Tribunal: Company directors don’t have to submit tax returns

Frustrated company director holding his head
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This was the conclusion of a tax tribunal case concerning late filing penalties, and it confirms what many accountants tell their clients.

Guidance is wrong

The gov.uk guidance on directors’ responsibilities says a company director must register for self assessment and send a personal SA tax return to HMRC every year.

Elsewhere on the HMRC pages there is a list of who must send in a tax return, which says “You’ll need to send in a tax a return if, in the latest tax year:

  • you were a company director - unless it was for a non-profit organisation (such as a charity) and you didn’t get any pay or benefits, like a company car.”

Both of these assertions are misleading, to put it kindly.

The law

An individual must submit an SA tax return if they are issued with a notice to file a return under Taxes Management Act 1970 section 8(1). An individual who has not been issued with a notice to file a tax return under TMA 1970, s 8, or who has received such a notice but it was withdrawn, must none the less report to HMRC if they have income or gains which are chargeable to tax for the year (TMA 1970 s 7(1)). This report must generally be made by 5 October after the tax year end.

A director whose only income is taxed under PAYE, or has no taxable income at all, is not required to report to HMRC or to register for self-assessment.

The case

Mohammed Salem Kadhem (case TC05929) became a director of a property company on 21 May 2014. He received no pay or dividends from that company and didn’t register for self-assessment. It appears that HMRC registered Kadhem for self assessment on 18 December 2014, and claimed to have sent him a notice to file an SA tax return for 2014/15 on 6 April 2015. 

Kadhem asserted that he did not receive a notice to file a tax return, and he was not expecting to receive such a notice as all his income (from another source) was taxed under PAYE. He eventually submitted an SA tax return for 2014/15 online on 21 September 2016. This was in response to a £100 late filing penalty issued on 17 February 2016. Further late filing penalties totalling £1,200 were issued on 26 October 2016.

Inaccurate guidance

At the tribunal hearing, HMRC quoted the guidance which sets out director’s responsibilities, as published on gov.uk (see above). The tribunal considered that this guidance does not have the force of law and concluded; “this Government guidance notice does not accurately reflect what the law says.”

The tribunal helpfully summarised: “if a person receives a notice to file a return he is under an obligation to file a return by the due date, but that is not what the Government guidance says”.

No evidence

HMRC could not convince the tribunal that the notice to file a return was sent to the taxpayer’s correct address, so the tribunal concluded that the notice to file a return was not received as Kadhem claimed. The tribunal accepted that he had a reasonable excuse for filing a late return and all the penalties were quashed.

Comment

The stubborn insistence by HMRC that all company directors must file an SA tax return has been a point of discussion on AccountingWEB for many years. In this case, HMRC was exposed by relying on guidance that does not reflect the law, and for keeping incomplete records of exactly where a notice to file has been sent.

Some accountants argue with HMRC that the notice to file a tax return for their client should be withdrawn, but as HMRC frontline staff only have access to the incorrect HMRC guidance, and not to the tax law, such arguments are rarely successful.

Unfortunately, the cost of challenging HMRC’s opinion on whether a director should submit a tax return is generally well in excess of the cost of completing the unnecessary tax return.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

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20th Jun 2017 12:18

Helpful, but sadly there's also:
MALINOVSKAYA - http://www.bailii.org/uk/cases/UKFTT/TC/2017/TC05725.html ; and
KACZMARCZYK - http://www.bailii.org/uk/cases/UKFTT/TC/2017/TC05744.html

Where the fact that the companies of which each were directors were dormant for all years and no additional liability was accepted by HMRC, but that was still not enough.

It seems odd that in the second of those the Tribunal referred to s8B withdrawal in passing, and it still appeared available with HMRC extension of time to claim as the returns apparently remained outstanding, but did/could not go so far as to suggest to HMRC that allow such a request and withdraw should be conscionable.

HMRC could really do with some more sensible and pragmatic guidance on this rather than leaving us most usually with a stonewall "the computer says no" response

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to Paul D Utherone
26th Aug 2017 12:53

You are saying Right Paul D Utherone I am also saying that thanks for this great content.I am writer of APK Site.

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By Matrix
20th Jun 2017 13:39

Thanks for this, can we rely on this case in appealing penalties or getting tax returns cancelled?

Now that I am registering (basic rate taxpayer) Directors for SA then it would be helpful in case HMRC start asking for previous returns.

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By jcace
20th Jun 2017 13:42

I guess the crux of this case is that the tribunal was satisfied that the taxpayer did not receive a notice to file a tax return, unlike the two cases mentioned by Paul.
Agree with Paul and Rebecca that HMRC need to give guidance in accordance with the law.

