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children bouncing on bed | accountingweb | HICBC - ignorance of the law was a reasonable excuse
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Ignorance of HICBC law was a reasonable excuse

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In yet another high-income child benefit charge case, the judge found it understandable that a couple failed to realise they were liable, because of the “domestic rough-and-tumble” of family life.

27th Feb 2024
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As pressure builds on the Chancellor to do something to reform the much-criticised high-income child benefit charge (HICBC), cases continue to come before the tribunals, illustrating the depth and breadth of the problems.

One such case is that of Jonathan Harwood (TC09027), where the first tier tribunal (FTT) had to consider appeals against both assessments to HICBC and penalties for failure to notify chargeability.

Meet The Harwoods

Mrs Harwood has claimed child benefit (CB) for three children: once in April 2010 and once for twins in November 2014. At the time of her first claim, HICBC did not exist and by the time of the twins’ birth, the claim form did include information on this recently introduced charge. 

However, she had no concept that the HICBC might apply to her – the information on the claim form referred to income in excess of £50,000, and her husband’s salary as a car salesman was below that figure. His tax affairs had always been fully dealt with under PAYE.

In 2016/17 Mr Harwood began to enjoy some private use of his employer’s demonstrator cars. He did not know that the taxable value of this benefit formed part of his income for HICBC purposes, and the last time either he or his wife had seen any reference to the charge was a couple of years previously, in the small print on a CB form describing a situation which was not – at the time – relevant to them.

In fact, though, this new benefit tipped his “adjusted net income” over the £50,000 threshold. Unbeknown to him, he was now liable to the HICBC and had a legal obligation under TMA s7 to notify HMRC of the fact by 5 October 2017. His headline salary subsequently rose above £50,000, but he continued to be unaware that this was a problem.

Meet the Revenue

HMRC was aware that there were any number of families in this sort of position: families that had been claiming CB for several years, who had always been taxed under PAYE and who had never been required to complete a self assessment tax return. 

In addition to their extensive campaign of press releases for the new charge, HMRC instituted a round of nudge letters and final reminder letters, encouraging families that might be affected by the HICBC to contact HMRC as soon as possible. Such letters were sent to the Harwoods in October and November of 2019, but received no response.

In 2021, HMRC Officer Dennis completed a review of Harwood’s tax affairs and concluded that there was a loss of tax for the years 2016/17 to 2018/19. A total HICBC of £5,752 was due for those years, and on 23 April he wrote to Harwood outlining the position, mentioning that late filing penalties and interest might also be due. 

Harwood telephoned Dennis on 7 May 2021 to say that he did not agree with the figures but would check his income and benefits position. On 21 May he phoned again to say that he now agreed the figures. On 24 and 25 May HMRC issued assessments under TMA s29 and penalty notices.

Postal shenanigans

The Harwoods lived at 34 Station Road. For some reason, the assessments and penalty notices were sent to 3 Station Road – nonetheless, they managed to find their way to the correct address, because Harwood wrote to HMRC on 22 June appealing against the assessments.

Postal issues might also explain why Harwood had not replied to the earlier nudge letters which had, it appears been properly addressed to number 34. St Andrews Terrace runs off Station Road and 34 St Andrews Terrace opens on to Station Road and has the number 34 displayed on the Station Road side. Deliveries from Morrisons and Amazon had, in the past, gone initially to the wrong number 34, and the local postman, once alerted to the problem, had needed to be extra vigilant in looking at the name of the addressee to ensure mail was correctly delivered.

Typical fact pattern

When the case came before the FTT in November 2023, the presiding judge was Judge Nigel Popplewell, who has become quite well known in the context of HICBC appeals. He has identified a typical fact pattern for such cases which, if met, in his view constitutes a “reasonable excuse” for failure to notify. He has applied that paradigm in several FTT cases and, while his judgments do not constitute precedent, at least one other FTT judge (Judge Amanda Brown KC) has cited them with approval in hers.

