Tax writer
Share this content
Brought to you by Nomisma

HMRC can use self assessment to force payment

The FTT decided HMRC was wrong to force a taxpayer to complete a tax return just to collect a tax underpayment created by PAYE. The Upper Tribunal has now reversed that ruling.    

20th Jan 2020
Tax writer
Share this content
Tax return
istock_PaulMaguire_aw

The initial tax underpayment was brought about by HMRC’s sloppy coding. HMRC issued tax return notices under TMA 1970 s 8(1), and my article in January 2018 explained how David Goldsmith successfully appealed against penalties for late filing of those self assessment tax returns.

HMRC’s appeal against the FTT’s judgment has now been heard by the Upper Tribunal (UT).

Jurisdiction

There is no direct statutory right to appeal against the issue of a TMA 1970 s 8 notice, so the validity of such a notice can only sensibly be challenged at the time of appealing against its consequences, such as penalties.

HMRC asserted that the FTT did not have jurisdiction to consider the validity of the s 8 notices in the course of an appeal against penalties, and any challenge to HMRC’s discretion to issue those s 8 notices could only be done at judicial review.

The UT refused to buy this argument if it meant that the FTT could not review the validity of a notice. When examining a penalty, the tribunal needs to establish whether someone has failed to comply with a notice – which in turn requires it to make certain that there was a validly issued notice with which to comply.

Conclusion: the FTT was entirely within its rights to examine whether HMRC had in fact issued the return notices for the correct purpose.

Meaning of “establish”

At the FTT, Judge Richard Thomas decided Goldsmith’s taxable income and tax liability had been “established” by the calculation on form P800 and the agreement of a payment plan. He ruled that the TMA 1970 s 8 notices could not have been issued for the purpose of establishing those facts.

However, in a similar case before the FTT Judge Barbara Mosedale took a different approach. She considered that “establish” means more than merely “calculate”:

  • Dictionary definitions suggest that to establish means something along the lines of “to place beyond dispute… making something secure or permanent”.
  • The notice to file a SA tax return requires the taxpayer to:
    • calculate their tax liability; and
    • assess that liability making the debt enforceable by HMRC.

In this context, the SA return would serve to establish the tax liability even where the mere calculation had already been made.

The UT agreed with this analysis, and that the s 8 notices had been validly issued.

Special circumstances

The FTT had stated that, even if found wrong on the issue of validity, it would still have negated the penalties on the basis that HMRC had failed to consider whether there were “special circumstances” (FA 2009, Sch 55, para 16).

However, the UT decided against this. A taxpayer’s right to appeal against penalties extends to:

  • appealing against the imposition of a penalty (paragraph 20(1)); or
  • appealing against the amount of a penalty (paragraph 20(2)).

The FTT’s remedies for these two instances are different. For an appeal against the imposition of a penalty, the tribunal may only “affirm or cancel HMRC’s decision”.

For appeals against amount, it may substitute any alternative decision which HMRC had the power to make. This includes the ability to make a determination of special circumstances which might reduce the penalty.

The UT considered that Goldsmith’s appeal lay against the actual imposition of penalties, not against the amount charged. Based on this, the FTT had no power to substitute a decision based on special circumstances.

The penalties (which the UT had already affirmed) could not be reduced as the FTT had wished to do.

Conclusion

HMRC failed in its attempt to prevent the FTT from examining the validity of notices to file when hearing appeals against penalties. This was entirely correct – if HMRC’s attempt to “play the man rather than the ball” had been allowed, there would be no meaningful safeguard against section 8 notices which failed to meet statutory standards.

Judge Mosedale’s opinion on why a notice to file can be issued has won against that of Judge Thomas. In many ways this is regrettable as:

  • There is now no safeguard against HMRC using self assessment to solve its (all too frequent) operational PAYE shortcomings; and
  • The original expectation that there would be two separate tribes of taxpayers, with PAYE taxpayers forever safe from the complexities of SA, has been well and truly buried.

As a consolation, the UT ruling is now binding on all future FTT judges, so there will at least be consistency.

It’s possible that HMRC staff will make less use of either TMA 1970 s29 discovery assessments or the new simple assessments – two measures specifically designed for the purpose – to collect underpayments.

And finally

This UT judgment has cast a spotlight on some awkward wrinkles in the appeals process.