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20th Jun 2017 13:55

Also the headline is not quite correct as "Tribunal: Company directors don’t have to submit tax returns" or gives a false impression.

Anyone, including directors, has to submit a tax return if required by HMRC and it is not withdrawn under s8B TMA. What the tribunal said was the HMRC Guidance that directors have to submit a return or register for SA for the sole reason that they are a director is not correct under the law.

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to Paul D Utherone
21st Jun 2017 14:23

Paul D Utherone confirms precisely my understanding of 45 years practice - whilst HMRC want directors to make annual personal Tax Returns, this is an internal HMRC (formerly IR) desire/practice, not the law. A director per se is no different from any other individual - if notice to make a Return is served, then a Return is to be made - otherwise if there is no need to notify chargeability, no Return need be made......HMRC have backed down in cases I have encountered..........but here the HMRC internal pre-hearing review process seems to have failed

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By LJCASE
20th Jun 2017 15:46

The Tribunal should have asked any accountant first - its well known amongst the accounting fraternity that directors dont have to submit annual returns unless they receive a notice to do so. Also that HMRC's guidance is wrong on a number of counts and that the guidance is not law (as confirmed in this case by the Tribunal).
There are some interesting factors to this case particularly in sections 16 and 17 including that
"HMRC say they do not issue reminders to file tax returns and have no obligation to do so"
The appellant stated that he hadn't registered for self employment but it was pointed out that self-assessment was set up on 18 December 2014 - so who asked HMRC to do so?
The question about the address also needs consideration. The appellant said he'd not received the notice but HMRC said they sent it. Unfortunately as it was not sent via recorded delivery there was no confirmation of this.

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By wayne
20th Jun 2017 21:24

I disagree with Rebecca's last paragraph.

The director had no liability to income tax or CGT so was not obliged to complete a tax return under TMA 1970 S7.

What HMRC want and what the law says are two different things.

Even if the notice to deliver a tax return was received by the director, and if there is no liability to IT or CGT then the accountant should ask HMRC to withdraw the notice under TMA 1970 S8, by virtue of TMA 1970 S8B as there is no tax liability. As long as this is done before the end of the Withdrawal Period (TMA 1970SB(6)(a)(b), generally 2 years from the end of the tax year in which the S8 notice has been given, then HMRC should withdraw the notice to deliver a tax return if they consider no tax is due based on the facts given by the accountant. I have done this successfully many times over the years.

So:

"Unfortunately, the cost of challenging HMRC’s opinion on whether a director should submit a tax return is generally well in excess of the cost of completing the unnecessary tax return."

I disagree.

If no tax return is required under TMA 1970 then the cost of a telephone call to HMRC dedicated agent helpline to cancel the tax return is far less than the cost of setting up a a file, AML procedures, issuing an engagement letter, (if not already done), a 64-8, calls, emails to/from the client, completing a SATR when no tax is due, charging the client for a SATR that is not required by law...

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to wayne
21st Jun 2017 09:39

The trouble with such calls however is they normally get referred to a back office, who then doesnt cancel the return as according to the (incorrect) guidance HMRC use being a director means they have to file a tax return.

I had one of these a couple of months ago and wrote, quoting the relevant legislation and they still wouldn't budge. Ending up filing the 3 nil returns.

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to wayne
21st Jun 2017 09:41

wayne wrote:

If no tax return is required under TMA 1970 then the cost of a telephone call to HMRC dedicated agent helpline to cancel the tax return is far less than the cost of setting up a a file, AML procedures, issuing an engagement letter, (if not already done), a 64-8, calls, emails to/from the client, completing a SATR when no tax is due, charging the client for a SATR that is not required by law...

If the file is set up, AML, engagement letter and 64-8 is done and the client has no other or minimal other income, as must be the case if a SA return is not required, all of which are often true for the clients to whom this would be relevant, then it is indeed easier to file the return than argue the toss.

In my experience it's rare indeed to have an issue in which you are contradicting the guidance by which the agents' helpline live and breathe dealt with quickly and with one call.

Of course with your typical one man bands it is now less of an issue since so many now fall in to self assessment with the new dividend regime.

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By Matrix
21st Jun 2017 09:44

HMRC issued returns in December 2016 for 2013-14 and 2014-15 for a Director and I had to file them since it was too late to cancel (according to agents SA line). There is a unit in Southampton who send out notice to file to Directors they spot have not filed returns and so we should expect more missing returns now we are registering Directors for SA who were previously not registered.

I would have had to write in to get the returns cancelled with little chance of success and it was easier just to file the returns. I charged the client a nominal fee since I had all the info (small salary and dividends) but it is difficult when you have been advising the client for years that Directors don't have to submit tax returns if no additional tax and then you can't get HMRC to cancel them.

