Andy Keates discusses how HMRC and gov.uk are wrong in respect of directors’ obligations to register for self assessment and submit nil tax returns.
It is important to distinguish between:
- HMRC’s powers actually granted by Parliament and the obligations actually imposed on taxpayers by the tax law; and
- The powers HMRC apparently believes it has and the obligations by which it thinks taxpayers are bound.
These two can be very different, as highlighted in first tier tribunal (FTT) case: Alexander Steele (TC06717).
Steele was a chef employed under PAYE. He also owned a rental property which generated a small amount of rent and even smaller profits (just £24 for 2016/17). He believed he had no obligation to notify HMRC of his earnings or property income.
Curiously, it was not his rental income which brought Steele to HMRC’s attention. It was the fact that he had been appointed a director of Hollybeach Ltd on 14 May 2008 and resigned that office on 30 May 2016.
This prompted HMRC to issue three notices under TMA 1970 s8, requiring Steele to file self assessment returns for the years 2013/14, 2014/15 and 2015/16 by 9 November 2017.
Steele filed the returns electronically on 29 January 2018. The reason for this delay was that he had been working in South Wales, and only found the correspondence from HMRC when he returned to his parents’ home (where the letters and penalty notices had been lying unopened). HMRC issued three £100 penalties for late filing of each return, which he appealed.
The judge summarised the three potential routes by which Steele’s appeal against the penalties could succeed:
(1) If the notices to file a return were not validly issued;
(2) If he had a reasonable excuse for failing to file by the due date; or
(3) If there were special circumstances. Since HMRC’s internal review had addressed this and concluded that there were none, this route would hinge upon a finding that this conclusion had been flawed.
Were the returns validly issued?
There was considerable confusion in HMRC’s records regarding exactly what was sent to Steele and when. However, the judge was able to deduce as a finding of fact that paper returns were delivered to Steele’s address more than three months before the date he filed electronically.
Judge Thomas was concerned to ensure that this was not another case of HMRC wrongly issuing TMA 1970 s 8 notices as part of their PAYE collection strategy (which he had criticised strongly in Goldsmith TC06284). Happily for HMRC, he was satisfied that the returns were issued for a valid purpose.
HMRC suggested that Steele didn’t have a reasonable excuse for the late filing of the returns, since:
(1) “A prudent person would have made arrangements to have any post from HMRC forwarded or otherwise brought to his attention”.
(2) Steele should have known since 2009 that he was under an obligation to register for self assessment, since on becoming a director he acquired several responsibilities, one of which “is to register for self assessment and send a self assessment return each year”.
(3) “HMRC expect a prudent person, exercising reasonable foresight and due diligence… to have made themselves aware of their responsibilities as a director.”
The judge found all of this quite astounding. He went so far as to suggest that the HMRC officer who wrote the statement of case “cannot ever have read s 7 TMA 1970”!
For those of us who have actually read TMA 1970 section 7, it is quite straightforward. The law makes no special mention of directors, but instead concerns itself with whether or not all of a person’s taxable income is covered by PAYE (and, for years prior to 5 April 2017, whether any dividend income is chargeable at the upper or additional rate). A director whose only income is being dealt with under PAYE has no obligation to notify chargeability.
HMRC is confusing the obligation to notify with its own “self-imposed and self-selected criteria for issuing a notice to file”.
The fact that HMRC chooses to issue s8 notices (to file tax returns) to all directors is not the same as saying that all directors must make an s7 notification of chargeability on being appointed as a director. Many directors need to, but that will be because they start to have new sources of income which is not covered by the exceptions.
The judge went on to castigate the opinion voiced by HMRC in point three above: “no one should be expected to make themselves aware of what is not a correct statement of the law”.
Update HMRC with address
The judge was also critical of HMRC’s notion that Steele should have told HMRC that he would be away from home for a prolonged period, just in case they wanted to send him time-critical correspondence through the post.
He reviewed all the various obligations which the PAYE regulations impose regarding updating addresses: all of them apply to employers, not to employees (even those who are directors).
Since Steele had no profits in the three years covered by the tax returns, he had no obligation under TMA 1970 s7 to enter the world of self assessment. He did have a property income profit of £24 in 2016/17, but the fact that he had already received SA returns before 5 October 2017 excused him from having to make an s7 notification for that year.
Steele had no obligation to inform HMRC that he wouldn’t be at home during the latter part of 2017. As someone who had always been dealt with under PAYE, he could have no reason to suppose he would be required to make any tax returns, let alone three at a time. He had not “failed to notify chargeability”, either for his rental income or his directorship, so had no reason to expect HMRC to contact him.
He had a reasonable excuse, so the penalties were dismissed.
The judge addressed this point for completeness. Even if he had decided Steele did not have a reasonable excuse, there would have been special circumstances to apply to dismiss at least two of the penalties.
As HMRC issued three returns at the same time, all of which have the same due date, Steele was exposed to triple penalties for what was a single failure. The judge referred to the recent case of Welland TC06265 as good authority to discharge two of the three £100 penalties.
As the judge pointed out, the gov.uk website does need to be revised, to ensure that what it says tallies with the actual law of the land.
In particular, it is no good HMRC arguing that a prudent taxpayer should make themselves aware of their duties and responsibilities if HMRC can’t get the law right on its own website.