Tax Writer
Share this content

Taxpayer penalised for employer’s mistake on P60

A taxpayer had to pay a penalty for reporting amounts from an incorrect P60 on his 2016/17 self assessment tax return. The first tier tribunal accepted he made an honest mistake but upheld the penalty.

11th Nov 2019
Tax Writer
Share this content
Businessman is hit by a big iron ball
istock_sesame_aw

Ringo Scheithauer [TC07091] was employed by Dunhill Pontefract PLC (Dunhill) during 2016/17. He received taxable pay of £306,722, with £129,654.09 of tax deducted at source.

However, the taxpayer’s 2016/17 self assessment tax return only reported taxable pay of £167,605.48 and £71,679.17 of tax paid.

In November 2017, HMRC opened an enquiry into his 2016/17 return and found that other amounts of income had not been reported, including £139,116.92 of employment income from Dunhill, as well as employment benefits totalling £6,699.

Consequently, in March 2018 HMRC issued a penalty notice of £694.15 for a prompted careless inaccuracy in his tax return, in accordance with Schedule 24 Finance Act 2007.

Inaccurate P60 cause of mistake

Scheithauer did not dispute the amount of income and benefits that should have been reported.

Rather, the taxpayer argued that he was under the impression from HMRC’s website that the information on his P60 had to be reported in his self assessment tax return and that he “could not understand why the employer did not include all of his pay” on the form.

It transpired that the P60 in question had failed to include Scheithauer’s earnings from April to August 2016.

The error arose as Dunhill moved their payroll in-house in September 2016, having previously outsourced to external accountants. The P45 that Dunhill received from the accountants had the taxpayer on a month 1 basis tax code throughout April to August 2016.

Under the month 1 basis, all payments are taxed as though it was the first month of the tax year, and any previous pay or tax is ignored. As a result, Scheithauer’s earnings to August 2016 were not included on his P60.

Issue of reasonable care

As the amount of assessable income was not in dispute by the taxpayer or HMRC, the first tier tribunal considered:

  • whether HMRC had correctly issued its penalty assessment;
  • Whether Scheithauer had been careless when filing his 2016/17 return; and,
  • whether the discovery of the underreported income by HMRC was prompted.

The law defines ‘careless’ as a failure to take reasonable care. The FTT noted that reasonable care “can be best defined as the behaviour which is that of a prudent and reasonable person in the position of the person in question.”

The taxpayer, who did not attend the hearing and was not represented, argued in his letter to HMRC that “it is clearly not my fault that I am in this situation”.

Scheithauer maintained he was not careless in his actions and had queried his P60 with his employer when he noticed the stated pay was low but was told that the P60 was correct.

As a German citizen, he was unfamiliar with “this specific UK tax issue” and believed that he had to report the P60 data on his return, even though he knew it to be incorrect.

HMRC, on the other hand, argued that the matter of the P60 was not the cause of the penalty, as it was not the taxpayer’s responsibility to issue the P60. Rather, HMRC had levied its penalty as it considered that Scheithauer had failed to take reasonable care to include all his employment-related figures on his return and so had acted carelessly.

HMRC further argued that Scheithauer must have known what his true income was, as it was a simple matter of adding together his payslips and that he could have contacted a tax adviser for assistance, but did not.

As a result, HMRC deemed that Scheithauer had completed an incorrect tax return, that it was a prompted discovery, and that his actions were careless. HMRC levied charged the minimum penalty (15%) associated with this nature of penalty, and calculated a penalty of £694.15 based on potential lost revenue of £4,627.73.

No shelter for honest mistakes

In its decision, the FTT found that the taxpayer made an honest mistake when completing his 2016/17 tax return. However, the FTT also noted that the law “does not provide shelter for honest mistakes” and commented that Scheithauer knew or should have known that the 2016/17 income figure on his P60 was incorrect.

Further, the FTT found that the disclosure was prompted and that HMRC had been correct to apply the £694.15 penalty. As a result, the taxpayer’s appeal was dismissed.

Conclusion

While there is no suggestion here that the taxpayer intentionally sought to underreport his employment income, this case highlights, once again, that ignorance of law or procedures is often not taken to be a valid defence when considering reasonable care or reasonable excuse.