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By SXGuy
21st Jun 2017 10:11

Thank you! I have been telling clients this for years. Something which hmrc contradict me for all the time. I quote their own statements on SA at them and they respond with rubbish. If a director who has not drawn anything subject to income tax clearly has nothing to list on a SA100 so why therefore is he required to file one? He isn't. It's not hard to understand. I've been in situations whereby I've had to submit a nil return for the sake of arguing with hmrc.

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21st Jun 2017 10:24

For future refrence

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21st Jun 2017 10:30

The Government just needs to change the law so that any company director must register for SA.
Anyone who becomes a director or sets up a company is doing it for a reason and that usually involves money.
Then there will be no doubt?

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21st Jun 2017 10:50

I think its best to file a SA tax return for all Directors, just in case, lets hope they are very simple and not to taxing, no pun.

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21st Jun 2017 10:50

The other issue to consider is when the client applies for a mortgage. I have had lenders demand SA302's for directors who have not filed returns and they do not accept the position that none was required - pointing to the HMRC guidance. HMRC need to change this.

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to jon_griffey
21st Jun 2017 12:47
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21st Jun 2017 10:54

@Wayne. I am not sure that you are correct "If no tax return is required under TMA 1970 then the cost of a telephone call to HMRC dedicated agent helpline to cancel the tax return is far less than the cost of setting up a a file, AML procedures, issuing an engagement letter, (if not already done), a 64-8, calls, emails to/from the client, completing a SATR when no tax is due, charging the client for a SATR that is not required by law...". I am not sure how you can consider that you are not acting for the client. To make a call to HMRC as an agent puts one in that box. One may also need a 64-8 for HMRC to accept one's instuctions.
@Richards1 I agree. HMRC write to every new director to advise of the Company's Tax reponsibilities so all that is needed is an extra letter requesting a SA100.

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21st Jun 2017 11:00

Yes, I agree with richards1

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21st Jun 2017 11:24

The funny thing about directors' SA is that on the one hand there is HMRC guidance saying they have to submit SATR's, while at the same time they will routinely issue letters to directors saying they do not have to submit future SATR's if their last return showed no income not taxed at source!

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to JDBENJAMIN
21st Jun 2017 13:32

Yes; this an excellent point and neatly shows the hand of the Mad Hatter at Her Majesty's RC.

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By cfield
21st Jun 2017 14:08

Clearly it was the confusion over the address which settled this case. HMRC couldn't confirm which address they'd sent the notice to or even if a notice had gone out at all. That's what swayed the Tribunal. The HMRC guidance was just a side issue. It's hard to believe the case would have gone to Tribunal if that was all they had to plead.

Interesting that they keep trotting out the Donaldson case. Seems this is standard practice now for every Schedule 55 penalty case that goes to Tribunal. Yet all Donaldson was about was the wording of the penalty notices, which is not the issue with most appeals.

I had a recent Tribunal case where they cited Donaldson and the HMRC Solicitor was as bemused by it as I was. Of far more relevance was Alexander Revell, which upheld the principle that the annual P14 submitted by the employer counts as the last known address for TMA s115.

With so many people now earning more than £100k, HMRC are raking in a fortune in penalties where they used the wrong address. Trouble is, their SA and PAYE systems don't seem to talk to each other very well, so if you've moved and failed to tell them (and no post gets returned) they just carry on writing to the wrong address until it gets near the 4 year deadline for determinations. It's only then that someone finally bothers to check the PAYE address.

This is what happened in our case, where the poor client didn't even know he was supposed to file tax returns. All his income was on PAYE. We won the case, but 3 months on they still haven't cancelled the penalties or called off the debt collectors. Just how long does it take HMRC to respect a Tribunal decision?

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to cfield
22nd Jun 2017 10:11

The good news with this particular case is that HMRC trotted out:
"16. HMRC say that as a company director one of the appellant’s responsibilities is to register for self-assessment and send a personal self-assessment tax return each year without prompt or reminder from HMRC."

But the Tribunal said:
"23. The Tribunal does not agree with HMRC’s contention that as a company director one of the appellant’s responsibilities is to register for self-assessment and send a personal self-assessment tax return each year without prompt or reminder from HMRC."

There are a number of other cases where in the finding of fact the Tribunal have just regurgitated the HMRC view, possibly because that was not challenged as part of the appeal, which it was here.

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By lme
22nd Jun 2017 10:29

Great clear article yet again thanks so much

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23rd Jun 2017 17:46

I agree with the point that directors don't have to register by virtue of being a director, but a few people have commented about having to now register anyway because the new dividend rules bring into self-assessment those previously paid a low salary and dividends which were presumably within the basic rate band. Another part of HMRC's guidance is that people with dividends above £10,000 should register, Presuming the minimal salary, dividends up to about £30K were within the basic rate tax band. Should they have registered because their dividends were above £10K even if no tax was payable under the old regime?

