Bains v Revenue & Customs (Income tax - high income child benefit charge) [2020] UKFTT 356 (TC)

FTT-Tax
Bains v Revenue & Customs (Income tax - high income child benefit charge)
[2020] UKFTT 356 (TC) · 2018-04-10
[1]This was an appeal against penalties of £444.90 for failure over three tax years to notify liability to income tax by reason of the high income child benefit charge (the “Charge”). The Appeal[2]On 1 September 2017 HMRC raised assessments to the Charge on the appellant, Mr Bains, for the tax years 2013-14 to 2015-16 inclusive (the “tax years in question”) in the amounts of £446, £1,066 and £1,425 respectively. On 5 September 2017 HMRC raised “failure to notify” penalty assessments in respect of those years in the amounts of £89.20, £213.20 and £142.50 respectively. For 2015-16, the penalty was calculated as 10% of potential lost revenue (“PLR”); for 2013-14 and 2014-15, the penalty was calculated as 20% of PLR.[3]Mr Bains appealed against the penalty assessments to HMRC by letter of 19 September 2017.[4]On statutory review of the penalty assessments by HMRC, HMRC’s review conclusion letter of 15 March 2018 upheld them.[5]Mr Bains notified his appeal against the penalty assessments to the Tribunal by notice dated 10 April 2018. It was received by the Tribunal on 15 May 2018, which was 30 days after the statutory deadline; however, the notice of appeal states that the form was posted first class on morning of 13 April 2018. As the delay is relatively short and the appellant appears to have made reasonable efforts to meet the statutory deadline, I give permission for late notification to the Tribunal. The Charge[6]The Charge was introduced as a new charge to income tax by Finance Act 2012, with effect for the 2012-13 tax year and subsequent tax years. In broad terms it applies where someone’s “adjusted net income” in a tax year exceeds £50,000 and that person, or his or her partner, is entitled to an amount in respect of child benefit for a week in the tax year.[7]Finance Act 2012 also provided that anyone liable to the Charge (and who had not received a notice to file a self-assessment tax return) had to notify liability to income tax to HMRC within six months of the end of the tax year (even if that person were otherwise exempt from such notification by reason of his or her total income being subject to PAYE).[8]Mr Bains did not appeal against the assessment to the Charge for the tax years in question - it was only in respect of the “failure to notify” penalties that he appealed. Findings of fact[9]Mr Bains and his wife, Mrs Bains, had their first child in November 2013 and a second child in 2015. Mrs Bains received child benefit in respect of one or both children during the tax years in question.[10]Mr Bains and Mrs Bains had separate bank accounts. Prior to HMRC sending him a letter raising questions about the Charge in August 2017, Mr Bains was not aware that Mrs Bains was claiming child benefit; nor did he ask her if she was.[11]Mr Bains’ adjusted net income for the purposes of the Charge exceeded £60,000 in each of the tax years in question.[12]Mr Bains did not notify HMRC that he was chargeable to income tax for the tax years in question, within six months of the end of those tax years. Nor did he receive notice to file a tax return from HMRC.[13]HMRC sent Mr Bains a letter on 17 August 2013, and Mr Bains received the letter shortly afterwards, the content of which was as set out in Appendix 1 to this decision. I make this finding on the balance of probabilities based on the following weighing of the evidence:(1) Although no copy of the letter was kept by HMRC, HMRC’s electronic records indicate that a “standard” letter with this content was sent to Mr Bains on 17 August 2013. Mr Bains says that he did not receive this letter. However, I put greater weight on the reliability of HMRC’s electronic records, than on Mr Bains’ memory of this matter.(2) Mr Bains argues that HMRC would not have sent him this letter, as his first child was not born until later in 2013, and neither he nor Mrs Bains was claiming child benefit at the date of the letter. HMRC respond that letters of this kind are sent to people in and around the threshold for becoming higher rate taxpayers (and Mr Bains was in this category); they say the letters highlight different tax liabilities to different types of taxpayer (not just the Charge) and are issued based on PAYE income data, not child benefit data. I am persuaded, based on HMRC’s arguments as well as the text of the letter, that it made sense for HMRC to have sent Mr Bains this letter, even though neither he nor Mrs Bains was claiming child benefit at the time, as they did not yet have children.[14]Since the introduction of the Charge in 2012, child benefit application forms have included wording concerning the Charge as set out in Appendix 2 to this decision. Accordingly, the child benefit forms filled in by Mrs Bains in respect of her two children included such wording.[15]HMRC wrote to Mr Bains specifically about his liability to the Charge in August 2017. Shortly after this, Mrs Bains paid the amount of the Charge owing for the tax years in question; and Mrs Bains cancelled her child benefit claim. Law relating to notifying liability to tax and penalties for failure to do so[16]Under section 7 Taxes Management Act (“TMA”)1970, a person who is chargeable to income tax for a tax year, and who has not received a notice under section 8 of that Act requiring a return for that year of his or her income and chargeable gains, is required to give notice to HMRC of his or her chargeability. There are certain exceptions to this in sub-section 7(3), but these do not apply where the person is liable to the Charge.