Some time ago we reported a tax tribunal decision that suggested that the automatic late return penalties issued by HMRC may be invalid as they did not involve a human being making an assessment. Another situation in which HMRC appears to be issuing erroneous penalty notices has now come to light.
This case relates to taxpayers, not in the self-assessment system, but dealt with via PAYE. It is not uncommon for PAYE to fail to collect the correct amount of tax, especially where there are multiple employments in the year.
The normal scenario in these circumstances is that HMRC calculates any underpaid tax and advises the taxpayer (usually using a P800 computation) before collecting the tax via PAYE in a later year. Sometimes however, it is not possible to collect the outstanding tax via PAYE and in these circumstances HMRC chooses to follow several routes:
- Write to the taxpayer asking them to make a voluntary payment
- Issue an assessment to collect the tax
- Issue a notice to file a tax return for the year concerned to bring the taxpayer into self-assessment
In the reported case HMRC went for option 1. After the taxpayer failed to make the voluntary payment HMRC went to option 3 and issued a notice to file a tax return under section 8 TMA 1970. This is in line with the warnings HMRC gives in its letters when it picks up a PAYE issue in an earlier year for a non-self-assessment taxpayer and requests a voluntary payment.
This sounds fine until you examine the actual legislation. A section 8 return notice has to be issued 'for the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by the person by way of income tax for the year.'
Hence the tribunal decided that as HMRC clearly knew how much tax was due it could not issue a valid request for a tax return, and thus there could be no penalties in relation to this.
This initially sounds like a response to a very specific set of circumstances, but it has wider ramifications. If a person not in self-assessment advises HMRC that they have just discovered that they have underpaid tax providing full details, and HMRC issues a return as it often does, by this reasoning the return is arguably invalid so there is no requirement to complete it. In addition, should a taxpayer in this situation chose to complete it late, or indeed not at all, HMRC has no right to fine them.
Looking ahead to Making Tax Digital, where theoretically many taxpayers will have all their information fed into the tax account automatically, the case raises the prospect that HMRC will amend the legislation to prevent people who are affected from refusing to prepare a return.
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