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23rd Jun 2017 17:58

Nice summary of the rules at http://www.accountancy.coop/informed/2014/01/company-directors-and-self-....

I registered someone for the first time with the reason being ' receiving income that can't be taxed through PAYE' (from July 2016 as it didn't matter before) and they received a notice to complete a return for 2015/16 and 2016/17. My guess is that they will be checking for dividend income, even if no tax was due, from the earlier year.

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25th Jun 2017 14:43

Gov.uk guidance is very different to the old HMRC guidance. HMRC guidance seems to have been written for accuracy and completeness. Since the move to Gov.uk it seems to be all about simplicity and they may believe that this is more important than accuracy. Might be a good Freedom of Information request to ask how many company directors there were at April 2017 and how many were issued with a notice to file a return for that year?

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By cfield
to the_Poacher
25th Jun 2017 15:18

the_Poacher wrote:

Might be a good Freedom of Information request to ask how many company directors there were at April 2017 and how many were issued with a notice to file a return for that year?

Well it doesn't matter does it, for if they've been sent a tax return they're legally obliged to file it whether they owe any tax or not.

A more relevant FOI request would be how many directors were sent a s55 penalty notice when they hadn't been issued with a notice at all and owed no tax.

Not many I'd have thought, as it's normally the SA record that triggers the penalty in the first place. The issue in this particular case was that they couldn't prove which address the notice had gone to, or even that a notice had been issued at all. Normally that's taken as read if there's an electronic record, and under TMA 1970 they're bang to rights, even if they've moved and never got the notice (unless of course Revell applies).

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30th Jun 2017 21:46

One way of looking at this situation is to note that Directors are employees of their Company but being an Employee does not imply that any earned income will be involved. There is the possibility that an employee, i.e a Director receives no earned income but does receive a Benefit in Kind, so if there is no earned income, there would be no notification to HMRC of "employment" and an employee might have taxable Benefit without HMRC's PAYE system knowing anything about the situation?
Notification of a Director, is I believe, a matter for Companies House and they do not interact in this area with HMRC, so no joined up thinking in operation - quelle surprise?

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10th Jul 2017 12:10

Hi All. I'm enjoying the discussion.

As a company director (not an accountant) I haven't filed Self Assessment returns since I started in 2013. I'm concerned about these penalty notices and would rather now file returns than fight with the HMRC about it. My concern is how I should do it without receiving a nice fat penalty by default? Should I register as self employed and backdate all returns to the beginning and then hope for the best? Or should I just say that I have additional taxable income for this year and file for the current year forward?

Thanks in advance for your thoughts on this.

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By Matrix
to kingflyer
10th Jul 2017 12:21

Complete the SA1 to say that you have untaxed income effective 6 April 2016. Do not complete the box to say you are a Director. I did this for a client and they only asked for tax returns for 2016-17 onwards. If HMRC asks for prior tax returns you will have 3 months to submit them before any penalties arise.

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By cfield
to kingflyer
10th Jul 2017 12:58

It depends on how you took cash out of the company. Was it salary, dividends, loan, rent, interest, or a combination? Also depends on how much you took.

In general, if you took salary up to the NI threshold (or if higher it was fully taxed under PAYE) and dividends up to the higher rate threshold, in theory you shouldn't owe any tax, but no one can say for certain without looking at all your tax affairs in the round.

In that case, and provided HMRC never sent you a notice to file for years up to 2015/16, there won't be any late filing penalties yet, even if they ask you to file for earlier years or you need to do so in order to claim a tax rebate.

It is a different kettle of fish from 2016/17 onwards due to the dividend tax, as basic rate taxpayers must now pay 7.5% on all dividends in excess of £5,000. Technically you should notify them of your obligation to file a tax return (i.e. register for Self Assessment) by 5/10/17 but in practice there will be no penalties of any type provided you file the tax return and pay the tax by 31/1/18. Hope that helps. Please PM me if you need any further assistance.

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to cfield
10th Jul 2017 15:57

@cfield Thanks! I may take you up on that.

Income was taken as salary up to the NI threshold and dividends under the higher-rate threshold so I don't anticipate any tax liability.

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By Matrix
to kingflyer
10th Jul 2017 16:07

If you follow my advice about the SA1 (and I assumed that you only had additional liability for 2016-17 due to the nature of your question and the whole point of this thread), then you will not need to incur accounting fees submitting tax returns which are not due.

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09th Sep 2017 18:49

yes very well explained about this was the conclusion of a tax tribunal case concerning late filing penalties, and it confirms what many accountants tell their clients ATC Coin Price

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