Roy Bevan v The Commissioners for HMRC

The Appellant (Mr Roy Bevan) is appealing against penalties (‘the Penalties’) that HMRC have issued, pursuant to Schedule 41 of the Finance Act 2008 (‘Schedule 41’), in respect of a failure to notify tax liability as a result of property letting income. The Penalties were charged as follows:

The Penalties were in the total sum of £1,803.11; of which £1,581.52 is unpaid.

With the consent of the parties, the form of the hearing was V (video). 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. The documents to which we were referred were: (i) the Document Bundle consisting of 225 pages (within which was the Letter of Appeal dated 19 June 2023; and (ii) the Statement of Reasons dated 14 September 2023.

The issues in this appeal are:

In this respect, HMRC bear the initial burden of demonstrating that the Penalties due. Once this is discharged, the burden of proof is upon the Appellant to demonstrate that there is a reasonable excuse.

Two further questions arise in determining this appeal. They are: if the Appellant is in default of an obligation imposed by statute: (a) what was the period of default? and (b) did the Appellant have a reasonable excuse throughout the period?

The above matters are to be considered in light of all the circumstances of the case.

The standard of proof is the civil standard; that of a balance of probabilities

In 1999, the Appellant purchased a property. The property was kept for personal use for over seven years, until it was let out from 16 February 2007.

On 28 July 2022, HMRC wrote to the Appellant asking for details of income from property. Records indicated that the Appellant owned property that may receive, or have previously received, income through letting

On 17 August 2022, the Appellant wrote to HMRC with details of property jointly owned with his wife. He added that the property had generated income, in the sum of £500, from 16 February 2007.

On 12 January 2023, HMRC issued a penalty determination under Schedule 41 for the tax years ending on 5 April 2007, 5 April 2008 and 5 April 2009.

On 16 January 2023, HMRC issued a notice of penalty assessment under Schedule 41, for the years 2010-11 to 2020-21 (inclusive).

On 5 February 2023, the Appellant appealed against the penalty determination and the Penalties.

On 24 February 2023, HMRC set out their view of the matter.

On 20 May 2023, HMRC issued the review conclusion letter, upholding the decision to issue the Penalties.

On 19 June 2023, the Appellant submitted his Notice of Appeal.

The relevant law, so far as is material to the issues in this appeal, is as follows:

Section 7 of the Taxes Management Act 1970 provides that:

Schedule 41 provides that:

Section 268 of the Income Tax (Trading and Other Income) Act 2005 provides that income tax is charged on the profits of property.

Mr Mignott made the following submissions, in summary, in support of HMRC’s decision as set out in the Statement of Reasons:

Mr Bevan made submissions, in reply, which can be summarised as follows:

At the conclusion of the appeal hearing, we reserved our decision and issued a Summary Decision thereafter. We now give our full findings of fact and reasons for the Decision.

The Appellant appeals against Penalties that have been charged for a failure to notify tax liability as a result of property letting income. It is trite law that no penalty can arise in any case where the taxpayer is not in default of an obligation imposed by statute. In Perrin v R & C Comrs [2018] BTC 513 (‘Perrin’) (Judges Herrington and Poole), at [69], the Upper Tribunal (‘UT’) explained the shifting burden of proof as follows:

The factual prerequisite is, therefore, that HMRC have the initial burden of proof and the standard of proof is the civil standard; that of a balance of probabilities.

Section 7(1) TMA (supra) places an obligation on every person who is chargeable to income tax for any year of assessment to notify HMRC of this fact. The time-limit for notifying chargeability income is six months from the end of the tax year in which the liability arises. The six-month time-limit ensures that a taxpayer can be sent a tax return in sufficient time to complete the tax return within the normal cycle for the year.

The Appellant accepts that he was in receipt of letting income. The tax due on the letting income has been paid and is not in issue. The Appellant does not dispute that for the years ending 5 April 2007 to 5 April 2021 (inclusive), he did not notify HMRC of his liability to tax in respect of the property income. Therefore, subject to considerations of ‘reasonable excuse’ and ‘special circumstances’ set out below, the penalties imposed are due and have been calculated correctly.

