John Sharp v The Commissioners for HMRC

The form of the hearing was V (video) using the HMCTS video hearing service. The hearing was attended by the Appellant, the witnesses, and the representatives. Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.

This is an appeal against the following assessments:

In addition, interest is chargeable.

The discovery assessments are made under s29 Taxes Management Act 1970 ("TMA") in respect of the Mr Sharp's liability to the High Income Child Benefit Charge ("HICBC"). and penalties were charged under Schedule 41, Finance Act 2008 ("Schedule 41") on the basis that he failed to notify HMRC of his liability to HICBC in accordance with his obligations under s7 TMA.

The assessments to HICBC were dated 30 April 2021 and the assessments to penalties were dated 24 May 2021. Mr Sharp requested a review, and the review conclusion letter dated 17 December 2021 upheld the liability to HICBC and penalties.

Mr Sharp now appeals against both his liability to HICBC and penalties.

Witness statements were submitted from Amy Woodham, a caseworker in HMRC's Campaigns & Projects Team, and Steven Thomas a Senior HMRC Officer working in the Campaigns & Projects Team. Their statements were taken as read as evidence in chief. Ms Woodham and Mr Thomas were both cross-examined. Mr Sharp gave oral evidence, but was not cross-examined. The electronic documents to which we were referred were a documents bundle of 160 pages, and HMRC's generic bundle relating to High Income Child Benefit Charge appeals of 808 pages.

The background facts are largely undisputed, and we find that they are as follows:

Mr Sharp is an employee whose salary is subject to withholding of tax under PAYE.

In November 2010, Mr Sharp's spouse claimed child benefit in respect of their first child. Their second child was born in December 2012, but child benefit was not claimed in respect of this child.

Mr Sharp was registered into self-assessment from 2 August 2004 in consequence receiving rental income from an investment property. Self-assessment tax returns were submitted for tax years 2012/13 and 2013/14 by an agent. Mr Sharp had engaged an agent to prepare and file tax returns for these years because he had suffered a loss as a result of his tenant failing to to pay rent for 10 months. Although Mr Sharp's Adjusted Net Income for HICBC purposes was less than £50,000 for 2012/13, he declared his liability to HICBC in his return for 2013/14 and paid HICBC for that tax year.

The investment property was sold in January 2014, and Mr Sharp's agent called HMRC to notify them that Mr Sharp no longer qualified for self-assessment treatment. In consequence, the self-assessment tax return issued for 2014/15 was withdrawn, and Mr Sharp did not file self-assessment tax returns for any of the periods under appeal.

Mr Sharp was returned to self-assessment for 2018/19, and declared his liability to HICBC for that year in his self-assessment return.

We were shown a copy of the Child Benefit claim form used from April 2011 to September 2012 which it was accepted was the version that would have been used by Mrs Sharp to claim Child Benefit in November 2010. As this was utilised before the introduction of HICBC, no mention of HICBC appears on the form.

Mrs Sharp did not claim Child Benefit for their second child, who was born in December 2012. It is therefore unclear whether Mr or Mrs Sharp read the claim form used from October 2012 to June 2013. The front page of the October 2012 form was headed “Changes to Child Benefit payments” and stated:

The second page of the Child Benefit claim form contained the same information about the change to HICBC where the person claiming Child Benefit or their partner earned more than £50,000. However, before the section of the form containing the information about liability to HICBC it stated (in bold in the original):

Since 2011, Mr Sharp has been a senior team leader within an architectural practice, and his income is subject to substantial fluctuations because of the receipt of variable bonuses. For the tax years under appeal, his adjusted net income, the child benefit received by his spouse, and the HICBC liabilities were as follows:

The amount of Mr Sharp's adjusted net income for HICBC purposes is not disputed.

