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Gift Aid: Right first time or wrong forever

Gift aid carry-back claims must be completely correct or they will fail completely. Whether such a mistake in a tax return is “careless” for penalty purposes depends on its nature and the potential consequences.

18th Sep 2020
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Royal Courts of Justice
iStock_Courts_Marek Slusarczyk

The unfortunate case of Allan Firth Webster [2020] EWHC 2275 (Ch) and his gift aid claim throws a harsh light on how the slightest error can scupper well-meaning and innocent attempts to benefit charity.

Not only did Webster lose the benefit of gift aid for the year in which it would have benefited him most, he also had to make up the tax reclaimable by the charity and was hit by a penalty for careless error.

How did this happen?

The mistake Webster made was simple, but catastrophic and made in understandably distressing circumstances.

The year 2016/17 was eventful and tragic for Webster: he sold his business and lost his wife. In her memory he established a charitable trust and on 4 August 2017, the first anniversary of her passing, he donated £800,000 to the trust. He intended to carry back this donation to be treated as made in the preceding tax year under Income Tax Act 2007 s426.

Before deciding on the exact amount of the donation he had put a provisional figure for gift aid of £400,000 into his tax return software, but when he came to submit the return he omitted to check and update that amount.

Precision is essential

Therefore, his claim stated he had made a gift of £400,000 when his gift was actually £800,000. In providing for carry-back s426 refers throughout to “a gift” and HMRC’s interpretation is strict: only the entire gift can be carried back, not part of it.

This inaccuracy rendered the entire claim invalid: it could not be treated as divisible into two parts, one of which could obtain gift aid. Also, because the claim was defective it could not be amended or rectified, even within the one-year window within which other entries on a return may be corrected or amended. This is because the TMA 1970 section that provides for amendment does not apply retrospectively.

As a result Webster lost the all the gift aid benefit for 2016/17. This was a crucial factor for him because it was in that year that he had paid enough income tax to cover the amount that the charity might reclaim.

Additional liability

While the carry-back election was invalid, the gift aid declaration to the charity was unimpaired but required comparison of the tax to be reclaimed with Webster’s income tax liability for 2017/18.

In that year he did not have the same large liability as he had had in the preceding year and so was obliged to make good to HMRC the tax credit reclaimable by the charity.

The failure of the carry-back claim also denied Webster any higher rate income tax relief for 2016/17, so he had significantly underpaid income tax for that year, incurring interest on that underpayment.

Penalty

HMRC enquired into his returns and the department’s closure notice for 2016/17 included a 15% penalty for careless inaccuracy. The total additional amount due from Webster was approximately £215,000.

High Court challenge

Complication, and no doubt additional expense, were added into the mix through the method of challenge Webster adopted. As well as pursuing matters through the conventional channel of the tax tribunals, he took the highly unusual step of applying to the High Court for the equitable remedy of rectification to correct an error in his claim.

In short, this route didn’t get him anywhere. Rectification as an equitable remedy is only available if:

  • it corrects an error in a document
  • no other remedy is available
  • it is fair and just to allow the document in question to be rectified; and
  • the court is an appropriate forum for resolving the problem.

The judge made it clear that he did not regard a careless mistake as suitable for rectification by the court and observed that since a tax return includes a declaration that it is to the best of the taxpayer’s knowledge correct and complete, he has a responsibility to take reasonable care.

The judge noted that the taxpayer had other routes to correct a return which were not yet exhausted and the appeal to the first tier tribunal (FTT) was yet to be heard. The judge also observed, as an aside, that if there was any document that might be rectifiable that would be the gift aid declaration given to the charity.

Ultimately the judge suggested that attempting to use the High Court to obtain a remedy on a case that was fundamentally flawed would be susceptible to being struck out as an abuse of process.

Carelessness

The High Court judge was completely unsympathetic to the contention that Webster had not been careless. The taxpayer’s argument was that this had been a single slip, and an easy one to overlook because it did not affect the ultimate tax liability as shown on the tax return and so there was nothing to alert Webster to the mistake.

Taking into account the amount at stake it was not reasonable to accept that Webster was not careless when he did not take the trouble to check that all the figures in the return and claim were correct.

The FTT will decide the appeal against the penalty, but it is difficult to see how the judges there will be likely to take a different view from the High Court.

