Directors: No legal requirement to file a tax return

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Another tax tribunal has slammed HMRC for insisting that there is a statutory requirement for a director to submit a self assessment tax return.

Old chestnut

Does a director have to submit a tax return if they receive no income? The law says ‘No’, but HMRC insist that all directors are required to register for self assessment and submit a tax return every year.

HMRC will fight this point all the way to tax tribunal, as I reported last year concerning the case of Mohammed Salem Kadhem (TC05929), who won his appeal and had the penalties for late filing removed.

Unfortunately, whether the taxpayer wins at the tax tribunal tends to be a lottery. Olga Malinovokaya (TC05725) and Krzysztof Kaczmarczyz (TC05744) both lost their appeals against late filing of tax returns issued to them solely because of their directorships. Their companies were both dormant throughout the relevant tax years, and they received no income from those companies, but HMRC would not back down from the requirement to file a tax return.

New case

In the case of Karen Symes (TC06320), the taxpayer’s accountants registered her for self assessment in November 2016, so she could declare and pay tax on dividends she received in 2016/17. But HMRC issued a notice to file a tax return for 2015/16. This made little sense to Symes, as she believed her tax position for that year had already been dealt with on a form P800 and a small tax refund was due.

Symes assumed the notice to file a tax return issued on 16 December 2016 was requesting a tax return for 2016/17 (as that is what she had been told to expect by her accountant), but it actually related to 2015/16. As soon as she realised her mistake she filed the 2015/16 return in paper form on 7 April 2017. Unfortunately the three-month period for filing the return ran out on 15 March 2017.

Symes did receive dividends of £25,285 for 2015/16, but as those were assessed as part of her basic rate band, the 10% tax credit covered all the tax payable on those dividends, and she had no further tax to pay.

Did she have to file?

HMRC said that as Symes was appointed a director of a company on 20 June 2014;”she had a statutory obligation to notify HMRC of her requirement to complete a self assessment tax return”.

The tribunal judge said: “No one has a statutory obligation to do anything in relation to income tax simply because they are a director of a company which is not a not-for-profit company. The statutory obligation on every person is to notify liability if they are chargeable to tax and their income and gains do not fall within at least one of the exceptions in TMA 1970, s 7(4)to(7)”

He went on the say: “Being a director per se does not entitle a person to dividends … If dividends from the company of which a person is a director fall within the higher rate band or above, then there was a liability to notify, but not because of being a director.” The judge was referring to 2015/16 as from 6 April 2016 there is a tax liability arising from dividends in excess of £5,000 falling with the basic rate band.

Decision

Symes did not have to notify HMRC of the need to file a return for 2015/16, as she did not have a tax liability for that year. The P800 form does ask the taxpayer to tell HMRC about any changes in circumstances, and refers to notes to the P800, but as the judge was not provided with a copy of those notes he discounted this point.

The tribunal decided that Symes did have a reasonable excuse for filing the 2015/16 late, as she relied on advice from her accountant, which was correct. She was not required to second-guess the accountant on matters of statutory interpretation and best practice.

Why do HMRC insist?

HMRC’s attitude is partly “computer says no”, but there is also a tendency for HMRC officers to rely on the guidance published on gov.uk rather than to read the tax law. The gov.uk guidance regarding who must submit a tax return is incorrect, as I pointed out in my earlier article, and HMRC must know this.

What to do

As AccountingWEB member: Wayne commented on my previous article, it is a simple task to ring HMRC and ask it to withdraw the notice to file a return under TMA 1970, s 8, if there is no tax lability. However, as other members pointed out it is not to easy to get HMRC to act on that request as the staff in the call centre will only read the gov.uk guidance.

From 2016/17 onwards it is more likely that a director/ shareholder will have a lability to tax due to dividends received, so it is important to check that all shareholders are registered for self assessment. 

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

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By Matrix
23rd Feb 2018 21:10

Thanks Rebecca this is great news. I have appealed penalties for 14-15 and 15-16 with exactly the same facts. Both appeals were rejected on the basis that the Director should have checked her responsibilities.

I will now reappeal.