Mr Thomas's witness statement described the extensive Government campaign in 2012 and 2013 to raise awareness of HICBC and its consequences using advertisements, television adverts and letters/mail shots to customers who would be affected. Of course, at that time, Mr Sharp's income was below the HICBC threshold, and we consider that it is unlikely that they paid much attention to the campaign. Mr Thomas also described the ‘briefing’ that was issued by HMRC in November 2012 to over a million higher rate taxpayers. His witness statement was very similar to witness statements given by other HMRC officers in other HICBC appeals. As it was entirely generic and focused mainly on attempts by HMRC to publicise HICBC to higher rate taxpayers in 2012 and 2013, and Mr Sharp was not a higher rate taxpayer at that time, we did not find Mr Thomas's evidence about these campaigns of any material assistance in this case.

Possibly because Mr Sharp was not a higher-rate taxpayer at these times, neither he nor Mrs Sharp received any of the letters mentioned in Ms Thomas's evidence.

HMRC's records show that Mr Sharp was sent a "nudge" letter. The copy of the letter included in the bundle shows that the letter was dated 18 December 2019. Mr Sharp's unchallenged evidence is that he did not receive this letter. His unchallenged evidence was that he was experiencing problems with receiving post because the name of his road was confusingly similar to another road in the same town. We have omitted setting out the names of the roads in this decision for obvious reasons, but we find that the names are confusingly similar, and we believe Mr Sharp's evidence that this resulted in problems in receiving post, and we find that he did not receive the nudge letter.

On 12 January 2021, HMRC's computer system allocated Mr Sharp's case to Ms Woodham. Ms Woodham reviewed HMRC's records. These showed that although Mr Sharp had apparently been sent the "nudge" letter mentioned above, he had not been sent any of the other targeted compliance letters. Ms Woodham noted that the nudge letter had not been returned to HMRC as undeliverable, and that Mr Sharp had not responded to it. The records indicated that Mrs Sharp had claimed Child Benefit and that Mr Sharp's adjusted net income for 2014/15 to 2017/18 inclusive exceeded £50,000.

Ms Woodham issued an "opening letter" to Mr Sharp on 1 March 2021 in respect of HICBC for the tax years 2014/15 to 2019/20.

Mr Sharp telephoned HMRC on 18 March 2021. During the course of that call, the HMRC officer to whom Mr Sharp spoke completed a "behaviour audit trail". Based on the responses given by Mr Sharp to questions from the HMRC officer, the officer considered whether Mr Sharp's behaviour gave rise to a liability to penalties. He decided that as a nudge letter had been sent to Mr Sharp in December 2019, Mr Sharp did not have a reasonable excuse for his failure to notify HMRC of his liability to HICBC based on ignorance of the law, and that penalties were chargeable under Schedule 41.

On 30 April 2021 HMRC raised assessments for HICBC, and assessments for penalties were issued on 24 May 2021. Mr Sharp's behaviour was considered by HMRC to be "non-deliberate", and that any disclosure of his liability to HICBC was prompted, as he had made no attempt to notify HMRC of his liability prior to the March 2021 letter. Under paragraph 6 of Schedule 41, the minimum level of penalty for non-deliberate prompted disclosure (where the disclosure was made more than 12 months after the tax was due) is 20% of the potential lost revenue (in this case HICBC liability). A 20% penalty was assessed.

On 15 June 2021 Mr Sharp submitted an appeal to the HMRC against the assessments and penalties.

On 28 June 2021 the HMRC replied to the appeal letter, providing their view of the matter, upholding the decisions, and inviting Mr Sharp to request a statutory review or appeal to the Tribunal. The offer of a review was accepted. The review decision letter, upholding the assessments to HICBC and penalties, was issued on 17 December 2021. It is against that review decision that Mr Sharp now appeals.

HICBC was introduced with effect from 7 January 2013. HICBC is imposed on individuals who have an adjusted net income of more than £50,000 in a tax year where that individual or their partner or spouse is in receipt of Child Benefit. Where liability to HICBC arises in any tax year, the individual who is subject to the charge must notify HMRC of their liability to income tax pursuant to s7 TMA.

  Until the Finance Act 2022 ("FA 2022") came into force on 24 February 2022, section 29(1)(a) TMA 1970 provided, as far as relevant to this appeal, that:

Subsections (2) and (3) of section 29 TMA only apply where the taxpayer has made and delivered a return and do apply in this case as Mr Sharp did not make a self-assessment tax return in the years assessed.

