NRCGT return

[etf]

If we agree that the Charter has been broken, having gone back and reviewed some of the HICBC penalties, surely HMRC should be doing the same review for NRCGT late filing penalties because a 3% to 99% swing in success rate does not look right. In not doing so, they are breaking the Charter again because they are not treating a cohort of taxpayers fairly. The publicity for NRCGT filings was much worse than for the HICBC, as articles on this website have already highlighted and so arguably the case for a NRCGT review is even stronger.

[etf]

Rebecca Cave again attacking HMRC:


HMRC is testing a radical policy of writing to taxpayers about the need to report and pay the capital gains tax from selling their second home within 60 days of the completion date.

30th Sep 2022

The key problem with new UK Property Account, which is needed to report and pay capital gains tax (CGT) on residential properties, is that taxpayers are blissfully unaware that it exists and of the tight deadlines which apply. John Stokdyk highlighted this trap for taxpayers way back in May 2021 when the reporting deadline was only 30 days from the completion date of the sale.

The professional tax and accountancy bodies have been battling with HMRC to improve the operation of the UK Property Account in the 30 months it has been operational and for some months before that.

In June 2021 Helen Thornley reported on the work of the Office of Tax Simplification (OTS) to simplify CGT, including to reform the UK Property Reporting Service. The OTS recommend two actions:

extend the deadline from 30 to 60 days
require conveyancers to help improve awareness by requiring them to provide information about the measure to vendors.
The first point was enacted from 27 October 2021 when the CGT reporting and payment deadline was doubled to 60 days after the completion date, but the second OTS recommendation was ignored by HMRC and the government.

Test letters
In August 2022 HMRC finally took some proactive action in this area.

As an experiment, it issued around 1,200 letters to taxpayers where it held information that showed that the individual may have been either considering selling or had recently sold a UK residential property. Where a tax agent was appointed a copy of this letter was also sent to the taxpayer’s agent.

HMRC is known to access data from the Land Registry for such property-based campaigns, but for the “preparing to sell” targets HMRC must have scraped data from estate agents’ websites of properties advertised for sale.

Inadequate FAQs
It is worth reading the appendix to the HMRC letter, which includes 15 FAQs and answers designed to help the taxpayer understand whether they need to report the sale, how they report, and how to calculate the gain.

I would argue that information is not sufficient to provide answers to all the points a taxpayer will need to understand when calculating and reporting a gain.

On some matters the information is misleading by omission – for example it doesn’t mention that the stamp duty land tax/land and buildings transaction tax/land transaction tax paid on the acquisition of the property can be deducted when calculating the gain. The FAQs also don’t explain how to report and calculate the gain on the disposal of a jointly owned property, which is a very common situation.

False directions
At two points in the list of FAQs HMRC suggests the taxpayer should refer to Appendix 18 of HMRC’s capital gains manual, but it does not give a direct link to that manual. Instead the FAQ says: “To view this, go to gov.uk and search for Capital Gains Tax.”

I tried following that instruction, but the results returned from a search on the gov.uk home page don’t take you anywhere near the HMRC manuals. This makes sense because the HMRC manuals are written for HMRC employees and not for taxpayers.

So why is HMRC directing taxpayers to read its manual?

Where’s the guidance?
The answer is that there is inadequate guidance on CGT matters published on gov.uk written for ordinary taxpayers.

The first detailed guidance from HMRC regarding the UK Property Service appeared in June 2021, but it was published on the Association of Tax Technicians (ATT) website as a workaround to explain the interaction of the UK Property Service and self assessment. Then in July 2021 ATT published a further FAQ document from HMRC.

These are prime illustrations of the late arrival of HMRC guidance on the gov.uk site, which bugs me no end, and doesn’t help taxpayers or their agents get the tax reporting or payments correct.

It was only in late December 2021 that HMRC finally published the detailed information on the UK Property Reporting Service, which is now in Appendix 18C of the HMRC Capital Gains Manual.

What’s it called?
Incidentally one of the problems is that HMRC can’t decide how to label this CGT reporting requirement. Is it:

The UK property account
The UK property reporting service
The UK property disposal service
CGT property account?
Ask for help
Finally, at no point in the HMRC letter or the list of FAQs does HMRC suggest the taxpayer should talk to a tax adviser or to their accountant before attempting to complete the UK Property Account to report the gain.

It is just not good enough.

[etf]

CGT incorrectly calculated by online service
by Rebecca Cave
Non-resident taxpayers may be paying incorrect amounts of tax due on UK property sales because the online UK property account service is not calculating the gain based on the figures reported.