A reasonable excuse for failing to notify chargeability is likely to arise where the taxpayer:

  • was not previously under an obligation to complete a tax return because they were paid through PAYE and had no other income or gains
  • was in receipt of child benefit payments prior to the introduction of HICBC so that the application itself made no reference to HICBC
  • had not received notification from HMRC directly at any point prior to the contact which led to the issue of the tax assessment
  • acted promptly in ceasing to claim child benefit and engaged actively with resolving the tax liabilities as soon as HMRC did make contact
  • had not, on the balance of probabilities and based on the available evidence, received the nudge letter. 

In such circumstances, the taxpayer’s ignorance of the law can (contrary to the common saying) be an excuse. This is supported by the upper tribunal’s judgment in Perrin, which confirms that what matters is an objective test of whether it was reasonable “for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long”.

Lost nudges

Based on the promptness with which Harwood responded to the letter of 23 April 2021, the judge felt persuaded that he would have responded similarly if he had received either of the 2019 nudge letters. This, combined with the postal confusions over the two number 34s, inclined him to rule as fact that Harwood had not received the nudge letters.

The information available to Mrs Harwood when claiming CB in 2014 would not have alerted her to the possibility that – some two years later – the HICBC might become due. Her husband’s earnings were below £50,000 and the claim form made no specific reference to benefits (which, in any event, were not an issue for her husband back in 2014).

Unrealistic situation

Should they have “put two and two together once they knew that his headline salary was above £50,000”?  The judge felt that for Mrs Harwood to have spotted that her husband was earning more than £50,000 and then to remember “the ‘small print’ admonition on the claim form which she had completed a number of years before” was an “unrealistic situation in the knockabout of domestic life when bringing up small children, holding down a job, and doing one’s best to make a success of home and work life”.

Harwood had a reasonable excuse for his failure to notify chargeability, and the penalties were dismissed.

Struck down

With regard to the assessments, two of them had been issued within the usual four-year assessment window provided by TMA s34. The assessment for 2016/17, however, was not made within four years of the end of the relevant year. The extended time limits given by TMA s36 do not apply where there was a reasonable excuse for the failure to notify chargeability.

On that basis, the assessment for 2016/17 was struck down. The judge noted that Harwood had already paid the assessments and penalties in full – even selling his family car to do so – and urged HMRC to make the appropriate repayments “as soon as reasonably practicable”.

Ball in Hunt’s court

We as tax professionals often criticise HMRC for bringing cases such as these before the FTT. However, as Judge Popplewell noted, HMRC has no “jurisdiction to consider the fairness or otherwise of primary legislation. Their role is to collect tax in accordance with the law as enacted.” 

The only way to stop the tribunals system being clogged with these cases is for Parliament to sort it out. The ball is in Jeremy Hunt’s court, no one else’s.

Replies (15)

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By Paul Crowley
27th Feb 2024 16:10

Time to just chuck it away. A stupidly unequal tax liability, that HMRC are unable to enforce the fair collection of.
If we can afford to drop EENIC by 2% then we can afford to dump this charge.

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By petestar1969
28th Feb 2024 10:52

You know this law is complicated when even an "accountant" gets it wrong, right?

https://www.accountingweb.co.uk/tax/personal-tax/hicbc-how-to-remove-the...

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By Justin Bryant
28th Feb 2024 12:16

There is a very odd loophole here in that if HMRC tell you that you should have notified after you've innocently overlooked the need to notify and you shortly thereafter notify them, having thereby had a RE in the meantime (and therefore ab initio under s118(2) TMA), then there is no possibility of HMRC assessing the tax if they're more than 4 years late notwithstanding HMRC's 20 year FTA assessment time limit.

I would welcome RT's comments on that apparent oddity. (I'm a bit surprised that's been overlooked by the author here, as it looks like a novel point to me.)

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Replying to Justin Bryant:
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By richard thomas
28th Feb 2024 15:02

I assume the issue is s 36(1A)(b) TMA.

The premise is that P did not notify under s TMA before 5/10 in CY+1 despite ss (3)(c) applying, but did notify once their ignorance of the law was explained within a reasonable time of being given the explanation.

I agree that s 118(2) means that they never failed to notify in time, so there was no failure within s 36(1A).

I am starting to wonder if I overlooked it in any s 7/Sch 41 case (not just HICBC ones of course), especially as 'twas I who, in McGreevy, started the "ignorance can be an excuse" point, approved in Perrin UT.