The ability of HMRC to raise assessments under s29 TMA is subject to time limits set out in section 36(1A) as follows:

 Section 7 TMA sets out the requirement for persons who are chargeable to income tax to give notice to HMRC that they are liable to income tax within 6 months of the end of the relevant tax year.

In relation to assessments under section 29 TMA to collect HICBC a series of decisions relating to an appeal brought by Jason Wilkes (ultimately confirmed by the Court of Appeal in HMRC v Wilkes [2022] EWCA Civ 1612 ("Wilkes")) held that HICBC was “neither ‘income’ nor even charged on income” nor was it “income which ought to have been assessed to income tax” or an “amount which ought to have been assessed to income tax” (see Wilkes at [29]). Accordingly, HICBC could not be assessed under section 29(1)(a) TMA.

Section 29(1)(a) TMA 1970 was amended by s97 FA 2022 to read as follows:

The new wording has retrospective effect but that is subject to an exception for discovery assessments in respect of HICBC in relation to which notice of appeal had been given to HMRC on or before 30 June 2021 which met certain conditions. The relevant provisions in section 97 are as follows:

In summary, the retrospective changes made by s97 FA 2022 do not apply to an appeal that was made on or before 30 June 2021 which concerned the issue identified in the decisions in Wilkes and that issue was raised by a party or this Tribunal before that date or the appeal was subject to a temporary pause on or before 27 October 2021 because of that issue.

Following the hearing and during the course of the preparation of this decision, we considered whether the European Convention of Human Rights might have relevance to this appeal. Article 6 addresses the right to a fair trial, and the case law of the European Court of Human Rights is that tax penalties in certain circumstances would be treated as "criminal" for the purposes of the Convention.

Article 7(1) of the Convention (No punishment without law) provides as follows:

We asked the parties to file their written submissions on the potential relevance of Articles 6 and 7 of the Convention to this appeal, and in particular to the retrospective effect of the amendments made to s29. Mr Sharp was not represented, and (for reasons we entirely appreciate) did not consider that he was capable of making submissions on the application of the Convention. HMRC provided written submissions, and our decision takes account of these.

It is not disputed that the imposition of penalties in the circumstances of this appeal is "criminal" for the purposes of the Convention.

However, "ordinary" liabilities to tax are not criminal. We find that the liability to HICBC is such an ordinary tax liability. The amendments made to s29 address the ability of HMRC to make a "discovery assessment" in order to collect HICBC, and we agree that the provisions of Article 7 are not engaged in relation to the retrospective amendments to s29 to allow HMRC to collect ordinary tax liabilities such as HICBC.

However, can penalties be imposed on the basis of a retrospective amendment to s29? HMRC submit that Mr Sharp's obligation to notify his liability to HICBC under s7 TMA was not imposed retrospectively. At all relevant times the law required Mr Sharp to notify his liability to HICBC within 6 months of the end of the relevant tax year. His failure to do so, submit HMRC, gives rise to a penalty under Schedule 48, irrespective of whether HMRC had power to raise a discovery assessment for HICBC liability.

We agree with HMRC – there was no retrospective imposition of an obligation on Mr Sharp to notify his liability to HICBC under s7. Even if s29 had not been amended by FA 2022, Mr Sharp would still have had an obligation to notify HMRC of his HICBC liability under s7 TMA. And it is his failure to comply with his s7 obligation that gives rise to penalties in this case.

We find that Article 7 of the Convention is not engaged, and HMRC are not prevented from imposing penalties for breach of s7 TMA obligations.

Mr Sharp notified his appeal to HMRC on 15 June 2021 and directions issued on 30 March 2022 stayed this appeal behind Wilkes. This appeal was not, therefore, subject to "a temporary pause" within s97(6)(b). However, as the appeal was notified to HMRC before 30 June 2021, we need to consider whether the exception in s97(5) applies. For this to apply:

As Mr Sharp's grounds of appeal do not raise the Wilkes point, we find that Mr Sharp does not escape the retrospective effect of s97 FA 2022.