8th Nov 2022
7 comments
Where a taxable gain arises on a UK residential property disposal the taxpayer must report this gain through the UK property account service and pay the tax due within 60 days of the completion date. It is reasonable to assume that the HMRC online system would correctly calculate the gain based on the figures reported.

For UK residents the UK property account does appear to calculate the gain correctly based on the figures supplied, but where the taxpayer is not a UK resident, HMRC has confirmed on the Agents Forum that the service does not calculate the gain correctly, and the system may even tell the taxpayer there is nothing to pay.

Rebasing the value
The problem appears to stem from a peculiarity in the capital gains tax (CGT) calculation for non-residents. These taxpayers can use a rebased value of their UK property instead of the actual acquisition value.

Prior to 6 April 2015 non-UK residents were generally exempt from CGT on gains made on the disposal of UK assets. From 6 April 2015 to 5 April 2019 these non-resident taxpayers were subject to non-resident capital gains tax (NRCGT) on the disposal of UK residential properties. The NRCGT was restricted to the portion of the gain that arose in the period since 5 April 2015. This meant the property had to be revalued (rebased) at that date.

From 6 April 2019 non-residents became subject to CGT on the disposal of any UK land and property held directly or indirectly, but only for the portion of the gain that arose from 6 April 2019 onwards. This led to another rebasing point for all properties that came into the NRCGT charge from April 2019.

There are now two revaluation points for properties disposed of by non-resident taxpayers:

Residential properties held at 5 April 2015 – revalued at that date
Other properties held at 5 April 2019 – revalued at that date.
If the property was rebased at 5 April 2015, it is not rebased again at 5 April 2019.

Property reporting service
From April 2020 the online form used for reporting gains subject to NRCGT was replaced by the UK property reporting service. However, non-residents must use this service to report gains arising from both residential and non-residential properties, held directly or indirectly.

There have many problems with this CGT property reporting service as Helen Thornley has pointed out, but errors in the calculation of the gain have not previously been raised.

Feature not a bug
When tax adviser Angela Williams used the UK property reporting service for a non-resident client who had disposed of a property and wanted to use a rebased value, she discovered that the service always calculated the CGT on whatever figure was entered in the “Did you make a gain or loss” box, which was incorrect.

HMRC was asked about this error and responded: “The confusion appears to be arising from the assumption the service calculates the gain, whilst in UK resident returns this is correct with non-UK resident returns this is not the case.”

Work around
It is not obvious to the users of the UK property reporting service that it does not calculate the gain for non-resident taxpayers. Whatever figure is put in the box, “initial gain or loss” will be the value on which the calculation is based, and any rebased value is ignored.

To make the system return the correct amount of CGT due the user needs to insert their own calculation of the gain as “initial gain or loss”. The help sections of the UK property service do not direct the user to the guidance for non-residents to calculate gains.

Williams commented: “I suspect there will be a lot of non-residents who have completed the UK property returns themselves, who will have paid the wrong amount of tax as a result, and in those circumstances, I do not feel it would be their fault at all.”

[etf]

A nice summary is contained in the link below for those considering appealing against NRCGT penalties.

https://www.rossmartin.co.uk/penalties-a-compliance/appeals/3588-non-resident-cgt-return-penalty-appeals

I have been advised that once HMRC reconciles its systems (if they didn't have two bloody systems ...no reconciliation would be necessary.....warning bell for the future going off in my head with HMRC due to introduce MTD4IT alongside self assessment) any penalties that are outstanding for 2021/22 that are within time will be issued. The above link may therefore attract lots of hits going forward.

[etf]

My professional body obtained the following explanation below from HMRC when questioned about the 3%.....MIND THE GAP......99% spread in successful NRCGT penalty appeal cases:

You asked about the penalty position on property reporting between 2016 and 2020. It may be helpful if I explain that HMRC’s approach to reasonable excuse claims (not just those in relation to CGT late filing penalties) was influenced by the 2018 Upper Tier Tribunal judgment in Perrin, in particular paragraphs 82 and 83 of the decision concerning ‘ignorance of the law’. As you will appreciate, Tribunal decisions do have an impact on how other cases are handled.


Will the 2019 prediction from bd6759 on this thread now move forwards in the light of the above admission (in any event GoochieGate's successful appeal was in 2016, two years before Reggie)? If not, how is that fair?

We will agree that it was wrong for HMRC to announce a review of HICBC penalties. By doing so they have opened a can of worms and set a precedent that will bite them.

A review of NRCGT penalties would have been the obvious choice and could have been explained away as unique because of the specific circumstances.