Replies (23)

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By Justin Bryant
20th Sep 2020 19:32

A completely unnecessary bear trap and typical of our nonsense harsh tax system. Why this harsh result for this particular type of tax relief claim and not others (like R&D claims for example)? Totally unfair, arbitrary craziness.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
20th Sep 2020 21:28

If you consider the law to be unfair, petition your MP.

In view of the amount of tax at stake perhaps the claimant should have spent a trivial amount of his fortune in paying for proper professional advice. That, after all, is what we are paid to do - help clients from walking into such bear-traps. (And to advise clients of the risks of submitting spurious R&D claims.)

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By lclackett
21st Sep 2020 10:08

I'm sure friends and family of that tax inspector will be really pleased for him/her when they share this story of success. No reasonable person would take this case on and surely there is no-one that considers this a fair outcome. A penalty on top really would be a disgrace.

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Replying to lclackett:
Psycho
By Wilson Philips
21st Sep 2020 10:34

Why shouldn't the case have been taken on? There was a reasonable amount of tax at stake and the taxpayer got it wrong. Whether the legislation underpinning the case is unfair or not is an entirely separate discussion.

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Replying to Wilson Philips:
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By lclackett
22nd Sep 2020 07:44

Why shouldn't the case have been taken on? Because it is morally repugnant to do so to steal a phrase. We all need to play nicer and society would be a better place for it.

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Replying to lclackett:
Psycho
By Wilson Philips
22nd Sep 2020 08:54

We’re continually told that morals should play no part in our actings as professional advisers. Why should HMRC be any different? The taxpayer made a mess of his claim so I’m struggling to understand why anyone thinks that HMRC were not entitled to pursue the tax. Bear in mind that it was the Tribunal that confirmed in short order that the tax was due, effectively vindicating HMRC’s decision to take the case.

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Replying to Wilson Philips:
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By lclackett
22nd Sep 2020 11:42

I don't know where you heard that from. My opinion is that morals works both ways so I have never advised on aggressive/artificial tax avoidance schemes for example. I've not suggested that HMRC should have a different set of morals from tax payers or tax advisers. They were entitled to pursue the case in the strict sense of the law and once that happens the tribunals hands are tied. I don't dispute the tribunal's decision but this has no bearing on the morality of the decision for the inspector to have taken this case forward in the first place.

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Replying to lclackett:
Psycho
By Wilson Philips
22nd Sep 2020 14:03

It’s a view often expressed by members on this site. Let me put it another way - what is morally wrong in chasing a sizeable tax liability which, according to the letter of the law, is due?

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Replying to Wilson Philips:
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By lclackett
22nd Sep 2020 15:41

It is just as morally wrong for a taxpayer to claim tax relief on an artificial loss created by some dodgy scheme or arrangement in my opinion. By the strict letter of the law it may be perfectly fine and be backed by counsel's opinion. By your logic you must think that example is equally fine but I think both sets of behaviour are morally wrong and that the strict letter of the law is not always the best measure of whether behaviour is decent or moral. That's just my view, you are entitled to your own opinion.

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Replying to lclackett:
Psycho
By Wilson Philips
22nd Sep 2020 16:05

Thank you for at least recognising that people may have different, equally valid, opinions. Others here are less accommodating. For my part, my view is that morals simply don't come into it.

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Replying to Wilson Philips:
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By lclackett
22nd Sep 2020 17:25

That's fair enough, I respect your opinion. Always interesting to hear other views.

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By Justin Bryant
21st Sep 2020 11:01

For the benefit of the ignorant who defend (and it would seem almost encourage) these nonsense tax bear traps (or at least they do not rightly denounce them), here is another recent example of how taxpayers can blow up over a (finely balanced) tax bear trap (with the loss of many jobs I suspect).
http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11785/TC0...

Outrageous when HMRC at the same time do basically nothing to discourage/police fraudulent R&D claims (and indeed encourage such fraud through such inaction).

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Replying to Justin Bryant:
Psycho
By Wilson Philips
21st Sep 2020 11:42

I don't see anyone defending (or encouraging) the "bear traps". Perhaps you would care to elaborate?

