Douglas Lakeland v The Commissioners for HMRC

This is a remade decision of the Tribunal following a reconsideration of our original decision dated 16 November 2023 conducted pursuant to Rule 38 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.

Under Rule 38, the Tribunal may set aside a decision and remake it if it is in the interests of justice to do so and one or more of a number of conditions are satisfied. One such condition is that there has been “some other procedural irregularity in the proceedings.”

As can be seen from this decision, one of the issues concerns the validity of discovery assessments given to the appellant. The law relating to the validity of these assessments is set out at [10 -13] below. The general rule is that an assessment arising from failure to notify can be made within 20 years of the end of the year of assessment to which it relates. But that is subject to the provisions of section 118(2) Taxes Management Act 1970 (“TMA”). That section provides that if there is a reasonable excuse for having failed to do something, a taxpayer shall not be deemed to have failed to do it unless after the expiry of that excuse he has failed to rectify the position without unreasonable delay.

In our original decision we decided that the appellant had a reasonable excuse for not notifying chargeability until he received a letter on 18 June 2021. We also found that he, through his wife, responded without unreasonable delay to that letter. And on that basis we decided that the appellant had a reasonable excuse and so allowed his appeal against the penalty.

However, HMRC had not brought to our attention the provisions of section 118(2) TMA, and the impact that our finding of reasonable excuse has on the validity of the discovery assessments.

In our view this is a procedural irregularity and allows us to set aside and remake our original decision. In our view, too, it is in the interests of justice to do so. This is that remade decision.

This appeal concerns the High Income Child Benefit Charge (“HICBC”). The appellant has been assessed (“the assessments”) to HICBC for the tax years 2012/2013 to 2017/2018 and 2019/2020, together with a penalty (“the penalty”) for failing to notify chargeability under section 7 TMA. The penalty has been assessed (“the penalty assessment”) pursuant to Schedule 41 Finance Act 2008 (“Schedule 41”). The assessments amount in total to £10,397. The penalty assessment is for £1,900.60.

There was no dispute between the parties as to the relevant legislation which we summarise below.

By section 681B Income Tax (Earnings and Pensions) Act 2003 (which was inserted by Finance Act 2012 with effect for child benefit payments made after 7 January 2013) a person is liable to a charge to income tax, the HICBC, for a tax year if:

His adjusted net income for the year is greater than £50,000.

His partner’s (“partner” is defined in section 681G) adjusted net income is less than his.

He or his partner are entitled to child benefit.

The assessments have been raised pursuant to HMRC’s discovery assessment powers as provided in s29 TMA. Accordingly, HMRC bear the burden of establishing that they have discovered that an amount of income which ought to have been assessed to income tax has not been so assessed. In the case of HMRC v Jason Wilkes [2020] UKUT 0150 (TCC) (“Wilkes”) the UT determined that HMRC had no power to make a discovery assessment in respect of the HICBC on the basis that the child benefit was not an amount of income which should have been assessed to income tax. The HICBC is a free-standing charge to tax.

Following the decision in Wilkes the provisions of section 97 Finance Act 2022 (“Section 97”) were enacted such that section 29 TMA was amended providing for a discovery assessment to be issued where “an amount of income tax … ought to have been assessed but has not been assessed” thereby providing for HICBC to be assessed by way of discovery assessment. Whilst the provision is generally only prospective s97 also provides that where a discovery assessment has been made to collect HICBC prior to tax year 2021/22 the provision is retrospective unless 1) pursuant to section 97(5) a notice of appeal was given to HMRC in respect of the assessment prior to 30 June 2021 and the Wilkes basis of challenge was asserted in that appeal on a date prior to 30 June 2021; or 2) pursuant to section 97(6) a notice of appeal was given to HMRC in respect of the assessment prior to 30 June 2021, the appeal was the subject of a temporary pause which occurred prior to 27 October 2021 and “it is reasonable to conclude that the temporary pausing of the appeal occurred (wholly or partly) on the basis that [the Wilkes issue] is, or might be, relevant to the determination of the appeal”. The appeals which are subject to the retrospective statutory amendment are defined as “protected appeals”. In this regard the protection offered is to HMRC and not the taxpayer.

By virtue of section 34(1) TMA, HMRC may raise a HICBC discovery assessment at any time within 4 years of the end of the tax year to which it relates. They also have the power, in consequence of section 36(1A) TMA, to raise the assessment within a period of 20 years of the year of assessment where the loss of tax arises because of a failure to notify liability to a charge to tax under section 7 TMA. That section provides that if a person is chargeable to income tax, they must notify HMRC of that fact within 6 months after the end of the tax year. But if their income consists of PAYE income and they have no chargeable gains they are not required to notify their chargeability to income tax unless they are liable to the HICBC. In consequence of the provisions of section 118(2) TMA, the 20-year assessment provisions do not apply where the taxpayer establishes a reasonable excuse for the failure to notify their liability under section 7. However, HMRC will always have a period of 4 years in which to make a discovery assessment for a protected assessment.

