Andy Keates examines why a taxpayer was charged penalties for failure to notify chargeability to tax despite having been within the self assessment system since 1996.
Matthew Redman (TC06857), an evangelical Christian singer/songwriter, worked in the UK from 1996 and filed SA returns to HMRC. Between 2008/09 and 2011/12 he lived and worked in the USA, paying tax to the IRS.
His tax agents, Myers Clark, urged him to provide details of his days spent in the UK since April 2009 (so his residence status could be determined), whilst frequently reminding him that penalties would be incurred on his late tax returns. He took a long time to provide this information, owing to European tour commitments and stress from dealing with his US filing obligations.
Eventually, HMRC issued a determination of his tax liability for 2009/10 and an acknowledgement that he was non-resident in 2010/11. This prompted Redman to provide Myers Clark with his UK dates and accounting figures.
When Myers Clark attempted to file Redman’s 2011/12 and 2012/13 tax returns, they were unable to do so. HMRC said it had removed Redman from the SA system for years later than 2010/11 and had not issued notices to file under TMA 1970 s8.
Myers Clark wrote to HMRC pointing out:
“This left Redman not with late tax returns but with effective failure to notify liability under s7 TMA 1970 for the affected years. We understand from you that your records show that the removal from SA occurred on 18 December 2011. We have no evidence of this ever having been notified to our client or us” (emphasis added by the tribunal judge).
HMRC’s response was to issue penalties (under FA 2008 Sch 41) for failure to notify chargeability. HMRC categorised the failure as “deliberate but not concealed”, and allowed the maximum reduction for “unprompted disclosure”. Redman appealed on the basis he had a “reasonable excuse”.
Was it deliberate?
The tribunal gave HMRC every opportunity to prove it had informed either Redman or his agents that it had closed his SA file: it could not do so. Redman’s attempts to file his (very late) tax returns strongly demonstrated that he had no idea that his SA record had been deactivated.
The judge ran through the authorities on deliberate actions, including cases I have previously discussed: Tooth (2018 UKUT 0038) and Dorothy Lyth TC05994. Her conclusion was that, in order for a failure to notify to be “deliberate”, the taxpayer must have known about the obligation and chosen not to comply.
“We have found as a fact that Redman and Myers Clark were unaware that he had been taken out of the SA system, so he did not know about the obligation and decided not to comply, and he did not intentionally shut his eyes to the true position. It is therefore not possible for Redman to be liable to a penalty for deliberate failure to notify.”
Since the failure was not deliberate, it must therefore have been careless. As a result, the penalties would automatically be reduced from 20% of the potential lost revenue for both years to 10% for the earlier year and 0% for the later year (FA 2008 Sch 41 para13(3)).
The penalties would, however, be cancelled altogether if Redman had a reasonable excuse.
The judge considered the procedure for establishing whether an excuse is reasonable, as set out in Christine Perrin (2018 UKUT 0156). The four steps are:
Establish the facts – including the taxpayer’s belief, acts or omissions, their own experience or relevant attributes, their situation etc;
Determine whether those facts are proven;
Decide whether, viewed objectively, those proven facts do amount to an objectively reasonable excuse for the default and the time when that objectively reasonable excuse ceased. Ask the question “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”;
Decide whether the taxpayer remedied the failure without unreasonable delay.
The judge had already found as a fact that neither Redman nor Myers Clark had been informed that he had been removed from the SA system (steps 1 and 2).
She commented: “that is an objectively reasonable excuse for a person in Redman’s position. He had been in the SA system since 1996. He knew he had missed the filing deadlines, but he had no reason to think he had an obligation to notify chargeability” (step 3).
The agent “called HMRC very soon after he became aware that he was unable to file Redman’s 2011-12 and 2012-13 returns, in order to notify liability to tax under TMA 1970 s 7. Thus, the failure to notify was remedied without unreasonable delay” (step 4).
All the penalties were cancelled.
HMRC may have been a little too eager to close down Redman’s SA record in 2011. Redman himself may have been a trifle too dilatory in providing his agents with the details of his days in the UK. Those two failings certainly contributed to making the situation messy, but it would be harsh to blame either party for them.
However, there are three blameworthy acts, all of which can be laid at the door of HMRC.
1. HMRC’s failure to tell anyone that it had closed the SA file. Had it done so, Myers Clark would have known to make a TMA 1970 s 7 notification of chargeability on time; instead they laboured hard to produce tax returns only to discover HMRC could not accept them.
2. HMRC’s shockingly poor judgement in categorising Redman’s failure to notify chargeability by October 2012 as “deliberate”. It had already been made very clear to HMRC that Redman had no idea that such a notification was due, and that he was trying to make – albeit late – the returns he thought were due from him under TMA 1970 section 8. It should have occurred to HMRC that this was, in part, its own fault.
3. HMRC’s refusal to accept Redman had a reasonable excuse.
If HMRC’s internal review processes were fit for purpose, this case would never have come to tribunal.