HMRC fumbles penalty appealby
HMRC was so sure the taxpayer had deliberately omitted income and benefits from his tax return that it asked the tribunal to allow the appeal against the penalties if it found the taxpayer’s behaviour was only careless.
In his recent first tier tribunal appeal, Angel Rodriguez-Issa challenged HMRC’s decision that inaccuracies in his tax return were the result of deliberate behaviour on his part.
HMRC had issued penalties for deliberate inaccuracies in Rodriguez-Issa’s 2016/17 tax return and when the taxpayer appealed, HMRC advanced its case on an all or nothing basis, leaving no room for the appeal to succeed if the penalties had to be recalculated on a careless basis.
The taxpayer was represented by the legendary Robert Maas.
Angel Rodriguez-Issa was made redundant by Morgan Stanley in July 2016, and subsequently took up employment with BNP Paribas.
Rodriguez-Issa’s 2016/17 tax return, which he completed himself, omitted £176,738 of income received from Morgan Stanley between December 2016 and February 2017 (ie after leaving Morgan Stanley). The return also omitted any reference to Morgan Stanley having written off a loan to him of £143,420.
In July 2019, HMRC issued a penalty under paragraph 1, schedule 24, FA 2007 for inaccuracies in the 2016/17 tax return, with those inaccuracies being the result of deliberate behaviour.
The potential lost revenue was £68,016.59. Following a review, the amount of penalty issued was reduced to £23,805. Rodriguez-Issa appealed (TC08123).
HMRC put forward the following arguments to support its case:
- Rodriguez-Issa agreed that income was omitted from his 2016/17 tax return and, therefore, the return contained inaccuracies.
- His tax affairs were very straightforward, containing just PAYE income and employment benefits. Despite this, he failed to declare a significant sum, and this was unlikely to be an innocent mistake.
- His settlement agreement with Morgan Stanley provided that he was liable for income tax arising out of the settlement sums. He also took legal advice prior to signing the settlement agreement.
- He failed to declare a taxable benefit (an interest free loan) in his 2015/16 return, and for that inaccuracy HMRC had issued a penalty for careless behaviour.
- The taxpayer could have taken advice to ensure his 2016/17 return was accurate, but did not do so.
All or nothing approach
In what can be described as an interesting approach, HMRC submitted the evidence established that the inaccuracies were the result of deliberate behaviour by the taxpayer rather than carelessness.
HMRC told the judges that if they did not find the deliberate error was proven, they should allow the appeal, as HMRC did not seek to advance a case based on carelessness.
While the FTT expressed surprise at HMRC’s position, that was how HMRC presented its case and the basis on which taxpayer fought it.
The taxpayer’s representative Robert Maas argued that HMRC did not establish that any inaccuracies in the 2016/17 tax return were due to deliberate behaviour on the part of the taxpayer.
While Rodriguez-Issa accepted that the 2016/17 return contained omissions, he argued that he was unaware of those omissions until they were brought to his attention by HMRC.
He had used his forms P60 and P45 from his employers to complete his return, arguing this complied with HMRC guidance on completing self-assessment tax returns. While Morgan Stanley had made payments to him after ceasing employment, he claimed that he was not aware of those payments until after he had filed his 2016/17 return.
Maas highlighted the fact that HMRC only informed Rodriguez-Issa about the inaccuracy in his 2015/16 tax return in February 2018, ie after the taxpayer had filed his 2016/17 return.
When Rodriguez-Issa received the penalty for the 2015/16 return, he did not amend his 2016/17 return, as he still did not appreciate that there was anything to amend.
Although the FTT agreed that there were inaccuracies in the 2016/17 tax return, HMRC did not successfully discharge the burden of proving that the inaccuracies arose from the taxpayer’s deliberate conduct, applying the approach in Auxilium (TC 05024).
The FTT also found that HMRC failed to establish that this case was one of the circumstances envisaged in Clynes (TC 05123) “where it can be said that deliberate conduct is made out because the taxpayer consciously or intentionally chose not to find out the correct position (where the circumstances are such that the person knew that he should do so).”
Ultimately, the FTT found that:
- Rodriguez-Issa understood that he had accurately completed his 2016/17 tax return because he had used the figures provided on the P60 and P45 in relation to his employment income.
- The taxpayer did not understand the tax treatment of the loan waiver and did not know that it needed to be included on his return.
- He did not know that there were inaccuracies in his 2016/17 return until informed by HMRC.
As such, HMRC failed to prove that the inaccuracies in the 2016/17 return were the result of deliberate behaviour on the part of the taxpayer. The appeal was allowed.
HMRC could have advanced a case based on careless behaviour on the part of the taxpayer. However, HMRC put all its eggs in the “deliberate behaviour” basket and presented a weak case to support such a strong position.
The FTT, for example, noted that HMRC’s cross-examination of the taxpayer (who was found to be vague and somewhat evasive) was lacking, with HMRC failing to challenge significant parts of the taxpayer’s account.