Had the taxpayer sought assistance from an accountant or tax adviser about how to report his incorrect P60, he almost certainly would not have found himself in this position.

Replies (40)

Please login or register to join the discussion.

avatar
By Matrix
11th Nov 2019 10:16

Well he should have included the figures from the P45 and then it would have been correct.

Thanks (1)
Replying to Matrix:
avatar
By DTB27
11th Nov 2019 10:31

From the way the article reads, the taxpayer was not issued with the P45, only the employer as a means of transferring the payroll data in house (why the accountant issued a P45 for an ongoing payroll I don't know).

If this is true, he would not have been able to insert P45 data. Also, the P60 should have shown pay from previous employments, which may have flagged this issue up as well.

It would seem that the fault lies squarely with the information that the taxpayer was provided by his employer/payroll department.

Thanks (5)
Replying to DTB27:
avatar
By BV
11th Nov 2019 11:19

As a week 1/month 1 code was in place, the P60 won't show pay and tax to date from previous employment, so the new payroll department should have asked for the P11 tax and NI forms for April to date. If changing the payroll software provider, these probably have to be input manually, so are a faff to input half way through the tax year and it takes much longer to set up, so I think they took an easy option and just used the in house P45 forms. However he was a higher rate taxpayer and if he submitted a tax return omitting half his income, he probably got a sizable refund. He could well have been aware that things were amiss but maybe chose to ignore it?

Thanks (0)
avatar
By DTB27
11th Nov 2019 11:00

Surely though, one of the points behind self-assessment and the "simplified" tax system we supposedly have in the UK is that an individual should not have to resort to speaking to a professional advisor in order to complete what (on the face of it) should have been a simple tax return.

The taxpayer reported the income per his P60 (which is what the HMRC portal requests), having raised with his employer that he thought the P60 was incorrect and been advised that it was not. Being a foreign national as well I can entirely understand his position. I think this is a case where HMRC should have used some discretion and suspended the penalty.

Thanks (19)
By SteLacca
11th Nov 2019 10:21

Harsh, IMO. HMRC's own SA102 notes state "Box 1 Pay from this employment Use the figures from your P45 or P60 to fill in box 1. If you left a job during the year, put the figure from the ‘Total pay in this employment’ section on your P45 in box 1. If you have a P60, put the figure in the ‘In this employment’ section in box 1. If you had more than one job in the tax year, your P60 may show this. Put those details on a separate ‘Employment’ page. "

In the taxpayer's circumstances, the only part of that to apply is inclusion of the figure from his P60. He didn't change jobs, and subsequent guidance regarding payments after P45 or P60 would not be discerned to apply.

Thanks (3)
Replying to SteLacca:
avatar
By unclejoe
11th Nov 2019 10:51

So the learning point here is that following HMRC published instructions won't save you from a penalty if the HMRC deem the information that they have provided to be wrong. Bizarre, and very worrying. The tax system is ssssoooo complicated. What we need is an Office of Tax Simplification so that it can all become understandable!

Thanks (11)
Replying to unclejoe:
By SteLacca
11th Nov 2019 10:53

Not necessarily so. This specific HMRC guidance (which comprises the Tax Return guidance to the employment pages) was not, upon my reading, brought into evidence at all. Had it been, the FTT may have been more inclined to side with the taxpayer.

Thanks (1)
Replying to unclejoe:
avatar
By Mikolaj
11th Nov 2019 11:24

We already have an 'Office of Tax Simplification' but it does exactly the opposite of what it was set up for, and makes tax even more complicated, it is more an 'Office of Tax Over Complication'.

Thanks (1)
Replying to Mikolaj:
avatar
By Open all hours
12th Nov 2019 09:32

Office of Tax Stupification.

Just feels like they are on a gravy train, destination ‘who cares’ just enjoying the ride.

Thanks (0)
avatar
By petestar1969
11th Nov 2019 10:33

Why was Dunhill given a P45 by the outsourced accountants? Surely, they were preparing the payroll on behalf of Dunhill, the employer? There was no cessation of employment. Or do you mean the P11 was "wrong"?