[17]Under paragraph 1 Schedule 41 Finance Act 2008, a penalty is payable by a person where he or she fails to comply with an obligation to give notice of liability to income tax under section 7 TMA 1970. (References in what follows to “paragraphs” are to paragraphs of Schedule 41 Finance Act 2008).[18]The standard amount of the penalty is 30% of PLR in a case (like this one) where the failure was not deliberate (paragraph 6).[19]Paragraph 13 provides for reductions in penalties where there has been disclosure. A 30% penalty can be reduced down to 10% for “prompted” disclosure where HMRC first become aware of the failure within 12 months after the time when the tax first becomes unpaid by reason of the failure; otherwise, it can only be reduced down to 20% for “prompted” disclosure. (If the disclosure is “unprompted”, the reductions may be down to 0% if within this 12 month period, and otherwise down to 10%).[20]A person discloses the relevant act or failure by(a) telling HMRC about it,(b) giving HMRC reasonable help in quantifying the tax unpaid by reason of it, and(c) allowing HMRC access to records for the purpose of checking how much tax is so unpaid (sub-paragraph 12 (2)).[21]A disclosure is “unprompted” if made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the relevant act or failure (sub-paragraph 12(3)).[22]Under paragraph 14, if HMRC think it right because of special circumstances, they may reduce a penalty under paragraph 1.[23]On an appeal to the Tribunal, the Tribunal may rely on paragraph 14 to a different extent than HMRC have done, but only if the Tribunal thinks that HMRC’s decision in respect of the application of paragraph 14 was flawed (when considered in the light of the principle applicable in proceedings for judicial review) (sub-paragraphs 19(3) and (4)).[24]Liability to a penalty under paragraph 1 does not arise in relation to an act or failure which is not deliberate if a person satisfies HMRC (or on an appeal to the Tribunal, the Tribunal) that there is a reasonable excuse for the act or failure (paragraph 20).[25]In The Clean Car Co Ltd v C&E Comrs [1991] VATTR 234

Judge Medd QC set out his understanding of “ reasonable excuse”:

“One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time, a reasonable thing to do?... It seems to me that Parliament in passing this legislation must have intended that the question of whether a particular trader had a reasonable excuse should be judged by the standards of reasonableness which one would expect to be exhibited by a taxpayer who had a responsible attitude to his duties as a taxpayer, but who in other respects shared such attributes of the particular appellant as the tribunal considered relevant to the situation being considered. Thus though such a taxpayer would give a reasonable priority to complying with his duties in regard to tax and would conscientiously seek to ensure that his returns were accurate and made timeously, his age and experience, his health or the incidence of some particular difficulty or misfortune and, doubtless, many other facts, may all have a bearing on whether, in acting as he did, he acted reasonably and so had a reasonable excuse.” 29. That this is the correct test was confirmed by the Upper Tribunal in Perrin v HMRC [2018] UKUT 156 . At [81] of that judgment, the Upper Tribunal also set out a recommended process for this Tribunal when considering whether a person has a reasonable excuse : “(1) First, establish what facts the taxpayer asserts give rise to a reasonable excuse (this may include the belief, acts or omissions of the taxpayer or any other person, the taxpayer's own experience or relevant attributes, the situation of the taxpayer at any relevant time and any other relevant external facts). (2) Second, decide which of those facts are proven. (3) Third, decide whether, viewed objectively, those proven facts do indeed amount to an objectively reasonable excuse for the default….In doing so, the Tribunal should take into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times. It might assist the Tribunal, in this context, to ask itself the question “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?” (4) Fourth, having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without reasonable delay after that time (unless, exceptionally, the failure was remedied before the reasonable excuse ceased). In doing so, the FTT should again decide the matter objectively, but taking into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times.”
[26]In the following paragraph ([82]), the Upper Tribunal went on to say:
“One situation that can sometimes cause difficulties is when the taxpayer’s asserted reasonable excuse is purely that he/she did not know of the particular requirement that has been shown to have been breached. It is a much-cited aphorism that “ignorance of the law is no excuse”, and on occasion this has been given as a reason why the defence of reasonable excuse cannot be available in such circumstances. We see no basis for this argument. Some requirements of the law are well-known, simple and straightforward but others are much less so. It will be a matter of judgement for the FTT in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long.”
