Financial confidentiality spares couple from HICBC penaltiesby
A married couple, who maintained financial privacy and were unaware of the High Income Child Benefit Charge implications, has escaped penalties after a tax tribunal backed the legitimacy of their financial confidentiality stance.
The High Income Child Benefit Charge (HICBC) has once again reared its ugly head before the first tier tribunal (FTT), in the case of Douglas Lakeland (TC08997). The appeal had mixed results: Lakeland was found to be liable to the charge itself, but not to the penalties for failing to make disclosure under section 7 of TMA 1970.
The Lakelands were married around 2012, and continued to maintain separate banking arrangements, with no joint account. Mrs Lakeland had been claiming Child Benefit (CB) since 2001 in respect of her children from a previous relationship; the benefit was paid into her personal bank account, and she had never mentioned its existence to her new husband.
Mr Lakeland was a PAYE taxpayer whose adjusted net income exceeded £50,000 a year, and in August 2013 was one of the many individuals to whom HMRC sent SA252: a “generic letter sent to over a million higher earners in 2013 warning them of the changes to the child benefit regime, and the introduction of the HICBC… warning the recipient to check whether the charge applied and if so the requirement to register for self-assessment.”
HMRC’s computer record indicates it sent that letter, but the evidence of both spouses was that they had not received it. The same was the case for a “nudge letter” of January 2021.
On 18 June 2021, HMRC wrote to Mr Lakeland explaining that its records showed he was liable to the HICBC and £10,397 was due for the tax years in question as well as potential interest and penalties.
It is clear that the Lakelands did receive that letter, since Mrs Lakeland wrote back on 10 July, pointing out that she, not her husband, was in receipt of CB, and asking for future correspondence relating to that benefit to be addressed to her.
HMRC did nothing further until 17 May 2022, when it sent a questionnaire to Mr Lakeland, which was returned (by Mrs Lakeland) on 1 June. (HMRC’s apparent inaction was as a result of ongoing litigation: pending the Upper Tribunal’s decision in Wilkes, and the subsequent retrospective legislation at s97 FA2022, HMRC lacked the authority to issue discovery asssessments for HICBC.)
Assessments were issued for the years 2012/2013 to 2017/2018 and 2019/2020 amounting to £10,397, together with penalty notices totalling £1,900.60. These were appealed and ended up before the FTT (Judge Nigel Popplewell and Mrs Patricia Gordon).
The FTT, no matter how sympathetic it may have felt, had “no alternative other than to uphold the assessments”. These were validly and timeously made and reflected the simple facts: one spouse was in receipt of CB while the other had an adjusted net income exceeding £50,000. The fact that neither spouse had been aware of this unfortunate set of combined circumstances had no relevance.
Since the appeals were not made before 30 June 2021, the Lakelands had no protection against the retrospective legislation in FA2022 (ironically, the “protection” mentioned by subsection 3 of that legislation extended only to HMRC’s ability to assess!).
If Lakeland had a “reasonable excuse” for not notifying chargeability, the FTT can dismiss the penalties.
In similar vein to the case of Shahid, decided by the same judge, the FTT summarised the procedure which it was obliged to follow:
- What are the facts that the taxpayer thinks give rise to a reasonable excuse? This includes his belief, personal experience or relevant attributes, and his situation at any relevant time.
- Are those facts proven?
- Do they actually amount to an objectively reasonable excuse for his behaviour? In other words, “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”
- Once the factors that amounted to a reasonable excuse ceased to be in force, did the taxpayer remedy his failure without unreasonable delay?
The FTT heard evidence which persuaded it that the August 2013 letter and the nudge letter of January 2021 were – on the balance of probabilities – not received by either spouse. Judge Popplewell was able to conclude this based upon the prompt actions taken by the Lakelands when they did receive the letter of June 2021.
Lakeland had rectified his omission without unreasonable delay (step 4) once it was brought to his attention by that letter. So, the issue at stake was whether it was reasonable for him to have been unaware – prior to that point – that he had a problem.
Based upon the evidence, Mr Lakeland knew about his level of income but was not aware of his wife’s CB claim. Equally, Mrs Lakeland knew that she was receiving CB, but had no certain knowledge of her husband’s financial situation. At the time HICBC was launched, they had only recently been married and (as “a legacy from Mrs Lakeland’s previous relationship”) kept their financial affairs separate from one another.
HMRC pointed to its extensive publicity campaign about HICBC, suggesting that no “reasonable” taxpayer could have been ignorant of the existence, scope and impact of this charge. Yet even if Lakeland had read HMRC’s publicity, it is reasonable for him to have believed it did not relate to him.
If either spouse had read the August 2013 letter, they might well have concluded that they should compare notes, which would have put them on notice that there was an issue; but the evidence was that they had not received it. The same goes for the nudge letter.
HMRC suggested that, based upon its advertising campaign alone, an objectively reasonable high-earning taxpayer should have interrogated his partner to find out if she was receiving CB, or that an objectively reasonable CB recipient should have asked her partner if he had income over £50,000. Failure to ask those questions was, said HMRC, not reasonable.
Judge Popplewell was “very suspicious of this proposition… financial confidentiality between partners is both understandable and wholly proper”.
“In the absence of actual knowledge of the workings of the HICBC, (and simply because the information is ‘out there’) we can see no justifiable or principled reason why one partner should cross examine the other regarding any claim for child benefit or his or her adjusted net income, and that by failing to do so, they cease to be a reasonably objective taxpayer.”
Mr Lakeland was unaware of the HICBC law – which was, for him, not unreasonable. He was unaware of an important fact (his wife’s CB) – which again was not unreasonable. Once he was made aware, he rectified his omission without unreasonable delay. For those reasons the appeal against the penalties was allowed.
Once again Judge Popplewell stakes his claim to be the go-to judge on HICBC reasonable excuses.