Thanks (1)
Replying to petestar1969:
By SteLacca
11th Nov 2019 10:51

Because, inexplicably, there was a change of PAYE reference number, and so an apparent change of employment.

Thanks (0)
Replying to SteLacca:
avatar
By petestar1969
11th Nov 2019 15:22

SteLacca wrote:

Because, inexplicably, there was a change of PAYE reference number, and so an apparent change of employment.

Really? That's very odd.

Thanks (0)
Universe
By SteveOH
11th Nov 2019 10:43

In the FTT's definition of reasonable care, I am somewhat surprised that the man on the clapham omnibus was not mentioned (I love that phrase).

Thanks (1)
avatar
By Roland195
11th Nov 2019 10:49

It strikes me that all of this income was correctly reported and taxed through the PAYE system. Assuming they managed to give him a tax code with no Personal Allowance, then it seems to me if HMRC did not insist on a tax return, everything would have worked as it is supposed to.

Thanks (5)
avatar
By raybackler
11th Nov 2019 10:56

As a foreign national earning over £300K, he should have sough the advice of an accountant. I am certain that if I was on the German version of the Clapham Omnibus, I wouldn't have tried to find my way through the German system without taking professional advice.

Having said that, I do believe that HMRC should have taken this into account and suspended the penalty. This would surely have been enough to ensure the taxpayer took advice in future. Also, his employer ought to have advised him to take advice.

Thanks (1)
Replying to Desert Orchid:
avatar
By geoffmw1
11th Nov 2019 11:18

the loss of tax was presumably due to the way in which month 1 was used up to August 2016

Thanks (0)
Replying to Desert Orchid:
avatar
By raybackler
11th Nov 2019 11:39

When you earn over £100K Self Assessment Tax Returns are compulsory. I defy any non-accountant to get it right first time they ever have to complete one. I have had many clients of European origin, never mind UK citizens who make a complete pigs ear of it. Tax doesn't have to be taxing, but it is.

Thanks (1)
Replying to raybackler:
By SteLacca
11th Nov 2019 12:16

Care to point me to the legislation that makes an SATR compulsory for anyone with income of more than £100K. (Hint, you can't, because it doesn't exist).

Thanks (1)
Replying to SteLacca:
avatar
By sandancer
12th Nov 2019 14:06

Not sure the requirement has been enshrined in legislation but it does form part of HMRC criteria for filing a self assessment tax return and once a notice to file has been issued you are obliged by law to complete a tax return unless you can show that you do not meet the criteria.

Thanks (0)
Replying to sandancer:
By SteLacca
12th Nov 2019 15:59

It's definitely not been enshrined in law, and where the taxpayer was only PAYE, would not even be caught by TMA S.7.

If HMRC issued a notice to file in such circumstances I would be seeking a S8B withdrawal rather than submitting the Return.

Thanks (1)
Replying to SteLacca:
avatar
By raybackler
13th Nov 2019 09:58

You are right and others have said, I was reacting to HMRC advice, rather than the law. I am aware that HMRC have stated, until recently, it was also compulsory for directors to file and that wasn't backed by law either. Serves me right for trusting HMRC and not checking this.

Thanks (1)
By Nebs
11th Nov 2019 11:16

The difference between £306K and £167K is so large that anyone would know their return was wrong. I'm surprised the penalty was so small.

Thanks (0)
avatar
By orcharddavies
11th Nov 2019 11:22

As some replies mentioned , HMRC should have considered suspending the penalty , But the standard penalty letters I have seen never mention or explain that possibility,
HMRC love collecting automatic penalties from the taxpayer !

Thanks (3)
avatar
By AndrewV12
11th Nov 2019 11:45

I think it was an honest mistake, though sometimes incorrect P60 are issued, drives me mad trying top sort it out.

Thanks (0)
avatar
By rbw
11th Nov 2019 11:58

The commentary (and comments) seem to focus on the P60 and ignore the absence of the £6,669 benefits. There's no clue as to what if any benefits were coded out. But they could account for a large chunk of the £4,627 potential lost revenue.