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By mabzden
24th Feb 2018 12:43

Curiously, I've had OMB director clients who were registered for self-assessment but who then received letters from HMRC telling them they no longer needed to file tax returns.

These letters normally followed the filing of a tax return where no additional tax was payable (in the pre-dividend tax days), but where the taxpayer had disclosed they were a director.

So HMRC seems to be all over the place on this issue.

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to mabzden
25th Feb 2018 19:29

"Curiously, I've had OMB director clients who were registered for self-assessment but who then received letters from HMRC telling them they no longer needed to file tax returns."

Yes, I've seem this with several clients - then have to tell clients HMRC have got it wrong (again) and that they do still need to submit SATRs due to dividend income in the following year.

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to Kent accountant
26th Feb 2018 11:33

I've had exactly the same thing many times.

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26th Feb 2018 08:39

As someone who started out in the profession, in the 1970's, it really is saddening to see such a decline in standards, in a Government department, which was; HM Inspector of Taxes and, which evolved into HM Revenue & Customs.
In my early days the (HMIT) staff, which I came into contact with were; personable, extremely knowledgeable and, didn't have to rely upon "guidance". There was mutual respect, between agents and HMIT but there was also respected co-operation. We even used to be invited to leaving parties, for some of their staff members!
Over the years, particularly when the self-assessment regime was introduced, these relationships have diminished beyond recognition and, although trivial, in nature, the insistence on HMRC describing taxpayers as "customers" simply adds to the stupidity and arrogance, which is apparent throughout this department.
Across many traditional agents and tax advisers, this agency is simply a laughing stock, seemingly unable to achieve and retrieve any respect from this side, of the relationship.
I can only see the situation improving, in the medium to long term, if politicians intervene, either by way of; standing committee, or public enquiry.
However, the situation should not persist and, in the longer term, HMRC may find that taxpayers seek financial redress to compensate them for the added costs, brought about, simply because HMRC wouldn't accept that they were wrong!

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to Chris.Mann
26th Feb 2018 10:13

As an ex HMRC Tax Inspector having left in 2014, I can tell you that HMRC caseworkers find it ridiculous using the term customer also. It’s HMRC policy people being obtuse and being stuck in their ivory tower.

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By crofte
26th Feb 2018 10:48

I've had the problem with a director who had no need to file a tax return, but then wanted a mortgage. The mortgage company insisted that as a director she must file a tax return.......

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to crofte
26th Feb 2018 10:55

Presumably, they needed to see SA302 tax calculations, with the support of the HMRC tax overview?
In those situations I don't see a problem.
The very real problem is a; public sector organisation believing that it can cherry pick what is and what isn't included in statutory law!

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to crofte
26th Feb 2018 11:35

I've had that too. I ended up having to register the client for SA and do a voluntary return, just to get an SA302!

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to JDBENJAMIN
28th Feb 2018 10:15

Fortunately SA302 documents are now toast!

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26th Feb 2018 10:50

I am so pleased that HMRC waste public money in arguing a case which they were bound to lose. All that is needed is for a self-assessment form to be issued to all new directors and for HMRC to match directors against HMRC records. Not too difficukt to do.

If it does not it should spend our money on more important and correct items.

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By SXGuy
26th Feb 2018 10:50

"Being a director per se does not entitle a person to dividends … If dividends from the company of which a person is a director fall within the higher rate band or above, then there was a liability to notify, but not because of being a director" I've said this all along. It's very clear who is required, just look at hmrcs own wording on a paper tax return.

I had an argument with hmrc once, they insisted a director was required to file a self assessment tax return, they had taken no dividends, had drawn no salary and was not a higher rate tax payer. I asked what information they proposed I add to the tax return as there was none. To which I got no answer.

In the end the easiest way to combat was to file a blank tax return, but I still believe they were wrong.

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26th Feb 2018 11:04

I guess its only me that can see that arguing with HMRC about whether or not tax returns need to be filed is a bit silly? Apart from the mortgage issue already raised, completing and filing tax returns is pretty straightforward billable work for we accountants, isn't it?

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to petestar1969
26th Feb 2018 11:42

Presumably, there's the ethical dilemma of whether the work needs to be completed and, in turn, billed for?
If it isn't lawfully necessary and, there isn't any tangible need to complete the return, why try and make the fix?

