A COMEDY OF ERRORS

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A COMEDY OF ERRORS

Mr Smith worked for his own PSC until December 2014.  From that date he took up full-time employment with a large company.  His PSC was dissolved in November 2015.

 

HMRC issued Mr Smith with a tax return for 2014/15 (it is not clear when).  As he did not complete this return by 31 January 2016, HMRC issued him with a penalty notice.  He called the HMRC helpline on 22 April 2016 (which is probably immediately he was issued with the penalty notice).  He told the helpline adviser that his company had not paid him any salary or dividend during 2014/15 and he thought that no return was required.  The adviser told him that he did need to file a return even if he made no income as he was a director.  Mr Smith duly filed his return and was issued with a further penalty notice (it is not clear when).  On 28 January 2017, he called HMRC again asking to appeal the penalties.  He was told it was too late to appeal and he paid the penalties.

 

On 9 June 2016, Mr Smith consented to paperless filings and gave HMRC his e-mail address.  In the period from 9 June 2016 to 6 April 2017, HMRC sent three e-mails to Mr Smith.  He did not read them as he thought that they were scams.

 

On 6 April 2017, HMRC sent him another e-mail, which he again thought was a scam so deleted it.  Unfortunately, if he had read it, it would have directed Mr Smith to his online account where he would have found that HMRC had posted a notice to file for 2016/17.  He similarly deleted HMRC’s six subsequent e-mails.  He had no reason to believe that HMRC would want to contact him as all of his income since December 2014 was received under deduction of PAYE and he was no longer a director.

 

On 31 July 2018, HMRC sent a letter to the accountants who had acted for him before December 2014 advising that Mr Smith had been charged with late filing penalties for 2016/17 of £900 and saying, “please pay these penalties.  Send in your tax return now to avoid further penalties for late filing”.  The accountants never received that letter.

 

In October 2018, Mr Smith discovered (from a conversation with a colleague) that he was liable to the Higher Income Child Benefit Charge because his earnings had increased.  He again spoke to the HMRC SA helpline which confirmed that Mr Smith met the relevant criteria.

 

He accordingly immediately filed a 2016/17 return.

 

Soon after, he received a letter from HMRC, not an e-mail, telling him that he had accrued penalties of £1,300.  He appealed these penalties to the FTT (albeit late).

 

At he hearing, the Tribunal asked both parties (Mr Smith appeared in person and HMRC was represented by a litigator from their Solicitors Office) if they were aware of any litigation which applied to paperless filing in an HMRC context “but neither party was able to assist”.

 

The Tribunal did its own research and discovered the Income and Corporate Taxation (Electronic Communications) Regulations 2003.  Reg 5 provides that where information covered by the Regulations “is delivered by means of electronic communications, [they] shall be treated as having been delivered, in the manner or form” required by the legislation.  It also provides that “information which is delivered by means of electronic communications includes information delivered to a secure mailbox”.  It also discovered that HMRC had power to define what is a secure mailbox and had done so by a direction of 7 April 2014.

 

Accordingly Mr Smith was deemed to have received the notice to file and he had not complied with it.  So far, so good, but the test for penalties is whether Mr Smith took reasonable care.  The Tribunal found that -

 

a)      Mr Smith is an intelligent man …  He relied on and trusted the advice from the HMRC helpline,

 

b)      the reasonable taxpayer with Mr Smith’s experience and other relevant attributes would have a good understanding of how the SA system worked, and be aware of and rely on the helpline, but would not have any specialist tax knowledge,

 

c)      a reasonable taxpayer, who had been t old by the HMRC helpline that he had to fill in an SA return “as he was a director” would have assumed that once he closed his company he would no longer have to complete a return, and

 

d)      accordingly that it was reasonable for Mr Smith to believe that he did not have to file an SA return in 2016/17.

 

They also found that the first part of HMRC’s e-mails (the part that Mr Smith could see on the e-mail list on his phone) was similar to spam messages.  However, they went on to find that he reasonable taxpayer would have opened the message and read it in full.

 

They also found that the reasonable taxpayer who had been told by HMRC that he had to file a tax return as he was a director, would have assumed that he no longer needed to do so once he closed his company.

 

They accordingly found that “it was reasonable for Mr Smith to believe that he did not have to file an SA return for 2016/17”.  However, they said this was not a reasonable excuse because the reasonable taxpayer with the same level of intelligence and background knowledge would have read the HMRC e-mails in full and have gone online to check his online account.

 

Mistakes all round!  The HMRC helpline were wrong then they told Mr Smith that he had to make a return as he was a company director.  There is no such obligation.  However they were also wrong in not telling him that he had to make a return if HMRC had sent him one (or had sent him a notice to file).

 

Mr Smith was wrong to sign up for paperless filings as he did not understand what that entailed.  As he did so only five weeks after talking to the HMRC helpline, it seems likely they suggested he do so but did not explain to him the implications of doing so.

 

The letter from HMRC to Mr Smith’s accountants, if it was ever sent, was clearly illogical.  HMRC were clearly not very good at conveying the message about the Higher Income Child Benefit Charge if Mr Smith only found out about it from the man in the pub (or the colleague on the assembly line).  HMRC seem a bit unreasonable to have only posted notices to Mr Smith about penalties online until the penalties reached £1,300, at which stage they were happy to write to him with the bad news.  HMRC were also wrong not to even be aware of the electronic communications regulations and the HMRC Direction made under them.

 

The Tribunal Service had been asked at an earlier hearing to send a copy of Mr Smith’s document bundle to HMRC but “by oversight” had not done so.  But the Tribunal thought that HMRC should have contacted the Tribunal Service shortly before the hearing to say they had not received it.

 

I find the Tribunal’s decision hard to follow.  If a person believed he had no obligation to file a tax return, I would not myself expect him to believe that HMRC would nevertheless want to communicate with him from time to time.  And if the Tribunal agreed that the first line of HMRC’s e-mail looked like a spam message, it is unclear why they believe that, had he read the full e-mail, Mr Smith would have gone online as it directed.  It is drummed into us that we should not open attachments to spam e-mails.  Going to a website at the direction of a spam e-mail seems equally dangerous to me.

 

However, what struck me is that while everyone (other, perhaps, than the Tribunal) make mistakes, the only one who was punished for his mistake was Mr Smith.  That’s what goes for justice in the tax world.

 

 

ROBERT MAAS