There was as far as I could see no explanation from Herr Scheithauer as to why he omitted those benefits from his return when he did return others. The tribunal seems not to have addressed the issue. But, even if he did not get the right information from his employer, it seems to me a tad careless to forget a company car.

Thanks (0)
Replying to rbw:
avatar
By Roland195
11th Nov 2019 12:09

£6,669 of benefit does not really equate with a company car for someone on £300k however that's just speculation.

Assuming Mr Scheithauer was dilligent & paid due concern to his tax affairs it is entirely possible he completed & filed his tax return before Dunhill got around to providing with a copy of his P11d (if at all).

Again, if the PAYE system was left to do what it had to in this case, this would all be properly reported, taxed & adjusted for 2017/18 with none of this being necessary.

If I had more faith in their general competence, you would be forgiven for thinking this is a deliberate policy to raise penalty revenue.

Thanks (1)
avatar
By ds
11th Nov 2019 12:09

Isn't the much heralded "Real Time Information" supposed to sort all this out for the tax payer and HMRC?
For any UK employee, let alone a foreign national, to understand the vagaries of the UK tax system is asking too much. The self-assessment form should come be pre-filled with the information HMRC has already collected through the year and ask the tax payer to check it is correct and make any alternations.

I have worked in countries where this is done automatically by the tax authorities and tax over payment and under payments are sent to the employee's payroll department automatically.

Just when are we to get a modern tax system ? I expect the answer is when we get a modern 21st century country and government. So probably never is the answer to that !

Thanks (4)
avatar
By Mr J Andrews
11th Nov 2019 13:01

So many ''WHAT IFS'' in this case ; I believe the result here could have gone either way. Had Ringo turned up to the tribunal and drummed his concerns rather than a simple letter , one wonders if the FTT would get away with their all too general statement that the law does not provide shelter for honest mistakes........

Thanks (1)
Replying to Mr J Andrews:
avatar
By 0705736
11th Nov 2019 16:12

According to Companies House Ringo ceased to be a director of the company on 13th April 2017. He has no other appointments listed at CH and therefore could be working anywhere in the world now, so it might have cost him a lot to get to the hearing, particularly if lost earnings are taken into account. I think he should have pointed this out in his letter to HMRC or preferably sent a letter to the tribunal about it, if in fact he didn't do so.

Also, responding to an earlier point in this thread regarding the benefits, the BIK of £6,669 multiplied by 45% is £3,001 which is less than the reported underpayment. Presumably the omission of benefits on the return must be part of the cause of the underpayment, with a small PAYE underpayment also.

He should clearly have included the BIK figure in his return, but as someone else has mentioned, the details are often provided fairly late or not at all, and in this case may not have reached him at all given that it relates to 2016/17 and he apparently left the company in April 2017 as mentioned above. Do all companies send P11Ds to people who have already left? They clearly should but I doubt if they do in many cases.

Coming from abroad, he wouldn't necessarily have been aware of the ins and outs of these things.

All in all, his return was incomplete and he was aware that the earnings figure was wrong so he should have obtained further advice before submitting it. Surely he could have expected to get suitable advice free by phoning HMRC on their SA helpline, although I must admit I wouldn't want to rely on them in a case like this without getting their advice in writing!

Really he would have been sensible to pay an accountant to do the return in order to satisfy himself that he was submitting a correct return and paying the correct amount of tax, but obviously he would have needed to point out to the accountant that the P60 was wrong - how many of us check the figures on a P60 before entering it on a client's return? Not me, unless I have some reason to think that it may be wrong.

Thanks (0)
avatar
By dwgw
11th Nov 2019 13:29

The law "does not provide shelter for honest mistakes".

Far beyond the rights and wrongs of this particular case, that phrase should be profoundly disturbing to any citizen. In our rush to maximise supposed efficiency and reduce everything to the instantly tangible and quantifiable, we seem to have lost sight of rationality, not to mention fairness.

Contrast this with our government, which can apparently rack up mistake after costly mistake, yet its leaders remain untouchable, either through wilful dishonesty or sheer brass neck.