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By 0705736
to Chris.Mann
26th Feb 2018 17:30

There is no ethical dilemma here. If HMRC have issued a notice to complete a tax return then a return is required by law. It's difficult to see that the cost of complying with the law in a simple case will be any more than the cost of a futile argument with HMRC about whether they were right to issue the notice, to my mind.

Many tax returns have to be completed and submitted but don't raise any tax for the government if the person concerned has no liability under SA for a particular year, but that doesn't mean that the taxpayer can choose not to submit.

HMRC need to ask people to submit returns who are likely to have a liability and company directors will generally be in that category, just as self-employed people are.

Surely it must be up to HMRC to decide who should submit a return, as long as their decisions have some logic?

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By cfield
26th Feb 2018 11:47

Maybe it's time someone applied for an injunction forcing HMRC to change their Gov.uk guidance to reflect the law or be in contempt of court.

That would set the cat amongst the pigeons.

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By tedbuck
26th Feb 2018 11:57

I think that it raises a bigger issue in that HMRC stick religiously to the rules when it suits them and don't when it doesn't. They are also totally inflexible in the face of forcing people to complete returns where there is absolutely no need to do so. I have a case of a pensioner who has two foreign pensions so has to complete a return. Her total income is less than the PA but HMRC won't let her not complete a return despite a request and a letter to HM Treasury. She cannot do it herself so has to get us to do it for her which she can ill afford. HMRC is just an arrogant pile of detached box tickers with no ability to adjust to circumstances. As one of your correspondents said HMIT was never like this they had more sense. HM Treasury now sees unfairness as acceptable if it raises money for them to waste. I think they will find that the profession's attitude that has always been to ensure the right amount of tax is paid will change to trying to see the least amount of tax is paid by edging round corners once believed to be unacceptable.
When a higher rate employee sees 52% of his earnings disappearing into HMG's greedy maw and looks at how it is largely wasted why on earth should he/she work harder to earn more?

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26th Feb 2018 12:13

Is this government guidance in the same territory as the lack of clarity as to the need to send a TR in respect of claiming child benefit?

In the same list on the gov website:

"your income (or your partner’s) was over £50,000 and one of you claimed Child Benefit"

Such implies both partners need to complete a tax return? My observation has been that the partner taking the couple above the band and who then correctly completes a SA return (for this or other reasons), will cover their obligation in respect of possible adjustments that may need to be made in respect of benefits claimed for a tax year.

As such one return should always cover it? That is common sense and not wasteful.

A really helpful thread. Thanks.

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to ChuckieB
01st Mar 2018 10:18

Not forgetting that under Self Assessment partner's income can be confidential, so you may not know whether you have to declare the child benefit! Same applies to Marriage Allowance transfer, etc.

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By cfield
to BryanS1958
01st Mar 2018 10:25

I think you'd have a hard job trying to make them believe you didn't know your partner was claiming Child Benefit.

Might be easier to claim that you thought she earned more than you.

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to cfield
08th Mar 2018 11:02

I don't really see why; many partners prefer to keep their financial affairs separate and often have separate bank accounts, keep their finances independent, etc so it would be a step too far for HMRC to assume otherwise.

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By cfield
to BryanS1958
08th Mar 2018 13:20

Good luck with that one. Keeping your husband's eyes off your payslips and bank statements isn't quite in the same league as keeping Child Benefit a secret. Every parent knows you can claim Child Benefit and most high earners know it is taxable if you make more than £50k, so the taxman will probably say the onus was on you to find out.

Having said that, I understand you only have to be shacked up with a single mum for a few weeks for the Child Benefit tax to potentially kick in, so if you earn more than £50k, watch your step.

The actual rule is contained in section 681G of ITEPA 2003 which merely states an unmarried couple living together as husband and wife. In practice there are several factors that determine whether or not that is the case including, I believe, where you put your birthday cards up.

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to cfield
15th Mar 2018 14:52

I don't think it would be a problem, HMRC cannot insist that there is full disclosure between parties when it is supposed to be independent taxation. If they want to call it independent taxation then that's how it should be treated. In any case you can choose not to claim Child Benefit, so how can the other party know one way or the other?

