Andy Keates explores a case which illustrates how HMRC used self assessment to collect tax when more suitable methods of tax assessment were available.
Goldsmith (TC06284) was paid less than the personal allowance for 2011/12 and 2012/13: £6,897, and £4,574 respectively. HMRC issued tax codes of 747L and 810L for those years, which his employer operated correctly, deducting no tax from his wages.
Goldsmith also received Employment and Support Allowance (ESA) for those years of £3,701 and £4,979 respectively. This taxable benefit pushed his total income above his personal allowances, and as DWP don’t operate PAYE on the ESA payments, he had more tax to pay.
HMRC’s end of year reconciliations identified tax underpayments of £624.60 and £289.80, which were notified to Goldsmith on forms P800. Unusually, neither of these amounts was coded out; instead, HMRC said that unless Goldsmith agreed on a payment plan with them, “a return would be issued”. Goldsmith paid the first three instalments of the payment plan, and then for an unspecified reason stopped making the payments.
HMRC issued notices to file 2012/13 and 2011/12 SA tax returns in March and May 2014. He filed the returns in November 2014, missing the filing deadlines for both. HMRC issued penalties (both fixed and daily) for late submission, and Goldsmith appealed.
After some discussion about whether the appeals against the penalties were lodged in time, the tribunal judge examined the following issues:
Whose is the burden of proof?
HMRC is required to show that the penalties had been validly issued. The judge felt justified in examining this issue, which he did by looking back at the reasons why the tax returns had been issued in the first place. If the returns were inappropriately issued, Goldsmith would not need an excuse for failing to submit them on time. This got quite messy and brings us to the next item on the list.
Does the FTT have jurisdiction?
HMRC submitted that the tribunal’s role was only to determine the narrow issue of the appeal, which was whether Goldsmith had a reasonable excuse for not filing his returns on time. The judge begged to differ, and after a lengthy review of case precedents concluded that he could rule on a broader overview of the situation.
Were the returns appropriately issued?
The basic right of HMRC to charge a penalty is given in FA 2009, Sch 55 para 1, where a taxpayer fails to deliver something on the appended list. The first item on that list is a self assessment return issued under TMA 1970 s8(1)(a). This section states that SA returns are issued “for the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by him by way of income tax for that year”.
The judge considered that HMRC had not issued the returns for that purpose: “HMRC did not need a return to establish the appellant’s income or the amount of tax payable, as the PAYE system had done that, and the P800 had ‘assessed’ it in the ordinary sense of that word. They said they needed a return to collect the tax that the appellant had started to pay off but then stopped doing so.”
The judge noted that parliament had made it clear in 1994 when introducing self assessment that there should be a division between those taxpayers who were in SA and those who could be dealt with using PAYE alone. He highlighted the sources of income which are specified in TMA 1970 s7 as not triggering the onset of SA: income collected under PAYE and income coded out via PAYE.
Using SA to collect a PAYE debt has other adverse consequences, such as starting the clock for interest at a date before the liability itself has arisen. SA taxpayers and PAYE taxpayers are two distinct tribes, and blurring the lines between them is wrong.
Overall, the judge felt that HMRC, having already established the income and the tax liability using the P800, could and should have collected it by assessment under TMA 1970 s 29 rather than trying to create an artificial SA liability under TMA 1970, s 59B.
It therefore follows that, if the returns were issued not for the purposes of TMA s 8(1), then the penalty was not due under FA 2009, Schedule 55.
What if the judge were wrong about this? If the penalty had been valid, would Goldsmith have a reasonable excuse for the late submission of his returns? The judge said not. All the evidence shows he could easily have filed the returns within the time given.
Was HMRC right to decide there were no “special circumstances” which would have justified reducing the penalties? The judge looked at why the PAYE underpayment arose in the first place. The DWP, when paying ESA, receives a PAYE code, but it does not operate that code. The code is only there for use when issuing a P45 so that a new employer can start operating PAYE properly.
HMRC should have been aware (as set out in PAYE77260) that the employer’s code should have been adjusted to take account of the ESA. This would have ensured little or no tax underpayment arose. The judge felt that this might have merited consideration under ESC A19 as an HMRC error (see PAYE95045). He commented:
“Failure to consider whether the underpayments arose from HMRC error or to question whether an underpayment should have been coded out, or whether ESC A19 applied, is in my view something out of the ordinary which makes the decision by HMRC on special circumstances flawed, because they have failed to take relevant matters into account.”
The penalties were invalid because the returns were not issued for the proper purpose. Even if they had been valid, special circumstances would justify reducing them to nil. On the other hand, if HMRC had got it right and issued valid penalties, Goldsmith would not have had a reasonable excuse.
There is a better way
The judge commented on advantages of the new system of simple assessment. It is clear that had this new system been in place in 2012 a simple assessment would have been issued to collect the underpayments and it would not have been necessary to bring the taxpayer within SA.