Not so much a broadside as a 50-page sustained bombardment, HMRC lost this penalty case – badly. And rightly so. And our work gets a mention, too.
Readers will be aware that we at TaxationWeb are not huge fans of the current penalty regime, particularly where the penalties dwarf the underlying tax at stake. In HMRC’s Penalty Regime Laid Bare, we highlighted one of the most objectionable offspring of the FA2009 Sch 55 penalty regime: as it applies to the Non-Resident Capital Gains Tax Return (NRCGT Return).
To recap, since April 2015, people who are not UK-resident for tax purposes and who dispose of UK residential property, are potentialy caught for UK CGT thereon, and are generally obliged to notify HMRC using an NRCGT return within 30 days – even if they are going to tell HMRC everything it needs to know a few months later, in their tax returns. There are substantial penalties for not doing so, even where no CGT is actually due. We pointed out how unfair the NRCGT regime is, and suggested that it was the worst of a bad bunch.
While HMRC is on record as saying it uses penalties to encourage compliance rather than to raise revenue, it could very easily be inferred that the main aim of forcing self-assessing taxpayers to submit an NRCGT return is to grant them an additional opportunity to be charged significant penalties for failing to submit paperwork they’d never even heard of. It was inevitable that such cases would come to Tribunal, and a recent hearing suggests that our concerns are justified.
McGreevy v HMRC
McGreevy v HMRC TC/2017/04089 was heard in July 2017 and published last month. The judgment is more than 50 pages long and, to my eyes, comprises a considered and comprehensive demolition of HMRC’s case – giving 4 separate reasons for effectively cancelling the penalties. However, those reasons will not apply to all penalty cases, nor even to all NRCGT cases – assuming HMRC learns from its mistakes.
In brief, the Australia-resident taxpayer was caught out in the early days of the new NRCGT regime, conveying a UK property in July 2015. She became aware of the NRCGT return filing requirement roughly a year later, when looking to prepare her 2015/16 tax return. While the taxpayer submitted the NRCGT return quickly once she’d found out about it, it was well beyond the required 30-day window from completion.
HMRC charged a penalty of £1,600 for the late NRCGT return. The taxpayer appealed on the basis that she was not aware of the separate NRCGT filing requirement, but HMRC rejected her appeal, saying she did not have a reasonable excuse. The taxpayer asked for HMRC to reconsider, and HMRC reviewed the case and still upheld the penalty. The taxpayer took her appeal to the tribunal.
For me, the case warms up around page 12, with:
“HMRC’s main reason for holding that the appellant had no reasonable excuse for her failure is that there was ample publicity for the fact that a non-resident who disposes of a dwelling situated in the UK must make an NRCGT return within 30 days of the completion date.
As HMRC have not provided any details of this publicity and guidance material… I have had to research the position myself.” I think this is the point at which the case goes downhill for HMRC.
The tribunal judge’s investigations took him to ETF’s assiduously curated forum postings: NRCGT Return, many of which have been duplicated on the ICAEW’s tax forum. The judge noted that HMRC had to “give notice” – i.e., that a taxpayer must be forewarned that penalties would be imposed. This clearly did not happen here, or with other NRCGT penalties, which are largely delivered as a fait accompli.
The judge also noted that HMRC’s “ample publicity” amounted to
- · The Budget Announcement itself
- · Three mentions in Agent Updates
- · Four “tweets”
“I am sure that every December in the past few years the appellant, like many other inhabitants of Rozelle, NSW, Australia, has been agog with excitement waiting for the British Chancellor of the Exchequer’s Autumn Statement. How much more relevant must it be to their tax affairs than anything the Australian Treasurer has to announce.”
“I cannot say what these [tweets] said or whether the appellant was using Twitter, and if she was whether she was following HMRC at the time. I suspect not.”
I am disappointed that the judge did not give any public consideration as to how likely it was that the taxpayer subscribed to Agent Updates. I also deduce that he also does not follow HMRC on Twitter (or at least, not in 2016). However, he redeems himself by incorporating Perrin v HMRC  UKFTT 488 (TC) - a case which also methodically demolished HMRC’s approach to the taxpayer defence of reasonable excuse (see HMRC: Unreasonable Interpretation of “Reasonable Excuse”)
But worse for HMRC was to come:
“The arguments advanced by HMRC about knowledge of the law are little short of preposterous. To say that information about NRCGT returns is “well within the public domain”, as if the public domain had boundaries where one could tell whether something was just in it or well within it or completely within it, is also claptrap.
Even assuming that the appellant started to market her property or exchanged contracts after 5 April 2015, it is also preposterous to expect that a document on HMRC’s website which is not easy to find for a tax judge makes invalid all possible excuses about not knowing of the NRCGT return deadlines.
There is a serious deficiency exhibited here in common sense, proportion and an ability to consider the position of what HMRC calls its customers.
