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Taxpayer escapes unknown tax liability penalties

Mary Appiah appealed two late payment penalties from HMRC, arguing that she was unaware she had an additional tax liability.

1st Nov 2019
Tax Writer
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On 29 January 2018, a tax agent filed a client’s 2016/17 self assessment tax return on time. Their client, Mary Appiah [TC07159], paid her 2016/17 tax liability of £903 to HMRC on time, on 31 January 2018.

So far, so ordinary.

A few months later, the taxpayer received a penalty notice from HMRC for late paid tax.

Confused? You wouldn’t be the only one.

An unknown tax liability cause of penalty

When Appiah paid £903 in January 2018 (believing it to be payment for her 2016/17 tax liability) HMRC actually allocated the payment to an outstanding 2015/16 tax liability totalling £1,633.41 that the taxpayer did not, at the time, even know she had.

This liability had arisen as Appiah’s accountant, in error, had failed to tick the box in her 2015/16 self assessment return confirming that she had an income-contingent repayment student loan.

Consequently, HMRC opened an inquiry into Appiah’s 2015/16 tax return and amended payment to £1,633.41, the due date for which was 31 January 2017.

As HMRC had allocated Appiah’s £903 against her 2015/16 liability (being the oldest debt) it deemed that Appiah had not paid her tax for 2016/17 on time.

HMRC issued two penalties – a late payment penalty of £45 for 30 days late payment around March 2018 and a further £45 penalty for six months late payment around August 2018, in accordance with Paragraph 3 of Schedule 56 of Finance Act 2009.

HMRC defended its actions, arguing that the taxpayer did not request that her payment be reallocated to 2016/17.

As part of her appeal, Appiah argued that she was not informed of HMRC’s allocation of her payment to 2015/16 until October 2018 and up to that time, she believed all taxes for 2016/17 had been paid.

No evidence that HMRC had given notice of the allocation

The first tier tribunal (FTT) considered whether HMRC had, on a balance of probabilities, shown that its penalties were lawfully imposed.

It found that “nothing by way of admissible evidence” was provided by HMRC to support its position. Specifically:

  • little evidence was provided around the 2015/16 tax return inquiry;
  • there was no evidence as to when HMRC actually informed the taxpayer of the allocation, nor if it had made her aware that she could still call for a reallocation; and
  • no evidence was provided relating to the initial late payment penalty, save for an “evidently useless” blank Notice of Penalty Assessment (Form SA370).

As a result, the FTT dismissed the penalties from HMRC and allowed the taxpayer’s appeal, with the tribunal Judge Dr Christopher McNall noting that:

“I do not consider that it is fair to criticise Ms Appiah for not calling for reallocation between 31 January 2018 and 29 October 2018 when there is no evidence that she (or, for that matter, her agent) were told what had been done by HMRC; and what Ms Appiah could ask it do [ie reallocate payment to 2016/17, if she so wished]”

Criteria for reasonable excuse also met

The FTT further considered whether, in spite of the above decision, the taxpayer would have had a reasonable excuse to appeal HMRC’s penalties.

Basing its findings on the case of Perrin [2018] UKUT 156, the FTT found the taxpayer’s belief that when paying the £903 to HMRC she was doing so to settle her 2016/17 tax liability and that she had no outstanding tax liabilities to be a reasonable one.

Finally, the FTT highlighted that HMRC should have considered the issue of special circumstances, but it did not. Had HMRC done so, the FTT believed it was arguable that a different outcome might have been arrived at, which in and of itself would have sufficed to allow the appeal.


This case is unusual, in that HMRC’s allocation of Appiah’s payment to her 2015/16 tax liability benefits the taxpayer (as the penalties for 2015/16 would have been higher than for 2016/17).

However, the sticking point in this case was the clear lack of communication from HMRC as to what the taxpayer’s powers were regarding reallocation of her payment, and indeed overall communication from HMRC that the taxpayer even had an outstanding tax liability.

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