[Lambs]

I was astonished to find that McGreevy v HMRC preceded the Perrin Case until I realised that this was Perrin at the Upper Tribunal, rather than the now-notorious Redston Scolding at the First Tier.
Be that as it may, see pp 37-39 of McGreevy, from which some shining wit derived at -

https://www.taxationweb.co.uk/tax-articles/general/hmrcs-penalty-regime-laid-bare-part-2-tribunal-demolishes-hmrcs-penalties.html:

'Of course, HMRC could challenge the decision. Having to gainsay 4 reasons for upholding the taxpayer’s appeal would be no mean feat and I would respect the ambition, if not the outcome. But, to my non-lawyer eyes, this case has also tarried over whether or not it is right to assert in civil cases that “ignorance of the law is no excuse”, and that could be a serious problem for HMRC.'

Regards all,

Lambs

[etf]

Thanks Lambs.

Having gone back to review HICB penalties, surely HMRC should be going back and reviewing NRCGT penalties? They appear to have admitted that they dealt with pre-Perrin (Upper) NRCGT appeals differently to later cases and this suggests those early appealers may have been treated unfairly (contrary to the Taxpayers Charter). The 3% to 99% variance in appeal success rate is tangible evidence of this.

The Civil Service code also states Civil Servants should:

deal with the public and their affairs fairly, efficiently, promptly, effectively and sensitively, to the best of your ability.

If they believe Taxpayers may have been treated unfairly, why has a review not commenced? ‘Honesty’ is being truthful and open (also in the CS code).

[etf]

A case where HMRC rejected a paper NRCGT return because the property postcode had been omitted. Retired Judge Richard Thomas' analysis of this situation is copied below.

By richard thomas
16th Dec 2022 18:12
While I note that Fawltybasil thinks that the FTT might decide one way or the other whether HMRC had a valid reason for rejecting a CGT return without a postcode, so the point is not worth further debate, I am nonetheless setting out what I might well have decided had the issue come before me as a judge of the FTT.

The first interesting question is – on what basis would the question get before the Tribunal? The only one I can think of (assuming that payment of the tax on time was not an issue) is whether HMRC would impose a penalty for late filing that they would not have imposed had the postcode-less return been accepted. This is slightly tricky because SteveHa admits the original return was a few days late. I doubt they would, but HMRC might have still assessed a penalty of £100 under paragraph 3 Schedule 55 FA 2009 (Item 2A) if they had accepted it. But as it is now more than 3 months late, in addition to the £100 penalty, paragraph 4 (daily) penalties are, HMRC would say, accruing and could be assessed once the return was accepted or after the 90-day period expired. There is to my mind a very convincing reason why such penalties cannot be assessed in this particular situation, but that probably wouldn’t stop HMRC (they did stop issuing NRCGT daily penalties after I pointed the flaw out in some decisions).

If a penalty appeal came before the FTT and the issue of validity was put in question, then in my view any assessment to a daily or other penalty would not be valid, for the simple reason that paragraph 1 Schedule 55 says:

“(1) A penalty is payable by a person (“P”) where P fails to make or deliver a return … specified in the Table below on or before the filing date.”
and Steve’s client has not failed to deliver the return (if they had failed to deliver it HMRC could not have returned it, a crassly stupid thing to do).

“Ah, but” I can hear the presenting officer saying were I to make that point “look at paragraph 16(a) Schedule 2 FA 2019” (see MUL’s first post). The return must include information that HMRC have prescribed, and that includes the postcode”.

What the return says on this matter is:

“Enter the address of the property you disposed of”

in the box, which contains 3 lines for “address” and one line for “postcode”.

So the client has not complied with paragraph 16(a). That doesn’t mean they have not delivered a “valid” CGT return. Suppose in this case the client makes a return and self-assessment under s 8 TMA which omits the CG pages and does not disclose the gain, the tax on which exceeds that paid on account with the CGT return. They open themselves up to penalties under Schedule 24 FA 2007 for an inaccuracy in a return, just like any tax evader does. I may be wrong but I don’t recall that HMRC have ever argued that, where tax has been evaded because income or gains were omitted when HMRC have prescribed under s 113(1) TMA that the CG boxes must be completed, if there is a chargeable gain not only are Schedule 24 penalties due but £1,600 or more of Schedule 55 penalties are also due as no “valid” return, complete in every detail, had been submitted.

In my view it is only if something like the declaration of truth has not been signed or the entries relate to the wrong year (that has happened to me at the FTT) that a return is not valid as not being a return within s 8 TMA. The same applies to a CGT return.

Of course there is a difference between the evader and this case. HMRC may very well not know at the time a return is delivered that a box that should have been completed has not been. They might realise if the taxpayer had ticked that they need to complete supplementary pages but do not include them, and I believe they would reject a paper return that did this. But the address box for the property is one (the only?) case where HMRC can see that the entry is incomplete because they know that every address in the UK has a postcode.