Section 7 TMA provides that if a person is chargeable to income tax he must notify HMRC of that fact within 6 months after the end of the tax year. But if his income consists of PAYE income and he has no chargeable gains he is not required to notify his chargeability to income tax unless he is liable to the HICBC.

Paragraph 1 Schedule 41 provides that a person who has not been sent a tax return is liable to a penalty if he fails to comply with section 7 TMA. Paragraph 6 Schedule 41 provides that in the case of a “domestic matter” (which this is) where the failure was neither deliberate or concealed (as HMRC accept), the penalty is 30% of the “potential lost revenue”; but paras 12 and 13 provide for a reduction in that percentage in the case of prompted disclosure where a taxpayer gives HMRC help in quantifying the unpaid tax, but subject to a minimum penalty rate of 10% if HMRC became aware of the failure less than 12 months after the tax “first becomes unpaid by reason of the failure” (paragraph 13(3)(a)) and 20% otherwise.

Paragraph 14 Schedule 41 provides that HMRC may reduce a penalty because of special circumstances (and by paragraph 19 the tribunal may do so where HMRC’s decision in this regard is flawed). Paragraph 20 provides that liability to a penalty does not arise if the taxpayer satisfies HMRC or the tribunal on an appeal that he had a reasonable excuse for the failure.

We were provided with a bundle of documents which was specific to this appeal as well as a substantial generic bundle which contained much information about the “advertising campaign” conducted by HMRC in relation to the HICBC. Oral evidence on behalf of HMRC was given by Officer Steven Thomas and Officer Robert Holmes. The appellant and his wife both gave oral evidence on his behalf. From this evidence we find as follows:

The appellant’s wife has claimed child benefit since December 2001. On making her claim, the claim form made no mention of the HICBC. At that time, and up to and including the tax year 2019/2020, the appellant was an employee and was not required to, nor did he, complete a self-assessment tax return. He received no notices to do so.

In 2012, prior to the introduction of the HICBC, HMRC issued several press releases which detailed the introduction of the charge and advised High Income Child Benefit parents to register for self-assessment. Similar press releases came out in 2014. In 2018 and 2019 HMRC, in response to misgivings raised in connection with reasonable excuse defences issued a further round of press releases dealing with that issue. There is considerable information about the charge on HMRC’s website.

HMRC’s records show that on 17 August 2013 the appellant was sent an SA 252 to his address at 9 Morefield Close Preston. SA252 is a generic letter sent to over a million higher earners in 2013 warning them of the changes to the child benefit regime, and the introduction of the HICBC which would apply if an individual or an individual’s spouse, claiming child benefit, earned more than £50,000 a year. And warning the recipient to check whether the charge applied and if so the requirement to register for self-assessment.

The appellant’s adjusted net income for the years under assessment, as evidenced by his PAYE records, exceeded £50,000 in each of those years.

On 6 January 2021, HMRC issued a “nudge” letter (“the nudge letter”). That letter was addressed to the appellant at his home address. The appellant’s evidence is that he did not receive that letter. The appellant’s spouse also said that he had not received that letter. It was not, however, returned to HMRC as undelivered.

The nudge letter explained that HMRC wanted to help the taxpayer to understand whether he needed to pay the HICBC. It explained the financial circumstances in which a taxpayer might be liable to pay the charge, what to do next, and that if a taxpayer is not sure if he or she needed to pay the charge, the taxpayer should phone HMRC for assistance.

On 17 June 2021 Officer Holmes selected the appellant for an in-depth review as to whether he had failed to notify HMRC of his liability to HICBC. He interrogated data provided by the Child Benefit Office. He checked HMRC’s PAYE records. He checked the self-assessment system. He calculated the appellant’s adjusted net income for the tax years in question and confirmed that it exceeded £50,000. He authorised the issue of an opening letter. We find as a fact that on that date Officer Holmes discovered that there was a loss of tax in tax years 2012/2013 to 2017/2018 and 2019/2020 caused by the appellant’s failure to notify liability to HICBC.

That opening letter was dated 18 June 2021, and addressed to the same address as the nudge letter. HMRC explained that their records showed that the appellant was liable to the HICBC and that they considered that he was liable to a charge of £10,397 for the tax years in question. It also explained why late payment penalties and interest might be due.