If you want to rely on “special circumstances”, make sure your appeal is not merely against the existence of a penalty, but also specifically against its amount. I think the UT was being needlessly pedantic here: if you object to the imposition of a penalty, it is rather likely that you also object to its having any amount other than zero!

Replies (6)

Please login or register to join the discussion.

avatar
By KenKLM
21st Jan 2020 12:23

What is laughable is that very often the P800 will state that the underpaid tax will be collected via a coding notice and the taxpayer then (reasonably) assumes he has not got to do anything more . Common sense and a "human" approach to this nonsense is called for in my opinion.

Thanks (1)
avatar
By essex accountant
21st Jan 2020 13:51

I have a client who owes £235 from a P800 from 2015-16. She has ignored demands to pay so HMRC issued tax return notices for 2016-17 and 2017-18 in September 2019 (without me knowing as her agent). The client never told me so I have not completed these tax returns and got penalties. She was on PAYE both years and thought understandably that she didn't need to complete them In 2018-19 she commenced a self employment and I have a tax Return ready to file by January 31st. Under this UT decision the tax returns were correctly issued. HMRC say to file the tax returns and appeal the penalties. HMRC won't withdraw the notice to file these tax returns.

All this for a £250-£300 fee!! What a waste of everyone's time. BTW her annual income as a carer is £20,000. Out of principle I will do this Pro Bono as she can't afford to pay me.

Thanks (1)
Replying to essex accountant:
By SteLacca
21st Jan 2020 16:13

I'd be tempted to try a S8B withdrawal again with an undertaking that the underpayment will be brought into account on the 2019 Return. That should satisfy everyone, and HMRC get their money without the client being unduly penalised.

Thanks (0)
Replying to SteLacca:
avatar
By Not Anonymous
21st Jan 2020 22:38

SteLacca wrote:

I'd be tempted to try a S8B withdrawal again with an undertaking that the underpayment will be brought into account on the 2019 Return. That should satisfy everyone, and HMRC get their money without the client being unduly penalised.

Why do you think it would be brought into account in the 2018:19 return?

Thanks (0)
Replying to essex accountant:
avatar
By Not Anonymous
21st Jan 2020 22:36

essex accountant wrote:

I have a client who owes £235 from a P800 from 2015-16. She has ignored demands to pay so HMRC issued tax return notices for 2016-17 and 2017-18 in September 2019 (without me knowing as her agent). The client never told me so I have not completed these tax returns and got penalties. She was on PAYE both years and thought understandably that she didn't need to complete them In 2018-19 she commenced a self employment and I have a tax Return ready to file by January 31st. Under this UT decision the tax returns were correctly issued. HMRC say to file the tax returns and appeal the penalties. HMRC won't withdraw the notice to file these tax returns.

All this for a £250-£300 fee!! What a waste of everyone's time. BTW her annual income as a carer is £20,000. Out of principle I will do this Pro Bono as she can't afford to pay me.

How would filing returns for 2016/17 or 2017/18 formalise the tax owed for 2015/16 though?

Sure there isn't a 2015/16 return required? Or there is more to this than the client has told you?

I really don't see what purpose the returns for 2016/17 or 2017/18 are serving if the only tax owed is for 2015/16.

Thanks (0)
Replying to Not Anonymous:
avatar
By whitevanman
22nd Jan 2020 13:52

If you read the post from Essex you will see that his/her client's case is similar to that of Goldsmith. There was a 2015/16 underpayment dealt with initially by P800. When the client failed to pay, HMRC issued returns (presumably so they could finalise the debt). I don't see how anyone can complain of this or claim that, in some way, the client is being unfairly treated. I cannot imagine why, in the circumstances, HMRC should be willing to withdraw the notices. My suggestion would be to file the returns and either repay the debt or, if unable to do so, contact HMRC's Debt Management to arrange time to pay. Who knows, they might be able to help!

Edit
Sorry Essex, I misread the main thrust of your post. I agree that if the P800 is for 2015/16 what is required ( to finalise that debt) is one with the 2015/16 income in it. I put it this way because some of us oldies still think if how it used to be when the 2016/17 return would have asked for details of income in the 2015/16 year.
The fact that 16/17 & 17/18 returns have been requested, certainly suggests some other facts (as you say).

Thanks (0)