There is no dispute that Mr Sharp was within the scope of HICBC, and no submissions were made that the amount of Mr Sharp's liability to HICBC was calculated incorrectly. We find that Mr Sharp is liable to HICBC in the amounts assessed. We also find that the assessment to HICBC complied with the requirements of s29 TMA. As Mr Sharp had not notified HMRC of his liability to HICBC, we find that the 20-year time limit in s36(1A) applies, and the assessments were made in time.

Paragraph 1, Schedule 48 imposes a penalty in the circumstances listed in that paragraph. These include the failure to give notification under s7 TMA. For the reasons already given, we find that Mr Sharp did not notify HMRC of his liability to HICBC.

Paragraph 5 sets out the "degrees of culpability" – namely "deliberate and concealed" and "deliberate and not concealed". Paragraph 6 then sets out the standard penalty for the different degrees of culpability as follows:

Paragraph 13 provides for a reduction in the amount of the penalty where the taxpayer has provided disclosure to HMRC. HMRC have given Mr Sharp the benefit of the maximum reduction allowed under that provision and have reduced the penalty to 20% of HICBC liability.

Paragraph 20 of Schedule 41 provides that a penalty will not arise in circumstances where the taxpayer has a reasonable excuse for his default.

The Upper Tribunal considered the correct test for reasonable excuse in Perrin v HMRC [2018] UKUT 156 (TCC). At [75], the Upper Tribunal concluded that the FTT in that case had correctly stated that “to be a reasonable excuse, the excuse must not only be genuine, but also objectively reasonable when the circumstances and attributes of the actual taxpayer are taken into account.” The Upper Tribunal set out helpful guidance as to how the FTT should approach the issue of reasonable excuse at [81] of Perrin as follows:

The Upper Tribunal in Perrin then made the following further observation at [82]:

The reference to The Clean Car Co in [82] of Perrin is to the decision of the VAT Tribunal in The Clean Car Co Ltd v Custom and Excise Commissioners [1991] VATTR 234. In that case, HH Judge Medd QC held:

The situation in The Clean Car Co was that the taxpayer had wrongly claimed input tax on the basis of an architect’s certificate rather than a VAT invoice and became liable to a penalty as a result. The taxpayer appealed on the grounds that it had a reasonable excuse for the error, based upon a genuine belief that recovery of the input tax was permissible on the basis of the architect's certificate and the hospitalisation of the managing director’s daughter. The Upper Tribunal in Perrin, having quoted the passage from The Clean Car Co above at [51], summarised the VAT Tribunal’s decision at [52]:

Another situation where ignorance of the law may constitute a reasonable excuse was identified by Simon Brown J, as he then was, in Neal v Customs and Excise Commissioners [1988] STC 131. The Upper Tribunal referred to this decision in Perrin, but the case itself was not cited to us. Neil concerned a 19-year-old model with no experience of tax, business or law who was subject to a late registration VAT penalty. She contended that her “total basic ignorance” of the law amounted to a reasonable excuse. The Tribunal disagreed. On appeal, having referred to section 61 of Trustee Act 1925 and its predecessor legislation which provided a trustee with relief from a liability for a breach of trust if they had acted “honestly and reasonably and ought reasonably to be excused”, Simon Brown J said (at 134-5):

In considering whether Mr Sharp had a reasonable excuse for his failure to notify his liability to HICBC, we must consider whether he had an excuse that is objectively reasonable, taking into account his attributes and circumstances. We apply the approach set out in Perrin in considering whether Mr Sharp had a reasonable excuse.

The relevant facts are that Mr Sharp's income exceeded HICBC threshold in the 2014/15 tax year - as his adjusted net income for that year exceeded £50,000. Accordingly, he should have notified HMRC by no later 5 October 2015 that he was chargeable to HICBC and thus liable to make a self-assessment tax return for 2014/15. Mr Sharp's case is in essence that, having first claimed Child Benefit in November 2010 at a time when HICBC did not exist, and having never been sent information by HMRC about HICBC, it was reasonable for him in all the circumstances to fail to appreciate that he had become liable to HICBC and thus also liable to notify HMRC of his chargeability to income tax for the years under appeal.