Burden and standard of proof[27]The burden of establishing that the appellant is prima facie liable for a penalty which has been properly notified and assessed lies with HMRC. The burden of establishing that the appellant should not be liable for the penalty because, for example, there is a reasonable excuse for the failure, or that the decision by HMRC that special circumstances do not apply in this case is flawed, lies with the appellant. In each case the standard of proof is the balance of probabilities. The parties’ arguments[28]The hearing bundle included the following documents setting out Mr Bains’ arguments:(1) Letter from Mr Bains dated 19 September 2017(2) Letter from Mr Bains dated 25 November 2017(3) Mr Bains’ notice of appeal to the Tribunal[29]A number of points were made in these documents (some of which I have already addressed in the findings of fact at [13] and [14] above) but I pick out the following as being most relevant to whether there is a reasonable excuse for the failure to notify, or special circumstances:(1) Mr Bains was not aware that his wife was claiming child benefit(2) Mr Bains says he was not aware that he had an obligation to complete a tax return(3) Mrs Bains says Mrs Bains was encouraged to claim child benefit, regardless of Mr Bains’ income, in a telephone call she had with HMRC shortly after their first child was born.[30]HMRC’s position was that the penalty assessments were validly raised as Mr Bains had not notified his chargeability to income tax within six months of the end of the tax years in question; that any disclosures made by Mr Bains regarding the failure to notify were “prompted” rather than “unprompted”; and they had given Mr Bains the maximum reduction in the penalties (20% for the first two years and 10% for the final year) under the rules in Schedule 41 Finance Act 2008.[31]HMRC argued that there was no reasonable excuse for Mr Bains’ failure to notify; and that their decision that there were no special circumstances, was not flawed. Discussion[32]The Tribunal’s powers are limited to interpreting and applying the law. Here, the law, as enacted by Parliament, puts the onus on taxpayers to inform HMRC of their chargeability to income tax; an exception is made for taxpayers under PAYE, but, when the Charge was introduced, Parliament enacted law that excluded the Charge from this PAYE “exception”. Mr Bains’ underlying liability to the Charge for the tax years in question was not in dispute here; and I have found that Mr Bains did not notify his income tax chargeability to HMRC within six months of the end of the tax years in question. Mr Bains’ disclosures to HMRC in 2017 were prompted. All this means the penalties were validly raised, subject only to the “defences” of reasonable excuse (as the failure to notify was not deliberate) and special circumstances. The law gives the Tribunal no power to reduce liabilities for interest on overdue income tax.[33]As to the defence of reasonable excuse, the principal excuse given by Mr Bains for failing to notify HMRC his liability to income tax by reason of the Charge was(1) he was not aware that he had to make such notification and/or(2) he was not aware that his wife was claiming child benefit.[34]I accept the facts comprised in the excuses above as proven i.e. from a subjective point of view, Mr Bains did not have the awareness as described above.[35]The question is whether this excuse is reasonable judged by the standard of a reasonably conscientious taxpayer in Mr Bains’ position.[36]I have found that Mr Bains received the letter sent by HMRC on 17 August 2013. At the time, Mrs Bains was expecting her first child (born about three months later). The letter gave considerable information about the Charge. The letter referred to the 2012-13 tax year, during which Mr Bains did not have children and neither he nor Mrs Bains was claiming child benefit - and so the Charge was not relevant to him for that year. However, in my view, a reasonably conscientious taxpayer in Mr Bains’ position would have paid attention to the content of the letter and noted the consequences of claiming child benefit - given that he and his wife were shortly expecting a child, and his income exceeded £50,000. Such a taxpayer would then, in my view, have asked his wife, in due course, whether she was claiming child benefit; and would then have had the information necessary to comply with the obligation to notify HMRC of his liability to income tax by reason of the Charge. At a minimum such a taxpayer, having been alerted to the Charge by the letter and knowing that he was soon to have a child, would have sought more information about his tax obligations (for example, from the HMRC website, or by phoning an HMRC helpline).[37]In my view, Mr Bains’ principal excuse does not disclose actions taken to the required standard, that of such a conscientious taxpayer in his position, and so is not a reasonable excuse under the law.[38]A further excuse given by Mr Bains is that his wife was encouraged or advised in a telephone conversation with HMRC after the birth of their first child, to claim child benefit, regardless of Mr Bains’ income; he says that if she had been given “the correct information” at that time, she would not have claimed child benefit (and so Mr Bains’ liability to the Charge would not have arisen).