent years, had been made in time.

No special circumstances

Mr Martin died in 2014, meaning that had Herrmann's reliance on him amounted to a reasonable excuse, it would have ceased to apply.

The final straw of Herrmann's appeal was his failure to remedy the situation without reasonable delay. The FTT noted that Herrmann made no attempt to rectify or find out about his tax position, nor make any arrangements for tax compliance, in the five years between Martin's death and 2019 when HMRC began their investigations.

The judge concluded that Herrmann did not have a reasonable excuse, there were no special circumstances and the assessments and penalties should be upheld in full.

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Replies (12)

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By Paul Crowley
09th May 2024 20:43

What a waste of taxpayers' money. Penalties were way too small.

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Replying to Paul Crowley:
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By FactChecker
09th May 2024 21:12

He didn't have much luck did he (what with his stooge dying early on)!

But although technically irrelevant, I'll admit to being curious as to what he did to end up serving 10 years in prison? Unless he was particularly badly behaved whilst inside, that suggests a court sentence of at least 15-20 years (aka 'life'). So maybe he just wasn't used to anyone saying No to him?

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Replying to FactChecker:
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By Paul Crowley
09th May 2024 23:05

I also thought that it must be a bit serious to actually serve that many years. Where did the money come from to buy the letting portfolio?

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Replying to FactChecker:
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By hje
10th May 2024 09:15

Yeah, don't google it at work.

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Replying to hje:
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By Truthsayer
10th May 2024 09:44

I've just googled him. Failure to attend to his tax returns is certainly one of his lesser misdemeanours...

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Replying to FactChecker:
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By Justin Bryant
10th May 2024 11:25

Maybe, based on Basil's views of the matter, he didn't file his CGT 60-day return.

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Replying to FactChecker:
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By SafeAsHouses
10th May 2024 12:21

FactChecker wrote:

He didn't have much luck did he (what with his stooge dying early on)!

But although technically irrelevant, I'll admit to being curious as to what he did to end up serving 10 years in prison? Unless he was particularly badly behaved whilst inside, that suggests a court sentence of at least 15-20 years (aka 'life'). So maybe he just wasn't used to anyone saying No to him?

Indeed, that was my first thought, it must likely have been very serious criminality to actually *serve* 10 years.

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By JB101
10th May 2024 10:28

I'm suprised he didn't try and challenge things due to his chnage of name 10 years ago. Some people seem to think they can always find loopholes and not bother with following rules.

Perhaps they should lock him up again, rather than just charge penalties!

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By Peter Anderson
10th May 2024 11:27

Monopoly rules don't apply in real life

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By JustAnotherUser
10th May 2024 13:12

do not look for this man or google what he did to spend 10 years in jail, i would go as far to say his past crimes are not relevant to this case and suggest links and names be removed.

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Replying to JustAnotherUser:
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By FactChecker
10th May 2024 16:27

Why (the suggestion)?

"Augustine Herman, First Lord of Bohemia Manor was a Bohemian explorer, merchant and cartographer who lived in New Amsterdam and Cecil County, Maryland" ... sounds innocuous enough.

Or did you mean the person who changed their name from Stanley Kissoon?
'cause if so, I'm not going to give him publicity but, his crime was of the sort for which "he's served his time" is not an appropriate closure.

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By stevenckay
13th May 2024 01:34

Proceeds Of Crime Act surely an issue?!

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