In a letter to HMRC dated 10 July 2021, the appellant’s spouse explained that the appellant does not and has not claimed child benefit which had been claimed by her and requested that future correspondence be sent to her.

On 17 May 2022 HMRC sent two letters to the appellant. The first (which is not in the bundle) explained that if the appellant wished HMRC to correspond with his spouse, then he should authorise her as his agent, and also sent a questionnaire for him to complete.

This questionnaire was completed by the appellant on 1 June 2022, and sent back to HMRC by the appellant’s wife along with a covering letter of even date therewith. She explained that her husband was unable to answer HMRC’s questions as he had never claimed child benefit. It was her understanding that she was entitled to do so. She referred to a letter having been received 11 months ago and sought an explanation as to why she had not been informed of the change in rules. Once again, she asked HMRC to correspond with her rather than with the appellant.

On 6 July 2022 HMRC issued the assessments. On 25 July 2022, the appellant appealed against these to HMRC.

On 12 August 2022, HMRC issued the penalty assessment, against which the appellant appealed on 29 August 2022. HMRC issued their view of the matter letter in respect of the appeals against both the assessments and the penalty assessment on 6 September 2022. They explain why they considered that the assessments and the penalty assessment was justified. They offered the appellant a statutory review.

On 5 July 2022 the appellant lodged an in-time appeal with the tribunal.

The appellant’s oral evidence was that he had not received the SA 252 in 2013, nor had he received the nudge letter. Furthermore, he was not aware that his wife was claiming child benefit until 18 June 2021 when he received HMRC’s letter of that date which he discussed with her. His evidence, too, was that he and his wife have separate bank accounts, and that the child benefit was paid into his wife’s bank account. They do not have a joint bank account.

Mrs Lakeland’s oral evidence confirmed that as far as she was aware, her husband had received neither the SA 252, nor the nudge letter. Her husband relied on her to deal with this sort of regulatory issue, and it was her view that had her husband received these letters, he would have discussed them with her in the same way that he discussed the letter of 18 June 2021 with her. She confirmed that it was at that stage, for the first time, that she disclosed to her husband that she was receiving child benefit. She first claimed benefit in 2001, before she married the appellant in or around 2012 when they set up home together. She had received correspondence from HMRC regarding the termination of child benefit when her younger daughter ceased full-time education, and also in connection with a tax rebate. Other than that, she had received no notification that she was not entitled to claim child benefit or that by doing so, she or her husband might become liable to the HICBC. The matrimonial home is owned by the appellant, although she is jointly liable for Council Tax.

There are two matters which we have to decide. The first is whether the HICBC is properly chargeable. The second is whether, if it is so chargeable, the appellant is liable to the penalty. Different considerations apply to these issues.

The appellant and his wife both submitted that the charge operated unfairly and in a capricious manner. A couple, one of whom was claiming child benefit, who each earned £49,000, would not be subject to the charge, whereas a couple, one of whom earned £50,001, would be subject to it. This is not fair and equitable legislation.

Regrettably for the appellant, we have no jurisdiction to consider the fairness, or otherwise, of primary legislation. Our role is to interpret the legislation as applied to the facts of this case. Nor, too, does HMRC have any jurisdiction to consider the fairness or otherwise of primary legislation. Their role is to collect tax in accordance with the law as enacted.

We have found that Officer Holmes made a discovery of an insufficiency of tax on 17 June 2021 and issued the assessments on 6 July 2022 We also find, and the appellant does not dispute this, that his adjusted net income for the tax years in question was greater than £50,000. Since the appeal to HMRC was not made before 30 June 2021 it is subject to the retrospective legislation in Section 97. It is a protected appeal.

We accept that the general time period for raising an assessment which is attributable to a failure by a person to comply with an obligation to notify is 20 years after the end of the year of assessment to which it relates. But, as set out at [12] above, in consequence of the provisions of section 118 (2) TMA, the 20 year assessment provisions do not apply where the taxpayer establishes a reasonable excuse for a failure to notify. But this only applies where the taxpayer has then acted without unreasonable delay to correct that failure.

We therefore turn to whether the appellant has a reasonable excuse in the context of the penalty, and if we find that he has, we will proceed to consider the implications for the assessments.

If the appellant can establish that he had a reasonable excuse for not notifying his liability to the HICBC, then, as well as the implications for the assessments, he can be excused from his liability to the penalty.

The onus is on the appellant to show that, on the balance of probabilities, the facts show that he had a reasonable excuse.