[39]I do not regard the facts of this excuse as sufficiently proven: it is not explained why Mrs Baines was telephoning HMRC about child benefit, nor is it clear exactly what information Mrs Baines was given about the Charge. In any case, even if I were to accept that Mrs Baines received incomplete or incorrect information about the Charge on a call with HMRC, the wording about the Charge on the child benefit application forms she completed (see the finding of fact at [14] above) was sufficient to alert Mrs Baines to the tax implications of claiming child benefit; the fact that she did not act on this information indicates to me, on the balance of probabilities, that her claiming of child benefit was not materially influenced by any telephone conversation she may have had with HMRC.[40]I should add for completeness that:(1) there is no suggestion here that Mr Bains intentionally failed to comply with the his tax obligations here - and I note that following HMRC’s August 2017 letter, the liability to the Charge was paid promptly; and(2) I have noted other points raised by Mr Bains in correspondence, including that it was not until August 2017 that HMRC wrote to him specifically about his liability to the Charge - however, they do not in my view provide an excuse for his failure to notify liability, much less a reasonable excuse.[41]As for HMRC’s decision not to reduce the penalties on the grounds of there being special circumstances, this was not in my view a flawed decision: I have no evidence of HMRC, in making that decision, either taking something into account they should not have, or failing to take something into account which they should have; and the decision was not, in my view, an unreasonable one. Conclusion[42]HMRC’s decision to raise these “failure to notify” penalties is AFFIRMED. Right to apply for permission to appeal[43]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. ZACHARY CITRON TRIBUNAL JUDGE RELEASE DATE: 08 SEPTEMBER 2020 APPENDIX 1 TEXT OF LETTER SENT TO MR BAINS BY HMRC ON 17 AUGUST 2013 We are sending this letter to help you to pay the right amount of tax. If you have had any changes to your income in the last year, or if you are affected by the recent changes to Child Benefit for people on higher incomes, you might need to complete a Self Assessment tax return. Changes to Child Benefit The new High Income Child Benefit Charge came into effect on 7 January 2013. You are liable to pay the tax charge if all of the following statements apply to you, or applied to you in the 2012-13 tax year:• you have an individual income of over £50,000 a year, and• either you or your partner received any Child Benefit payments after 7 January 2013, and• your income for the tax year is higher than your partner's. The partner with the higher income is liable to pay the charge if both partners have income over f50,000. If you or your partner stopped your Child Benefit payments before 7 January 2013, you do not need to take any further action. To check whether the tax charge applies to you, go to hmrc.gov.uk/childbenefitcharge If it does apply, then you must register for Self Assessment for the 2012-13 tax year by 5 October 2013 , so that you can declare the Child Benefit you received, pay the tax charge on time and avoid a late payment penalty. You might be able to avoid Self Assessment in future years if you (or your partner if they are the Child Benefit recipient) choose to opt out of receiving Child Benefit and avoid incurring the tax charge. Go to hmrc.gov.uk/childbenefitcharge if you want to opt out. Other changes to your income If there have been any changes or additions to your income in the last year, or you have made any payments that qualify for tax relief, you must let us know. For example: We might owe you some money if you:• incurred expenses as part of doing your job, such as using your own car for business travel• paid into a private pension plan, and have not claimed the right amount of relief, or• made payments or charitable donations that might reduce the amount of tax you owe. You might owe us money if you:• received income from savings (including dividends)• received rental income from letting land or property• received tax relief for work related payments that you no longer pay (for example, laundry costs for uniforms or protective clothing)• started working for yourself, or• received any other income that has not been taxed. These are just a few examples. To find more information about Self Assessment and whether you need to register, go to hmrc.gov.uk/yourtaxreturn To tell us about any changes phone us on 0300 200 3310. Remember, if you need to register for Self Assessment to pay the High Income Child Benefit Charge, or to repay any tax that you owe, the deadline is 5 October 2013. To register online, go to hmrc.gov.uk/register Don't delay. Please act now. APPENDIX 2 EXAMPLE OF TEXT INCLUDED ON CHILD BENEFIT APPLICATION FORM WHEN MRS BAINS APPLIED FOR CHILD BENEFIT This information only applies if you or your partner have an individual income of more than £50,000 a year From 7 January 2013, if either you or your partner have an individual income of more than £50,000 a year then you (or your partner) will have to pay a High Income Child Benefit Charge on some or all of the Child Benefit you receive. What are my options? You and your partner should jointly decide whether to keep or stop receiving Child Benefit payments. If you KEEP receiving Child Benefit payments, then you will have to declare them on a Self Assessment tax return and pay the new tax charge. If you STOP receiving Child Benefit payments, then you won't have to pay the tax charge or fill in a tax return unless you need to for other reasons.”