Independent taxation also works in HMRC's favour in other circumstances e.g. transfer of marriage allowance, when one party may not know the other is earning less than the personal allowance. This naturally affects the poorest in our society more than the richest because they can often be less financially aware and are more likely to have a basic rate partner and a partner earning less than the personal allowance.

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26th Feb 2018 13:05

I am amazed that HMRC took this to tribunal. Do they not read the Taxes Acts (or Aweb?)

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to Vaughan Blake1
28th Feb 2018 10:17

No!

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26th Feb 2018 16:08

I would in cases like this ask the Revenue for their statutory authority and I have found they back down when they actually check the legislation to answer your query. Although in one case they sent me the text from a third party guidance note which did not agree with the legislation.

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26th Feb 2018 16:08

I would in cases like this ask the Revenue for their statutory authority and I have found they back down when they actually check the legislation to answer your query. Although in one case they sent me the text from a third party guidance note which did not agree with the legislation.

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26th Feb 2018 16:09

I find myself in an apparent minority of 1 in disagreeing much of what I have read here.
The Symes case was really about whether there was a reasonable excuse for late filing, not whether the return had to be made. In that context I feel the heading of the article is misleading and sensationalistic. I cannot see in the judgement for example, that the judge "slammed" anyone. Based on the facts, the tribunal found in favour of M/s Symes. HMRC Officers(and it seems several of those making comments here) were confused and made the mistake of making a completely incorrect statement about directors having a statutory obligation to file a return and that is what seems to be giving some problems. Of course it would be better if they got it right but that applies to each of us. This confusion was pointed up at para 34 of the tribunal judgement.
To put matters straight, S7 contains a simple requirement for everyone who is chargeable to notify chargeability. In this context a person is chargeable if they have a chargeable source of income. Actual tax due is irrelevant. If it were left there, every person with £1 or more of income would have that responsibility. Neither HMRC nor anyone else would think that a good
idea and therefore, the draftsman went on to temper the rule by including a number of exceptions. That is all S7(3)-(7) does. They restrict the number of persons who need to write to HMRC annually.
Wholly separate from S7, is S8 and that says (paraphrased) that you have to make a return when required to do so by a notice issued by HMRC. This is not limited by anything in or similar to, the S7 exceptions (for present purposes).
What the HMRC officers were quoting were the broad rules by which HMRC officers decide whether to issue a notice. So, if for example someone tells HMRC that they have become a director, that is a factor that may lead to a Notice to File being issued. That notice stands good irrespective of whether there is a net tax liability or anything else. That is completely in accordance with the law and HMRC guidance (which of course sets out how they will apply the legislation and does not itself have statutory force).
The officers in the Symes case acted in accordance with both the law and HMRC guidance. They got confused about reasoning but that did not alter matters. The case was won by Symes because the judge found that, on the facts, she had a reasonable excuse for late filing.
As some members note, HMRC does review matters and where appropriate, will write telling "customers" that they will not be required to file in future unless their circumstances alter (and reminding them of the S7 obligation). This again is just a commonsense application of the law. It does not mean that HMRC are all over the place. On the contrary, it is perfectly right and proper.
I would agree that things are not great at HMRC but I do not think we should compound matters by becoming equally confused.

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By trecar
26th Feb 2018 23:25

I have read the comments regarding the time prior to amalgamation of HMIT and HMCE and I do think that there is a bit of the rose tinted spectacles creeping in. I remember a case from that time where a HGTO tried to insist that bad debts were not an allowable charge against profits. It was only when he was referred to the relevant legislation that he backed down. With bad grace I might add. I also remember an assistant DI who was renowned for asking multiple questions which when answered resulted in even more. And almost every time the cases were closed by time pressures with no positive results for HMIT.

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By Eddie S
27th Feb 2018 05:44

Director’s entitlement to dividends? And I always thought dividends were paid to shareholders.

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02nd Mar 2018 11:31

Always ask up front for the statutory authority both for the alleged offence and for the penalty determination as well as for the name of the officer who determined the penalty.

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