But that difference does not justify HMRC taking a more drastic stand in this case than in the evader case.

There is also the good old Latin law dictum “de minimis non curat lex” to consider. Is the omission of a taxable gain important? Yes. Is the omission of a postcode from a unique address important? No. One because as has been pointed out you can use Royal Mail’s Postcode Finder to find it. Two because it doesn’t matter. It doesn’t affect how much tax is due. It is similar to putting in the UK Property pages that the business has 1 property when it has 2, so long as the income figures is correct.

It is also instructive to see how tax law relating to mistakes in assessments and other HMRC communications has developed. The relevant law is s 114(1) TMA:

“An assessment or determination, warrant or other proceeding which purports to be made in pursuance of any provision of the Taxes Acts shall not be quashed, or deemed to be void or voidable, for want of form, or be affected by reason of a mistake, defect or omission therein, if the same is in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts, and if the person or property charged or intended to be charged or affected thereby is designated therein according to common intent and understanding.”

The case law shows that s 114(1) only applies to a mistake if it is capable of misleading the person receiving the communication. The most recent authoritative statement is in Donaldson v CIR in the Court of Appeal. This approach is consistent with what is done in the interpretation of unilateral contracts such as notices to quit – see Mannai Investment Co Ltd v. Eagle Star Assurance [1997] UKHL 19 and the speeches of Lords Steyn and Hoffmann particularly.

There is an argument that s 114(1) actually applies in this case, namely that “other proceeding” includes making a return.

So I would undoubtedly have thrown any penalties out.

Where there is an electronic return the issues are somewhat different. But it would be interesting to know whether omitting the postcode causes the return to be rejected.

[etf]

From the same missing post-code thread-an indication that HMRC is taking over 6 months to process these paper returns....

By SteveHa
16th Dec 2022 14:57
64-8 does NOT include CGT. Granted re the postcode, but as other respondents have highlighted, a postcode is not required to identify a property.

More worrying is that the taxpayer has 60 days to file the Return, yet it's acceptable for HMRC to take 189 days to reject it.

[etf]

I've copied part of an article on MTD below which makes a point about the suitably of people running these projects....not sure I'd label them 'the smartest guys in the room'.

It echos my own thoughts on the "not so nimble nine" who based on tangible evidence are asleep at the tiller in their role of making sure HMRC follows the Taxpayers Charter-two quick examples to support my theory are copied below.

1) "Making things easy-We’ll provide services that are designed around what you need to do, and are accessible, easy and quick to use, minimising the cost to you."

Is the proposed MTD4IT reporting following this mantra?

2) "Treating you fairly"

We'll allow 3% of NRCGT penalty appeals in one quarter and 99% in another and we'll charge a penalty on one case but not on another even though the circumstances are identical. And even though another code says as Civil Servants "we have to be open and honest", we haven't yet thought to go back and review those dodgy appeal decisions even though we took that step with another cohort of Taxpayers (Child Benefit High Income).

I'd like to see some people working at the coalface on board, with a genuine interest in improving things, rather than a Roy Keane "prawn sandwich" brigade.

What’s the problem MTD will fix?
So where next? The threshold announcements and phased entry to the scheme seem sensible, although this does come with a risk of over-complicating this still further.

Back to fundamentals, the government needs to be honest with businesses about what problem they’re trying to fix with MTD, and how any potential scheme will deliver a solution.

The MTD ITSA “review” announced on Monday needs to cultivate a genuine culture of listening to small businesses and advisers, and acting on that instead of trying to be the smartest guys in the room.

Instead of the usual parade of bankers, corporate lawyers and institutionalised yes-men presiding, it would also be nice to have the presence of those who’d been anywhere near the running of a small business.

Perhaps if they’re feeling particularly bold, they could try switching the approach of the scheme from stick to carrot and making it voluntary for at least the medium term. This may be enough to win back some in the profession and convince others that this is more than just a penalty farming exercise. Legislation should not be the main driver for digitisation, and mandating the use of third-party software with only vague promises of free offerings seems like a gateway to the Kafkaesque workings of the US tax system – and its assorted issues.

Digitising has tangible benefits to businesses and accounting firms big and small, but for some the cost of change or hassle of implementation just doesn’t make sense – they need to be listened to just as much as the bleeding-edge pioneer types.

At a recent FreeAgent small business roundtable in London, Enterprise Nation founder Emma Jones suggested the boldest thing any government could do right now would be to do nothing. Perhaps when it comes to digitising businesses and their taxes, this seems like an approach worth trying.