I do not think that it is unreasonable for a person who knows that they have been making annual SA returns, that those returns require a return of CGT liability, (even if they do not know that the return does not even require a gain exempt because of private residence relief to be returned) and whose own gain is exempt (but is one that they obviously tried to report in their on-time return for 2015-16) not to realise that they must file a NRCGT return showing no tax to pay within 30 days of completion, or otherwise to face penalties of £1,600. Why would they?
An obvious cohort of taxpayers who might be subject to NRCGT was those non-residents who filed income tax returns of rents received from UK properties. A targeted communication from HMRC in early 2015, eg when returns for 2015-16 were issued, could have alerted these people to their NRCGT return responsibilities. But there is nothing in the bundle to say that was done: HMRC rely on the Chancellor’s Autumn Statement and an obscure document on their website as being something of which the appellant would be expected to be aware.
The reviewing officer compounded the HMRC errors by suggesting that HMRC do not know who needs a tax return and supplementary pages so there is a requirement to notify chargeability to NRCGT. This is precisely not the appellant’s position. Nor is it the law. Section 7A TMA says that the existence of NRCGT liability is not to be taken into account in deciding whether there is a s 7 TMA duty to notify. But the point is that the appellant was on HMRC’s radar, she could have been targeted for publicity about NRCGT returns but wasn’t. She cannot be blamed for HMRC’s shortcomings.”
At this point, and given the strong parallels between the foregoing paragraphs and my previous article, I harbour a notion we may have been separated at birth. Perhaps we simply share “common sense”. Whatever that is. And use of the word “claptrap” must trigger some kind of treble word score, surely?
The judge gave 4 reasons for allowing the appeal:
1. HMRC fundamentally misunderstood the relationship between NRCGT reporting and CGT. NRCGT reporting is 30 days from completion, which in this case was July 2015. But CGT follows exchange of contracts. HMRC had done nothing to establish when contracts had been exchanged in this case but had simply fired off penalties. The judge was not satisfied that contracts would have been exchanged after 5 April 2015, such that a Non-Resident Capital Gain actually arose in the first place, to be returned. This will be of limited use to other taxpayers with later disposals.
2. Even if there had been an NRCGT disposal, HMRC had made no ‘conscious decision’ to notify penalties, nor had it correctly notified the taxpayer of the penalties. Here again, I suspect HMRC might be able to take steps now to correct these failings for future cases. For instance, it has previously been decided that such decisions can be taken to apply as a matter of policy for all future cases. The decision just needs to be made.
3. HMRC’s consideration of whether or not special circumstances (to reduce any penalty) might apply had been flawed, and the judge was happy to conclude that they did apply. This was again a procedure that HMRC could address, if it wanted to.
4. The taxpayer did in fact have a reasonable excuse because she could not be expected to know about NRCGT return filing requirements based on the limited publicity and HMRC’s failure to warn her and similar taxpayers of their new obligations.
It is the last of these that will, I think, give HMRC the most difficulty. The case serves as yet another critique of HMRC’s abject failure to apply reasonable excuse in line with the law. I am actually bloody angry on behalf of taxpayers that my previous article on reasonable excuse and more importantly the tribunal’s comprehensive lecture notes in Perrin, are now more than three years old. And nothing has changed. Angry, not so much for the represented taxpayers and those few whose cases are fairly heard at tribunal, but for the vast majority of unrepresented taxpayers whose valid reasonable excuses are rejected as a matter of policy. HMRC has no reasonable excuse for maintaining that policy which it has been told, time and again, is wrong.
So comprehensive is the judge’s work, so wide in scope, that he even found time to make the point that this objectionable regime, of penalising taxpayers for failing to submit information returns about tax returns that were going to be made anyway, is set to be introduced on a massive scale, and it is called Making Tax Digital:
“...HMRC seem to be on the point of repeating this approach. Under the proposals for 'Making Tax Digital', certain taxpayers will be required to make quarterly returns of receipts and outgoings. Taxpayers will still be required to make, or make the equivalent of, income tax returns. The quarterly returns will not be used by HMRC for any compliance purposes and will not be enquired into. There is no requirement to pay anything with them as there is with VAT returns. Yet there will be penalties for failure to deliver [quarterly information returns] on time, and penalties for failures to deliver the [real tax return], or its equivalent, on time.” (emphasis added)
As to what HMRC may do with this case, I hope it is, at long last, to admit just how wrong the penalty regime is for NRCGT (and by implication other returns – particularly information/’nil’ returns) and that reasonable excuse does not mean the taxpayer has to have been hit by an avalanche on his way to file his tax return.
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.
I wonder if HMRC appreciates that TaxationWeb has probably done more now to publicise taxpayer duties under the new NRCGT regime than HMRC did. There's an irony in there somewhere.