The legal principles which we must consider when an appellant submits that he has a reasonable excuse are set out in the the Upper Tribunal decision in Christine Perrin v HMRC [2018] UKUT 156 (“Perrin”). The relevant extract is set out below:

The test we adopt in determining whether the appellant has an objectively reasonable excuse is that set out in The Clean Car Co Ltd v C&E Commissioners [1991] VATTR 234, in which Judge Medd QC said:

That this is the correct approach has also recently been confirmed by the Court of Appeal in William Archer v HMRC [2023] EWCA Civ 626 (“Archer”).

It is clear from the foregoing extract from Perrin that ignorance of the law can, in certain circumstances, comprise a reasonable excuse It is a matter of judgment for us as to whether it is objectively reasonable for the appellant in the circumstances of this case to have been ignorant of the requirement to complete a self-assessment tax return in light of his liability to the HICBC.

In her decision in Naila Hussain [2023] UKFTT 00545 Judge Brown reviewed a number of HICBC cases and said this:

We confirm that the foregoing is an accurate reflection of Judge Popplewell’s view of when a taxpayer might have a reasonable excuse in HICBC penalty cases.

In this case it is HMRC’s position that the appellant was on notice that he might be liable to HICBC as long ago as 2013 when he was sent to the SA 252, and more recently when he was sent the nudge letter in January 2021. So he has never been ignorant of the law by dint of receiving the SA 252, but if he did not receive it, he has not been ignorant of the law since he received the nudge letter in January 2021. Any reasonable excuse he had, therefore, ceased a reasonable time after that date and certainly had ceased by 1 June 2022 as he had not acted promptly to engage with HMRC to resolve the HICBC issues.

Although not stated as succinctly as this, it is the appellant’s case that he was not on notice about the HICBC until he received the letter of 18 June 2021. It was only on that date that he realised that his wife was claiming child benefit, and his wife’s letter to HMRC 10 July 2021 was a clear engagement to deal with the issue. Similarly, his wife’s letter of 1 June 2022 returning the completed questionnaire, was a clear and timely engagement with HMRC in response to HMRC’s letter of 17 May 2022.

We agree with HMRC and that if the appellant received either the SA 252 or the nudge letter, then any ignorance of the law defence would have expired by the time of the subsequent engagement with HMRC in July 2021 and June 2022.

So the issue is whether we believe the appellant and his wife when they say that neither the SA 252 or the nudge letter had been received by them.

Under section 7 of the Interpretation Act 1978 (“section 7”), which applies to service of documents authorised or required by legislation, “service is deemed to be effected by properly addressing, pre-paying and posting a letter containing the document and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post”.

Clearly neither the SA 252 nor the nudge letter is a document authorised or required by legislation. But we intend to adopt the same approach towards service set out above. It seems to us common sense. If HMRC are alleging that either or both were sent to the appellant and thus he was on notice that someone earning more than £50,000 was liable to the HICBC if they or their partner was claiming child benefit, they need to show that they had sent one or both to him. If the appellant then alleges reasonable excuse on the basis that he did not receive it, he needs to establish non-receipt.

We have seen a draft SA 252, and an extract from HMRC’s computer which suggests it was sent to the appellant at his correct address on 17 August 2013. The appellant submits that there is no evidence of actual posting, but we infer on the basis of the principle of regularity, that it was so posted in accordance with section 7. We find the same as regards the nudge letter.

So we now turn to receipt, and whether the appellant has established that he received neither the SA 252 nor the nudge letter. We are satisfied on the balance of probabilities that he received neither. We benefited from seeing the appellant and his wife giving evidence. The manner in which they gave evidence was entirely consistent with Mrs Lakeland’s observation that if they had received those letters earlier they would have acted on them and that they did not want to go through life being in trouble. They were clearly honest and honourable people who were very upset that they had fallen foul of the tax authorities and were very keen to rectify things.

And this was borne out by the fact that once they were on notice that something was wrong, by dint of the letter of 18 June 2021, they discussed the position and it was at that stage that the appellant realised for the first time that his wife was claiming child benefit. It was entirely believable that this was the case, given that she started claiming child benefit back in 2001, and that since her relationship with the appellant, they had maintained separate bank accounts and kept their financial affairs private. This was a legacy from Mrs Lakeland’s previous relationship. The child benefit had been paid into her personal bank account which she kept private from the appellant. There is absolutely no moral or legal obligation for her to tell him that she was claiming benefit until he was put on actual notice of his liability to the charge on 18 June 2021.

On 10 July 2021 the appellant, through his spouse, engaged with HMRC. His reasonable excuse defence based on ignorance of the law was still running at that stage. There was then a hiatus until May 2022, which was a result of the Wilkes court proceedings. In our view this stopped time running regarding ongoing engagement. This recommenced with the letter of 17 May 2022, to which the appellant, again through his wife, responded on 1 June 2022. Again, this was timely engagement, and his reasonable excuse defence had not run out by the time that letter was written.

