Fifty shades of HICBC: Courts play penalty lottery
The first tier tribunal (FTT) system has recently heard a large number of cases challenging penalties for failing to report the HICBC. Andy Keates investigates how taxpayers can resist such penalties.
Virtually all the FTT cases concerning the high income child benefit charge (HICBC) involve appeals against penalties charged for failing to notify HMRC of chargeability (TMA1970, s7). This is a requirement when an individual’s “adjusted net income” exceeds £50,000 and child benefit is being claimed by the individual or their spouse/partner.
Unaware of the law
In most of these appeals the main ground has been that the taxpayers were entirely unaware they had a requirement to notify HMRC.
HMRC’s position is that a substantial information campaign was run prior to the introduction of the HICBC in 2013, including a standard letter (SA252) sent to everyone it identified at that time as being at risk of the charge.
Taxpayers making a child benefit claim subsequently would have received information on the HICBC as part of their claim.
Despite the publicity, a significant number of people were still unaware that HICBC existed, or that they were caught by it, until HMRC wrote to them asking why they had failed to notify chargeability.
Several of the FTT panels might have been open to the possibility that – if the taxpayers could convincingly prove they were genuinely unaware of the HICBC – this ignorance might offer some hope of a reasonable excuse. However, in most cases there was little or nothing by way of convincing proof.
Thomas Rogers (TC07608)
Rogers inexplicably failed to turn up to the hearing, and so was unable to offer any evidence or testimony in support of his claim that he had no knowledge of HICBC. Since the burden of demonstrating a reasonable excuse lies with the taxpayer, the judge had no choice but to uphold the penalties.
Alistair Smith (TC07640)
Smith “staunchly maintained” that he was “fully unaware” of the change in the law.
The judge pointed out that the test for a reasonable excuse is objective: “The standard is that of a prudent and reasonable taxpayer in the position of the taxpayer in question.” She was unwilling to accept that Smith, a senior IT manager, could reasonably have “succeeded in insulating himself from being aware of the change” for almost five years.
Richard Cook (TC07641)
Cook offered an even stronger argument of ignorance: not only was he unaware of HICBC, he didn’t even know his partner had claimed child benefit! According to his letter of appeal, she had claimed it “unilaterally… without my knowledge” and for part of the relevant time the he and his partner were separated.
He advised the FTT that he would not attend the hearing, and that he understood that a decision would be reached in his absence.
Sadly for him, this meant that the FTT was unable to hear evidence or testimony to establish “as a matter of fact that he was (and at all material times remained) unaware that his partner was claiming child benefit”. It seems likely that the judge might have taken that, if proven, to be a reasonable excuse.
Kevin Ramsdale (TC07657)
Ramsdale believed his wife was no longer claiming child benefit at the relevant time. The judge suggested that there might have been scenarios in which this would have been a reasonable excuse:
- If he had asked his wife if she was claiming child benefit and “for some reason she had said no”, Ramsdale might well have established a reasonable excuse.
- If he had merely been “confused… and mistakenly thought child benefit had stopped”, a reasonable taxpayer would be expected to have done more to clarify his confusion.
Sadly for Ramsdale, he was unable to satisfy the judge that “it was reasonable for him not to have the discussion with his wife about the HICBC”.
Kevin Brazier (TC07671)
This case is a genuine outlier: the judge not only accepted that “it was highly possible” that Brazier was completely unaware of HMRC’s media campaign advertising HICBC, but decided that this did in fact constitute a reasonable excuse.
The Bedford three
Three essentially identical cases were heard on the same day in Bedford before Judge Hellier, and the FTT’s judgments were similarly identical: James Fuller (TC07675), Joseph Carty (TC07674) and Anthony Morrow (TC07670).
The judge was clearly sympathetic with the three taxpayers, and tried very hard to do right by them. To his eyes, elements of the HICBC system seemed inequitable: “A taxpayer is potentially penalised for not letting HMRC know that he has chargeable income so that they can send him a tax return in which he can tell them what they already know.”
Despite his sympathy, after wrangling his way through the law, the judge was forced to conclude that the three did not have a reasonable excuse.
Simon Clarke (TC07637)
The FTT concluded that Clarke’s ignorance of the HICBC was not a reasonable excuse. However, it also decided he fell within HMRC’s own penalty refund guidance, and so cancelled his penalties.
HMRC’s policy to refund penalties imposed for failure to notify the HICBC is described in a flowchart that says HMRC will refund or cancel penalties for 2013/14 to 2015/16 if:
- The taxpayer’s adjusted net income increased to over £50,000 after the introduction of HICBC and they have not made a new claim to child benefit since then; or
- They had income over £50,000, were not in self assessment (and not claiming child benefit) and started a new relationship with a child benefit recipient between 2013 and 2016.
The FTT continues to hold the line that ignorance of the law is not a reasonable excuse, despite clearly sympathising with taxpayers who might struggle to recognise that HMRC’s campaigns are aimed at them.
The tribunal’s attitude towards the “penalty refund” spreadsheet is wildly inconsistent. In Smith, the judge held that this was part of HMRC’s discretionary power, and that the FTT had no authority to make a direction on the matter. For Clarke, on the other hand, the judge appeared to have no problem in wielding HMRC’s discretion for it.
It would be helpful if the upper tribunal could sort out when the penalty refunds should apply, as it risks becoming yet another FTT postcode lottery.