Penalties for not reporting a tax liability

Notifying liability

A fundamental requirement of the tax system is that unless HMRC has asked you to complete a self-assessment tax return for a year, you must notify it if you believe you have income or capital gains chargeable to tax. Finola Owens (O) asked her accountant to do just that in respect of rental income she received in 2016/17. He notified HMRC in February 2018 in a letter saying “We are writing to give notice of liability to tax under TMA 1970, s 7(1) for tax year SA17”. HMRC did nothing until March 2019, when it asked for more information.

Trap. The deadline for notifying chargeability is the 5 October after the end of the tax year in which changeability first occurred. This means HMRC ought to have been notified by 5 October 2017.

Discovery assessments

Despite the lateness of O’s notification it’s odd that HMRC delayed so long in responding. O’s accountant then made matters worse by delaying his response to HMRC. As a result, HMRC issued so-called “discovery assessments”. As their name suggests, HMRC issues these if it “discovers” a taxpayer has a tax liability it has not been informed about. O appealed against the assessments on the ground the deadline for issuing a tax assessment for 2016/17 had passed, which was down to HMRC’s failure to act timeously.

FTT’s view

The judges noted that the legislation (s.7 Taxes Management Act 1970 (TMA)) doesn’t require specific wording or information to notify chargeability to tax. On that basis the accountant’s letter ought to have been sufficient to satisfy the law. However, in the First-tier Tribunal’s (FTT’s) ruling the judges made a great deal over the sparsity of information initially provided by O’s accountant and made the point that her tax position could have been resolved much sooner had the accountant been more forthcoming. On the strength of this it ruled in favour of HMRC and confirmed the assessments.

The right decision?

The FTT’s ruling might seem fair given that the notification was made late and the accountant could have done more and sooner. However, in our view there’s a problem with the FTT’s decision. Irrespective of the accountant’s seemingly poor efforts, he did notify O’s chargeability to tax which meant HMRC had time in which to act by sending O a self-assessment tax return to complete. This would have immediately put the matter on a proper footing. Instead, HMRC delayed and then decided to issue discovery assessments by which time the earliest of these was later than usually permitted by legislation.

Lessons. While we think O and her accountant did enough to meet the requirements of s.7 TMA , a more sensible approach would have been to provide HMRC with as much information about the chargeable income at the same time. We can only speculate that had the accountant done so the FTT’s ruling might well have gone the other way.

Tip. If time is short to meet the 5 October deadline meaning you can’t provide full information about your income or capital gains, give as much as you have time for and follow up with more details as soon as you can. If HMRC still fails to act then it won’t have a leg to stand on.