This demonstrates to us that had the appellant received the nudge letter, he would (as asserted by his wife in her oral submissions) have discussed it with her in the same way that he discussed with her the letter of 18 June 2021. And we have no doubt that in those circumstances the appellant would have engaged with HMRC shortly after receiving the nudge letter as his wife would have told him then that she was in receipt of child benefit.

HMRC submitted that there is evidence that 99.7% of post sent by HMRC is received by the recipient. That may well be the case, but in the case of this appellant we have the benefit of his evidence, and that of his wife. And we must find the facts in light of that evidence.

We find that the appellant did not receive either SA 252 or the nudge letter, and the first time that he learnt that there was an HICBC issue was on receipt of the letter of 18 June 2021. It was on or around that date too, when he discussed the contents of that letter with his wife, that he first learnt that she was in receipt of child benefit. He then acted promptly to resolve his tax liability.

He therefore has a reasonable excuse for failing to pay the HICBC based on ignorance of the law.

We have also considered HMRC’s submission that in the context of HICBC, and the extensive advertising campaign, an objectively reasonable taxpayer would ask their partner one or both of the following questions, or an alternative to the same effect: are you claiming child benefit, and do you have an adjusted net income of over £50,000. And that if the partner exercises their right to refuse to give this information to their partner, HMRC have a mechanism to allow the requesting partner to obtain the relevant information. And in this case, that is what the appellant should have done irrespective of whether he had received the SA 252 or the nudge letter.

We are very suspicious of this proposition. Our view is that financial confidentiality between partners is both understandable and wholly proper. We accept that if one partner actually knows of the HICBC (as might have been the case with this appellant had he received SA 252 or the nudge letter) it would be reasonable to check with his or her partner whether he or she was in receipt of child benefit. But in the absence of actual knowledge of the workings of the HICBC, (and simply because the information is “out there”) we can see no justifiable or principled reason why one partner should cross examine the other regarding any claim for child benefit or his or her adjusted net income, and that by failing to do so, they cease to be a reasonably objective taxpayer.

We take the same view towards HMRC’s submission on this point as Judge Popplewell does towards a reasonable excuse defence generally as set out at [23] above. Where a taxpayer is on actual notice that the HICBC applies if one partner is claiming child benefit and that his or her partner has an adjusted net income of more than £50,000 in a tax year (in other words the information set out inter alia in an SA 252, a nudge letter, a post 2013 claim form or a post 2013 SA return and the notes thereto) then it is very likely to be objectively unreasonable for him or her not to seek information from their partner regarding whether they are claiming benefit and/or whether their adjusted net income is more than £50,000. But in the absence of any such actual knowledge, a taxpayer does not act objectively unreasonably if he or she does not seek that information from his or her partner.

We now return to the assessments, and consider the impact on these of our finding that the appellant had a reasonable excuse for failing to notify. We have found that he had that reasonable excuse until the date of the opening letter on 18 June 2021. Following that, the appellant responded to HMRC on 10 July 2021. There was then an hiatus until HMRC sent their letters to the appellant on 17 May 2022, to which the appellant responded, completing the questionnaire, on 1 June 2022.

The provisions of section 118(2) TMA require that the taxpayer must act without unreasonable delay. What represents unreasonable delay has been considered in Archer with the Court of Appeal confirming that the taxpayer is entitled to take a short period to evaluate the position before acting (in particular see paragraphs 87-91).

In this case the appellant took about three weeks to respond to the 10 July 2021 letter and two weeks to respond to the letter of 17 May 2022. HMRC accept that the reason there was a delay, on their part, between July 2021 and May 2022 was because of the ongoing Wilkes litigation.

It is our view that the appellant acted without undue delay and so that he had a reasonable excuse for failing to notify up to and including 10 July 2021.

The consequence of this, in terms of the assessments, is that the ordinary time limit of four years applies. An assessment therefore is only valid if it is made not more than four years after the end of the year of assessment to which it relates. The assessments were made on 6 July 2022, so if they relate to any year of assessment which ended before 6 July 2018, they are not valid.

The only assessment which was made within that period is the assessment for 2019/2020. All of the other assessments were made more than four years after the end of the years of assessment to which they relate.

Accordingly, the only liability for the HICBC is for the tax year 2019/2020 in the amount of £1,788.

We dismiss the appeal against the assessment to HICBC for the tax year 2019/2020 for £1,788, but we allow his appeal against the assessments for the earlier years and the appeal against the penalty of £1,900.60.

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.