It is vitally important to distinguish between the powers actually granted by Parliament to HMRC; together with the obligations actually imposed on taxpayers by the tax law; with the powers HMRC apparently believes it has and the obligations by which it thinks taxpayers are bound.
These two can be very different, as highlighted in a recent First Tier Tribunal (FTT) case: HMRC v Alexander Steele
HMRC v Steel: Background
Mr Steele was a chef employed under PAYE. He also owned a rental property which generated a small amount of rent and even smaller profits (just £24 for 2016/17). He believed he had no obligation to notify HMRC of his earnings or property income.
Oddly enough, it wasn’t his rental income which brought Steele to HMRC’s attention, but rather the fact that he had been appointed a director of Hollybeach Ltd on 14 May 2008 and resigned that office on 30 May 2016. This prompted HMRC to issue three notices under TMA 1970, requiring Steele to file self-assessment Tax Returns for the years 2013/14, 2014/15 and 2015/16 by 9th November 2017.
Mr Steele filed the returns electronically on 29th January 2018. The reason for this delay was that he had been working in South Wales, and only found the correspondence from HMRC when he returned to his parents’ home (where the letters and penalty notices had been lying unopened).
Despite Mr Steele explaining what had happened, HMRC issued three £100 penalties for late filing of each return, which Mr Steele appealed against.
HMRC v Steel: The Law
- The judge summarised the three potential routes by which Steele’s appeal against the penalties could potentially succeed:
- If the notices to file a return were not validly issued
- If he had a reasonable excuse for failing to file by the due date
- If there were special circumstances. Since HMRC’s internal review had addressed this and concluded that there were none, this route would hinge upon a finding that this conclusion had been flawed
HMRC v Steel: Were the returns validly issued?
There was considerable confusion in HMRC’s records regarding exactly what was sent to Steele and when. However, the judge was able to deduce as a finding of fact that paper returns were delivered to Steele’s address more than three months before the date he filed electronically.
Judge Thomas was concerned to ensure that this was not another case of HMRC wrongly issuing penalty notices as part of their PAYE collection strategy (which he had criticised strongly in an earlier FTT appeal). However, happily for HMRC, he was satisfied that the returns were issued for a valid purpose.
HMRC v Steel: HMRC’s arguments
HMRC suggested that Steele didn’t have a reasonable excuse for the late filing of the returns, for three reasons:
- “A prudent person would have made arrangements to have any post from HMRC forwarded or otherwise brought to his attention”.
- Steele should have known since 2009 that he was under an obligation to register for self-assessment, since on becoming a director he acquired several responsibilities, one of which “is to register for self-assessment and send a self-assessment return each year”.
- “HMRC expect a prudent person, exercising reasonable foresight and due diligence, to have made themselves aware of their responsibilities as a director.”
The judge found all of this quite astounding. He went so far as to suggest that the HMRC officer who wrote the statement of case “cannot ever have read his own department’s instructions derived from the relevant tax legislation, Taxes & Management Act 1970”!
The judge was also critical of HMRC’s notion that Steele should have told HMRC that he would be away from home for a prolonged period, just in case that on the off chance that they might want to send him time-critical correspondence through the post. He reviewed all the various obligations which the PAYE regulations impose regarding updating addresses: all of them apply to employers, not to employees (even those who are directors).
HMRC v Steel: Property rental income
Since Mr Steele had no taxable profits in the three years covered by the tax returns, he had no obligation under TMA 1970 to enter the world of self-assessment.
Whilst he did have a property income profit of £24 in 2016/17, the fact that he had already received the three SA Tax Returns before 5th October 2017 excused him from having to make a declaration for that year.
HMRC v Steel: Reasonable excuse
Mr Steele had no obligation to inform HMRC that he wouldn’t be at home during the latter part of 2017. As someone who had always been dealt with under PAYE, he could have no reason to suppose he would be required to make any tax returns, let alone three at a time.
He had not “failed to notify chargeability”, either for his rental income or his directorship, so had no reason to expect HMRC to contact him.
The judge therefore ruled that he had a reasonable excuse, so the penalties were dismissed.
HMRC v Steel: Special circumstances
The judge addressed this point for completeness and to highlight the unreasonableness of HMRC bringing this case in the first place.
He pointed out that even if he had decided Steele did not have a reasonable excuse, there would have been special circumstances to apply to dismiss at least two of the penalties.
As HMRC issued three returns at the same time, all of which have the same due date, Steele was exposed to triple penalties for what was a single failure. The judge referred to the recent case of HMRC v Welland as good authority to discharge two of the three £100 penalties.
Finally and for good measure, the judge pointed out that the gov.uk website urgently needs to be revised, to ensure that what it says tallies with the actual law of the land. In particular, it is no good HMRC arguing that a prudent taxpayer should make themselves aware of their duties and responsibilities if HMRC can’t even get the law right on its own website.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.