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Replying to richard thomas:
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By Justin Bryant
28th Feb 2024 16:05

Noted with thanks and I'm glad you agree (I assume) that it looks like an interesting and novel point.

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Replying to Justin Bryant:
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By More unearned luck
28th Feb 2024 17:12

But for section 118(2) there would be a great imbalance between taxpayers who have filed a TR for the relevant year and those who haven't.

Without s 118(2) HMRC could go back twenty years in FTN case regardless of the circumstances, whereas if a return was filed then HMRC are limited to four years in cases of the omission being made despite reasonable care being taken and six where the taxpayer was careless.

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Replying to More unearned luck:
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By Justin Bryant
28th Feb 2024 17:21

I think you've missed the point here. Until now, cases (as far as I'm aware) have only shown that relying on professional advice can neutralize the 20 year DA period for FTN (e.g. if you took advice that a property was a PPR and so did not file an SA100 when you sold it), as the reasonable excuse for not notifying continues until that advice is proved wrong (and if that's after 4 years then that's tough for HMRC).

What this case shows (interestingly, oddly and I think as a novel point) is that the very act of a taxpayer promptly notifying HMRC of their previously omitted notification (after HMRC tell you about the relevant liability) kills off HMRC's ability to assess you for it beyond the usual 4 year DA time limit. Assuming that's correct (and RT I believe agrees it's correct), I'm surprised that that is not the main point of the above article (although it may not be common, as most taxpayers would presumably instinctively (initially at least) deny the liability and so would not promptly notify HMRC of it when prompted by them).

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Replying to Justin Bryant:
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By More unearned luck
28th Feb 2024 17:48

Ok. But why should it matter who disabuses the taxpayer of his ignorance? To take your example if the taxpayer learnt that the PRR advice was wrong from say a new accountant or from reading about PRR in the Sunday papers, he has an RE. But if he learns of the mistake when he gets a letter from HMRC, he doesn't?

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Replying to More unearned luck:
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By Justin Bryant
29th Feb 2024 10:51

I think you need to re-read everything above, as what you say above shows that you have badly misunderstood all this.

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Replying to Justin Bryant:
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By Justin Bryant
29th Feb 2024 12:14

By contrast, a typical s7 FTN assessment & penalty case, where the liability is disputed by the taxpayer and so there cannot be a RE late notification (of the liability) to HMRC by the taxpayer in the first place (and so a 20 year DA period can apply), is here: https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j12977/TC...

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Replying to Justin Bryant:
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By Justin Bryant
01st Mar 2024 16:40

The point is not contradicted here (albeit a brief summary): https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch56100

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Replying to Justin Bryant:
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By needhelptax
12th Mar 2024 19:12

Your post is interesting - I'm trying to understand it further. I have a tribunal hearing with HMRC mid Apr for HICBC for 7 year period 2012-2019 and representing myself (I'm a layman) - case details similar to this. I did not receive a nudge letter as it was sent to an old address. HMRC system notes say if taxpayer rings, DO NOT issue self assessment tax return if for HICBC only. It says it multiple times over the investigation period. Do you think they were trying to avoid the 4 year cap?

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Replying to needhelptax:
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By richard thomas
13th Mar 2024 10:48

I (and I suspect others on this forum) cannot say for sure why HMRC put this on (presumably) the SA Notes which they have disclosed to you, without knowing all the facts of your case.

You may not know this as a newcomer to the forum, but I was, until 2019, a judge on the FTT dealing among others with HICBC cases, and I am quite prepared to see what I can do to help you as a litigant in person, obviously pro bono. If you wish me to, please reply to this accordingly. We had then better take this offline and I will send you a private message about the case.

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Replying to richard thomas:
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By needhelptax
13th Mar 2024 12:25

Yes please, I would 100% take you up on that! I am new to this forum, I came across it trying to build my case. How can I share my contact details or can you private message me through here somehow? Thank you so much!

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By AlgernonB
28th Feb 2024 16:38

After reading this article, I feel heartened that common sense still exists, even in the world of taxation.

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