I also disagree with the description of the VAT treatment in that latter case as a "bear trap". Deciding the correct rate of VAT to apply is often very difficult. Nevertheless, it is incumbent upon the supplier to ensure that they are applying that correct rate. HMRC will offer a written ruling in cases of uncertainty and it may have been prudent of the taxpayer in this case to have done so. Or they might want to seek recourse from any advisers that mistakenly told them that the supply was eligible for reduced-rating.

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Replying to Wilson Philips:
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By Justin Bryant
21st Sep 2020 13:44

God knows what you mean and it's pretty obvious what I mean re our nonsense, inscrutable tax system causing unnecessary bear trap etc. problems. Another example of how stupidly complex VAT is such that the FTT cannot even get it right & have to apologise is at para 64 here: http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11801/TC0...

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Replying to Justin Bryant:
Psycho
By Wilson Philips
21st Sep 2020 13:54

That’s OK. I know what I mean. As should anyone else that works with VAT.

I’d still be interested to know where you perceived someone defending or encouraging the “bear traps”.

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Replying to Wilson Philips:
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By Justin Bryant
21st Sep 2020 14:22

For good measure it's not just the FTT but HMRC themselves who cannot apply VAT simply and rather farcically get costs awarded against them for their incompetence in not deploying a killer argument sooner per para 33 here:
https://assets.publishing.service.gov.uk/media/5f68508be90e0759ffbc3667/...

You do not denounce or even criticize these bear traps is what I mean and thus implicitly indicate you are happy with them (or at least indifferent).

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Replying to Justin Bryant:
Psycho
By Wilson Philips
21st Sep 2020 14:37

You really ought to stop drawing inferences/conclusions from negative or absent remarks.

But since your initial response was clearly directed at me let me assure you that I am far from ignorant as to the “bear trap” in question - having encountered it first-hand and making sure that the client’s tax return was correctly completed in the first place.

Whether or not I consider the legislation to be unfair is neither here nor there, which is why I offered no opinion - the issue is whether it was reasonable for HMRC to pursue a case for tax relief claimed incorrectly under the prevailing legislation, however unfair that legislation might be. I find nothing wrong with HMRC doing their job. Whether other departments of HMRC are failing in their duties is of no relevance to this case.

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By flightdeck
21st Sep 2020 18:36

"No good deed goes unpunished"

"Computer says no"

What a disheartening article, do we HAVE to sink to our lowest, pedantic capabilities?

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Replying to flightdeck:
Psycho
By Wilson Philips
21st Sep 2020 21:38

If you think that correct application of the law, however unfair that law might seem, particularly where there are significant amounts of tax involved, is pedantic then I’d suggest that you are in the wrong business.

The taxpayer was not punished for his good deed. He was punished for [***] things up (and, it would seem, for not taking professional advice despite the amount of tax at stake).

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Replying to Wilson Philips:
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By raycad
21st Sep 2020 23:58

Actually, that's inaccurate as the following extract from the Case report makes it clear that the taxpayer DID take professional advice:

"The Claimant explains that although the donation was made in the 2017/2018 tax year he was aware from his limited knowledge of tax, and as confirmed by his financial adviser, that he would be able to treat the payment as made in 2016/2017 for Gift Aid purposes."

My bet is that he will by now have already made a negligence claim against his financial adviser. If so, no doubt the firm's PI insurers are currently fully engaged with this!

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Replying to raycad:
Psycho
By Wilson Philips
22nd Sep 2020 08:58

I did see that but read “financial adviser”, perhaps incorrectly, as a reference to an IFA rather than a qualified tax adviser. And we all know how clued-up IFAs are in tax matters!

Either way, yes, as I mentioned above a claim may well be in point.

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By Justin Bryant
23rd Sep 2020 09:17

The taxpayer should go to the FTT and deploy a Pollen Estates "to the extent that" argument re the (partial) gift.

Also, what if the tax return gift entry was £1 too much. Would that also be permanently rejected on the same basis? If not, why not?

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Replying to Justin Bryant:
By Duggimon
25th Sep 2020 10:37

There's one donor, one donee, and one payment. On what basis could Pollen Estate possibly apply?

You can't make an argument that he should get to carry back part of his gift, to the extent that it was reported on his tax return, because the relevant law states clearly that this isn't possible.

Perhaps I've misunderstood your application of the case.

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