Careless But Not Deliberate Behaviour Saves A Taxpayer
In a welcome, but perhaps surprising decision for the taxpayer, a tax tribunal has cancelled a number of financial penalties as the notices were not validly served; and two discovery assessments cancelled for being served out of time.
What’s the background?
An Australian man ran a successful music business as a sole trader and was a UK resident for tax purposes. He was also investing in starting a new wine business in France (his wife is French) because of concerns about the future of his music business. He also had a young family.
However, he was always behind with his paperwork and had regularly been late in submitting his tax returns. HM Revenue and Customs therefore issued discovery assessments in respect of the four tax years to 2007/2008 under section 29 Taxes Management Act 1970, on the basis that the loss of income tax was deliberately brought about by the taxpayer. The taxpayer was also issued with late filing penalties and a number of late payment surcharges. He appealed.
What was the FTT’s approach?
The First-tier Tax Tribunal acknowledged the taxpayer’s failure to deal with his responsibilities but nonetheless he always caught up – and took the view that it was not his intention to cause loss of tax.
The individual was also under the impression that his UK tax liability would be offset by his losses from the wine business in France; his focus was on the new wine business; his young family; and also litigation around his music business. Even so, he met regularly with his accountants and sought to give them the necessary paperwork when requested. His behaviour was therefore careless, not deliberate, for the purposes of section 36 TMA.
The time limit for issuing s29 discovery assessments in a case involving an income tax loss brought about carelessly was 6 years, which meant that two of the discovery assessments had not been issued in time in any event. (The limitation period for deliberate tax loss is 20 years).
As for the penalties and surcharges imposed, the FTT accepted the taxpayer’s claim and supporting evidence that he had not received notice of the penalties. For instance, there were a number of discrepancies in HMRC’s records of his contact details (he had lived at different properties during the years in issue). The FTT also found that on the evidence, had the individual received notice he would have paid the penalties. For instance, whenever he received a letter from HMRC his usual practice in the period between 2007 and 2011 was to pay any sums demanded and to pass the letter to his accountants.
As for the remaining two discovery assessments, HMRC agreed to cancel one of them; and the final one was upheld but varied to reflect a revised calculation by HMRC.
What does this mean?
Tax rules are complex and this decision is a welcome clarification of the correct approach to be taken to a taxpayer’s failures to file on time and to pay tax when due. Where the evidence lends support to the argument that a taxpayer was not deliberately depriving the government of income (or capital gains) tax, HMRC must ensure it complies with the required time limits under s36 TMA.
It’s also a salutary lesson for HMRC to ensure its records of individuals’ names and addresses are kept accurate and up to date; otherwise they risk failing to comply with the statutory rules of giving notice of penalties. Specialist tax advice should always be taken.
1Robert Don Hunter Dougan v HMRC [2022] UKFTT 00140 (TC
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you