Court clarifies failure to notify HICBC penaltiesby
Penalties for failure to notify a liability to the high income child benefit charge have been both upheld and discharged in near identical situations by the first tier tribunal. The upper tribunal has now ruled in favour of HMRC.
In May 2018, I wrote about the first tier tribunal (FTT) case of James Robertson, who was charged a £528 penalty for failing to notify HMRC that his wife was receiving child benefit. Since Robertson’s income exceeded £50,000, the fact that his partner was receiving child benefit exposed him (as the highest earner) to the HICBC.
At the time, the FTT threw out the penalty and I predicted HMRC would appeal, which it did. This appeal has now been heard by the upper tribunal (UT).
Why did FTT cancel the penalty?
The first point to note is that the HICBC is not a tax on income (either the taxpayer’s income or their partner’s income). It is a freestanding charge to tax which is triggered by the level of the taxpayer’s income and is calculated in respect of the amount of child benefit received by the taxpayer or by their partner (not necessarily their spouse).
Judge Thomas’ reasoning was that the TMA 1970 s29 discovery assessments which HMRC issued to collect the HICBC were invalid for two reasons:
- A discovery assessment under TMA 1970 s 29 can only be made where HMRC discovers that the taxpayer’s income has been insufficiently taxed. All of Robertson’s income had been fully taxed through PAYE. On that basis, the discovery assessments should not have been made and were invalid.
- Even if it had been right to make the assessments, on the basis of HMRC’s knowledge of Robertson’s situation, those assessments had been made too late – in other words, HMRC’s discovery of outstanding tax was “stale”.
In the absence of valid assessments, the FTT argued, there was no potentially lost revenue (PLR) upon which to charge a penalty
Upper tribunal view
Shortly after the FTT decision on Robertson the case of David Lau, whose situation was essentially the same, also came before the FTT. The judge on that occasion, Judge Anne Scott, came to a very different conclusion. The UT has agreed entirely with her reasoning and applied it to Robertson.
There are four steps to Judge Scott’s reasoning:
- Both Lau and Robertson were liable to the HICBC because they each had income in excess of £50,000 and they (or their partner) received child benefit during the tax year.
- In cases of failure to notify liability, the Potentially Lost Revenue (PLR) is defined as any income tax (or CGT) to which someone is liable and which remains unpaid by 31 January following the end of the tax year.
- The PLR does not equate to the amount charged by an assessment. Assessments are simply a means of collecting tax whose liability has already arisen.
- When determining time limits, the penalty legislation (FA 2008, Sch 41, para 16 (4)) expressly acknowledges that an assessment may or may not have been made. In either case, it is open to HMRC to issue a penalty as long as there is PLR.
The UT refused to be drawn on whether the assessments were valid – since the penalty was valid regardless of the existence of the assessments, there was no need. The judges did, however, flag this as an argument which will need to be determined definitively at some later date.
HMRC’s appeal was allowed and Robertson is liable to pay the penalty.
In my previous article, I identified two doubts which the FTT ruling on Robertson left open.
- Whether the HICBC can validly be collected using TMA 1970 s29 discovery assessments. This remains open to doubt, although the UT has flagged it as a question which does require settling.
- Whether a failure to notify penalty can be charged if the only exposure is to the HICBC. This has now been fully and definitively settled as a precedent which will bind all future FTT cases.