Thanks (3)
avatar
By maxaca
11th Nov 2019 14:07

The P60 was incorrect as P45 earnings should have been added to the record and, if necessary, shown as 'previous employment' earnings on the P60 giving a combined result - although since his employment did not actually change, only the payroll provider, there should have been no form P45 the new payroll provider should have carried on with the year to date figures. With RTI HMRC usually send a correction notice to include P45 previous earnings. It seems that everyone got it wrong!

Thanks (4)
By buttercup books
11th Nov 2019 14:14

The P60 was wrong,

How often do we check a P60 figure, do we ask for all the supporting payslips to check they add to the P60??

When we have mixed income, we look at all the self employed income, produce a set of accounts , transfer the figures to the SA tax return add on the P60 and bingo, how often do we check the P60 is correct,

I feel the employer bears some responsibility here - the employee asked them to check and they still said the P60 was correct, I'd be looking to them to cough up some of the fine

I don't see how we can check the accuracy of every P60, P45 and P11 - and that's the implication

Thanks (3)
avatar
By 0705736
11th Nov 2019 16:21

Let me congratulate Herr/Frau Scheithauer (senior) on their excellent taste in music! (According to Companies House, Ringo was born in 1966 which was of course in the midst of Beatlemania.)

Thanks (2)
avatar
By justsotax
11th Nov 2019 16:23

The only growth area and 'add-on' the Revenue can charge for these days - penalties....it is time to start recharging them everytime they make an error!

I should add some individuals are plebs too, but then I bet he knows what his bonus/annual rise is as a % of gross salary .....

Thanks (0)
avatar
By sammerchant
11th Nov 2019 19:05

This is so very wrong, in all respects. By all means charge him the tax due, which I believe he was happy to pay, but the penalty, if any, should have been levied upon the employer.

HMRC have given up on the concept of equity in their approach.

Thanks (1)
avatar
By unearned luck
11th Nov 2019 23:02

This case reminds me of Hilaire Belloc's tale of woe about Lord Finchley:

Lord Finchley tried to mend the Electric Light
Himself. It struck him dead: And serve him right!
It is the business of the wealthy man
To give employment to the artisan.

Thanks (2)
avatar
By johnjenkins
12th Nov 2019 09:37

At least it's one penalty shoot out the Germans didn't win.

Thanks (3)
avatar
By James
12th Nov 2019 10:24

No including the figures from a P45 is not necessarily correct. I have a client who retired, was issued a p45 and within a few days was paid additional earnings. The amount was only about 5% of his total earnings for the year so it was not obvious that it was not included. When the revenue picked it up he queried it with his employer a quasi government organisation and one of the biggest employers in the U.K and was told the revenue's instructions were that in this instance an amended P45 was not allowed to be issued, but that the employee should be advised that the sum was not included in the P45. The employer took the view that the issuing of a payslip was such a notification though the only way my client could tell was to compare the gross earnings on the payslip with the P45, which I would have thought was somewhat a*** retentive!

In this case it was easy for the revenue to spot it, as he was retiring so had no further earnings. I wonder if it would be so easy to spot if the P45 was passed to a new employer to incorporate in his PA.Y.E. records!

Thanks (0)
avatar
By whitevanman
12th Nov 2019 17:23

I dont know why, but this case follows what seems to be a trend of tribunals, hmrc and some contributors to Aweb, of not giving all the relevant facts.
We can only guess what the tribunal saw but what they have recorded makes no reference to the omitted benefits other than that the total £6000 odd, includes about £5500 for a car and was not included in the return. Oddly thereafter, the fact did not apparently, deserve further comment.
Also, the case records some conflicting comment, said to come from hmrc's review. This says that, when the payroll was taken in-house, Dunhill received a P45 from the accountants who previously handled the payroll. But it then goes on to say that the employee was sent a P45 but denies having received it. Consequently, it says, Dunhill were unaware of the previous pay and tax details.
As I say it seems a little contradictory. If I may speculate, it would appear that they decided they should cease all employees from the old PAYE ref and follow the P45 process. Because the appellant did not send his P45 to the Dunhill pay section, they operated an Emergency code and were unable to show previous pay and tax when they produced the P60 (or when asked for a fresh one).
Also, despite all this, the appellant was apparently, able to respond very quickly to HMRC, agreeing their figures of the correct pay, tax and benefits. How he could do that without the P45 is not stated (he could have added up all his pay slips , I suppose). Nor does he say how he could agree the figure of benefits without (purportedly) having a P11D.
You may reach the conclusion, by this stage, that not everything that Herr Scheithauer says, is correct.
He also did not do himself any favours by not putting in a more detailed appeal (perhaps omitting the allegation that penalties had been charged simply because he earned a lot and is foreign) and not attending the appeal hearing.
That said, this is a man who earns about £6000 per week and the penalty was only £694.15. Perhaps not worth his effort?
The fact is that he knew what he earned and knew the P60 did not show the full amount. Nonetheless, he only put the P60 figures in his return and that is not what a reasonable person would do. Nor was it reasonable to omit his benefits.