Paragraph 20 of Schedule 41 provides for the discharge of a penalty where a taxpayer has a reasonable excuse for their failure to notify. There is no statutory definition of ‘reasonable excuse’. Whether or not a person had a reasonable excuse is an objective test and is a matter to be considered in the light of all of the circumstances of the particular case: Rowland v R & C Comrs (2006) Sp C 548 (‘Rowland’), at [18]. The test we adopt in determining whether the Appellant has a reasonable excuse is that set out in The Clean Car Co. Ltd. v C&E Commissioners [1991] VATTR 234 (‘Clean Car’), in which Judge Medd QC said this:

Although Clean Car was a VAT case, it is generally accepted that the same principles apply to a claim of reasonable excuse in direct tax cases.

In Perrin, the UT set out a four-step process for the First-tier Tribunal (‘FtT’) to use when considering whether a person has a reasonable excuse.

The UT explained that the experience and knowledge of the particular taxpayer should be taken into account in considering whether a reasonable excuse has been established. The UT concluded that for an honestly held belief to constitute a reasonable excuse, it must also be objectively reasonable for that belief to be held. The word ‘reasonable’ imports the concept of objectivity, whilst the words ‘the taxpayer’ recognise that the objective test should be applied to the circumstances of the actual (rather than the hypothetical) taxpayer. The standard by which this falls to be judged is that of a prudent and reasonable taxpayer, exercising reasonable foresight and due diligence, in the position of the taxpayer in question and having proper regard for their responsibilities under the Taxes Acts: Collis v HMRC [2011] UKFTT 588 (TC) (‘Collis’).

The decision depends upon the particular circumstances in which the failure occurred. Where the person had a reasonable excuse for the failure but the excuse ceased, the person is to be treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased.

In Harrison v R & C Comrs [2022] BTC 525, the UT viewed the four-stage approach to be guidance, rather than a set of principles to be followed.

In Barrett v HMRC [2015] UKFTT 329 (TC), Judge Berner said this:

And:

We proceed by determining whether facts exist which, when judged objectively, amount to a reasonable excuse for the defaults which have occurred and, accordingly, give rise to a valid defence. In this regard, we have assessed whether the facts put forward and any belief held by the Appellant are sufficient to amount to a reasonable excuse.

In further amplification of his Grounds of Appeal, the Appellant submits, inter alia, that (i) he was unaware that income from a jointly owned, let property is deemed by HMRC to be split equally between spouses and there was nothing that prompted him to check what the correct position was; (ii) his income was taxed at source under PAYE and he has never been under self-assessment; (iii) he and his wife regarded all of the profit from the letting to exclusively be his wife’s income in order for her to utilise her personal allowance; (iv) he had no reason to seek advice on the taxation of the letting income; (v) he has paid the tax due for 2006-07 to 2008-09 via his self-assessment account without delay; (vi) he does not dispute the fact that he failed to notify.

Whilst we find that the Appellant was a credible witness whose evidence represents a truthful and accurate description of the circumstances leading up to the default, the evidence before us does not support a finding that a reasonable excuse has been established in the circumstances of this appeal.

In respect of the first of the Appellant’s submissions and the lack of awareness concerning how property income is viewed in respect of spouses who are joint owners of rental property, we find that the Appellant did not exercise due diligence by seeking the appropriate specialist advice (from a tax adviser or from HMRC) to establish the tax consequences of receiving letting income. In this respect, we have borne in mind the comments of the tribunal in Hesketh & Anor v HMRC [2018] TC 06266, where Judge Mosedale held that Parliament intended all of its laws to be complied with, and that ignorance of the law was not an excuse. The onus is upon an appellant to ensure that they properly understand their obligations under the law. In Spring Capital v HMRC [2015] UKFTT 8 (TC), at [48], Judge Mosedale said this:

Similarly, in Lau v HMRC [2018] UKFTT 230 (TC), Judge Anne Scott held, at [37] to [38], that:

In Gilbert v HMRC [2018] UKFTT 437 (TC), at [38] and [40], Judge Helier said this:

As held by Clauston J in Holland v German Property Administrator [1936] 3 All ER 6, at p 12:

It is therefore trite law that ignorance of the law cannot come to the defence of a violation of the law: see also Qualaphram Ltd v HMRC [2016] UKFTT 100 (TC), at [121]. We find that the Appellant proceeded on the misunderstanding, or assumption, that the letting income would not be split between himself and his wife, for tax purposes, given that they jointly owned the property.