Mr Sharp's evidence, which was not challenged, was that having claimed child benefit in November 2010, he did not receive any further communications from HMRC about HICBC. The first time that Mr Sharp became aware that he was liable to pay HICBC was in March 2021 when he received HMRC's opening letter. Mr Sharp's evidence that he did not receive the "nudge" letter was not challenged by HMRC, and we believe and find that he did not receive the nudge letter.

In essence, Mr Sharp seeks to rely on "ignorance of the law" as a reasonable excuse. As the Upper Tribunal states in [82] of Perrin, it is a matter of judgment 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.

We have not found this an easy case to decide. Mr Sharp was liable to HICBC for 2013/14, and declared his liability to HICBC on his self-assessment tax return for that year, and paid the charge. Mr Sharp's submission was that as this tax return had been completed by an agent on his behalf, he was not aware of the relevance of this declaration on his tax return. Mr Sharp was required to file a self-assessment tax return for 2018/19, and he declared and paid HICBC for that tax year.

We find it odd that Mrs Sharp made no claim for child benefit for their second child who was born in December 2012. As Mr Sharp was not cross-examined on his evidence, we do not know whether her decision not to claim child benefit was because of the notification on the claim form of HICBC? In the absence of any evidence on this point we make no findings in this respect. On the other hand, there was no mention in the claim form used at that time of the obligation to notify HMRC of liability to HICBC within six months of the end of that tax year or any instructions on how to make such a notification.

Mr Thomas's evidence described HMRC’s publicity campaigns in 2012 and 2013 to alert higher rate taxpayers to the existence of HICBC and the consequent need to register for self-assessment. The Generic Bundle also included certain materials from such campaigns. However, we were not shown any evidence of campaigns or materials from 2015 or later which were intended to alert existing claimants of their obligations in relation to HICBC in the event that their income rose above £50,000 after they had begun to claim Child Benefit. And we have found that Mr Sharp did not receive HMRC's "nudge" letter.

Was it was objectively reasonable, in the circumstances of the case, for Mr Sharp to have been unaware of the requirement to notify HMRC that he had become liable to HICBC, taking into account the fact that HICBC did not exist when Mrs Sharp claimed child benefit and the absence of any subsequent communications, either by way of a general campaign aimed at those in their position or direct correspondence, in the tax years under appeal?

We note that Mr Sharp declared a liability to HICBC in his 2013/14 and 2018/19 tax returns. Even if Mr Sharp did not appreciate that he had made such a declaration for 2013/15 because of the use of an agent to prepare that return, no such excuse could apply to 2018/19 when he prepared the return himself. So, even if Mr Sharp had a reasonable excuse because of his ignorance of the law, that excuse would have ceased by the time he filed his 2018/19 tax return on 4 April 2020 at the latest. And in any event, a prudent and reasonable taxpayer in Mr Sharp's position would have checked a draft of his 2013/14 return before it was filed, and so would have become aware of HICBC on reviewing the draft return.

We find that Mr Sharp ought reasonably to have become aware of his liability to HICBC by 31 January 2015 (the statutory filing date for his 2013/14 tax return) and certainly by 4 April 2020 (the date on which he actually filed his 2018/19 tax return). We therefore find that – by the time HMRC sent its opening letter to Mr Sharp in March 2021 - it was no longer objectively reasonable for Mr Sharp, in the circumstances of the case, to have been ignorant of his liability to HICBC for the tax years under appeal. To the extent that he may have had a reasonable excuse, that excuse would have ceased, and Mr Sharp would have had a duty to notify his liability to HICBC.

Accordingly, we find that Mr Sharp did not have a reasonable excuse for failing to notify his liability to HICBC under s7 TMA.

We have found that Mr Sharp is liable to HICBC in the amount assessed.

We have found that Mr Sharp is liable to penalties for his failure to notify HMRC of his liability to HICBC. We note that HMRC have given the maximum permitted reduction as regards the amount of penalties. We therefore find that Mr Sharp is liable to penalties for the amount assessed.

The appeal is dismissed.

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.