Thanks (1)
avatar
By richard thomas
14th Nov 2019 16:07

Scheithauer is an odd case. I say straight away that if I had been hearing this case faced with the information given by HMRC as reported I would have concluded, like Michael Connell and John Wilson, that the appellant had been careless in the completion of his return.
This is certainly the case with the omission of benefits: the appellant does not seek to say that he had not got a P11D or to explain why he did not return the amounts.
In relation to the understated tax on pay (about one-third of the total of the PLRs) I would have explored with the presenting officer (who is one of the best) some of the review officer’s statements in the letter of 6 April 2018.

On page 4 lines 40/42 of the decision the review officer says:

“However, it is your responsibility to include all of your income in your tax return. You must have known what your income was. It was easy to calculate by adding up the figures on the payslips.”

The declaration on page TR8 of the 2017 SA 100 is that:

“the information I have given on this tax return and any supplementary pages is correct and complete to the best of my knowledge and belief.”

The SA102 for 2017 is quite emphatic about returning pay from employments. The rubric for Box 1, the relevant box, says:

“Pay from this employment – the total from your P45 or P60 – before tax was taken off”

The SA102 Notes say:

“Box 1 Pay from this employment
Use the figures from your P45 or P60 to fill in box 1.”

Nothing is said about returning income not shown on a P60 or P45, or for that matter in relation to box 2 about tax which should have been deducted but was not (which is creditable under regulation 185 of the PAYE Regulations in certain circumstances).

It does seem to me to be too far fetched (ignoring national stereotypes) to say that Herr Scheithauer did what he was asked to do by the SA 102 which he must have completed, and that his behaviour was not careless, especially as the declaration I quoted seems to have complied with in relation to pay, if not to benefits. The information he gave on the tax return was what he was asked to give.
As an alternative I might have considered whether I could make a special reduction given the special circumstances here.

What is more surprising is that there is no hint in the decision that the officer informed the appellant that the penalty was not suspended as required by CH83120. The Penalty Explanation Schedule may have shown that the penalty was not suspended but I cannot recall if that explains the officer’s reasoning. The alternatives are these: either the appellant was explicitly told that the penalty was not suspended and did not appeal that decision or, contrary to the HMRC Compliance Handbook (CH83133 etc) the matter was not actually considered at all by HMRC.

Where I would take issue with the decision is the last sentence of §36. It is unfortunately a misquotation of an extract from the decision in Garnmoss Ltd v HMRC [2012] UKFTT 315 (TC) which does not use the word “honest”. But even that has been held by subsequent Tribunals to be somewhat over-simplistic, and by itself not to be helpful. The point is that there are two types of mistake in completion a tax return, dishonest ones and honest ones. Dishonest ones may be penalised by penalties for deliberate conduct or by prosecution. Honest ones are further divided: those that are honest but careless (penalised by lower penalties) and those that are honest and not careless. The law does not indeed provide shelter for the honest but careless mistakes, unless a reasonable excuses is given for the carelessness or special circumstances are present. And of course ignorance of the law may, but very often will not, constitute or form part of a reasonable excuse (Perrin v HMRC [2018] UKUT 156 (TCC) at §82).

But it does provide shelter for honest mistakes that are not careless.

Thanks (1)