In respect of the second of the Appellant’s submissions, the fact that the Appellant’s income was taxed at source is not determinative of the appeal. This is because a person’s income does not only include their salary. It also potentially includes other income, such as taxable social security benefits, bank or building society interest (in excess of the annual savings allowance), share dividends, or profits from any self-employment or property rental in excess of rental allowances. Various types of tax relief are taken into consideration in determining a person’s Adjusted Net Income (‘ANI’). Such reliefs include Gift Aid charitable contributions and personal pension contributions. HMRC would not, therefore, have any way of knowing about additional income that had not been notified to them.

In respect of the third of the Appellant’s submissions (that relating to the decision that the property income would be treated as exclusively being his wife’s income), we have found that the Appellant failed to seek the appropriate advice and proceeded on the basis of a misguided assumption. Moreover, the incontrovertible fact in this appeal is that the rental income was paid into the Appellant’s own account.

We find Mr Bevan to be a very honest and open witness who fully acknowledged that he did not appreciate all of the subtleties of the issues concerning property income that is split between join owners. His thinking was that it was his wife’s income as his wife did not have any other income. Clearly, a mistake was made. A mistake can be described as an erroneous belief, which is what happened in the appeal before us. Whilst the default may not have been intentional, this does not amount to a reasonable excuse in the circumstances of this appeal. In Garnmoss Ltd. T/A Parham Builders v HMRC [2012] UKFTT 315 (TC), the tribunal held (in the context of a VAT appeal and the question of reasonable excuse) that:

The rent was deposited into the Appellant’s account, as accepted by the Appellant.

In Katib v HMRC [2019] UKUT 189 (TCC) (‘Katib’), the UT (in the context of a late appeal) concluded that the lack of experience of the appellant and the hardship that is likely to be suffered was not sufficient to displace the responsibility on the appellant. The differences in fact in Katib and the appeal before us do not negate the principle established in relation to the duty placed upon taxpayers to adhere to statutory duties.

In respect of the fourth of the Appellant’s submissions and the conclusion that there was no need to seek advice, we find that it would have been prudent for the Appellant to seek advice in relation to letting income and the tax consequences of such income. The fact that the rental income remained fixed at £500 (or below the market rate) does not translate into the arrangement being inconsequential, in respect of any liability to tax.

We find that whilst the Appellant may have honestly believed that he was not required to notify his liability to tax, having purchased a property which was subsequently let, in our judgment it was not objectively reasonable for the Appellant to have failed to consider the ramifications. In those circumstances, the initial belief is not objectively reasonable. We are not told of any efforts by the Appellant to inform himself of the requirements of taxable income over and above the fact that his employment income was being taxed at source under PAYE.

In respect of the fifth of the Appellant’s submissions, and the fact that the tax due has been paid, we find that this does not translate into an absence of liability to a penalty. Liability to a penalty in the circumstances that exist in this appeal (where a failure to notify is accepted) is set within the legislation.

HMRC do not consider that the Appellant acted deliberately and the penalties were set at 20%. Reductions were further given to reflect the co-operation given by the Appellant. We find that the penalties have been correctly charged.

Paragraph 14 of Schedule 41 allows for the reduction of a penalty if HMRC think it right to do so because of special circumstances. The Tribunal may rely on special reduction, but only if HMRCʼs decision was ‘flawed’ when considered in the light of the principles applicable in proceedings for judicial review’. That is a high test. It is in the context of that specific jurisdiction that the question of proportionality must be considered. From time to time the FtT has made general observations about what might constitute special circumstances. There have been a number of cases on special circumstances, from which we derive the following principles:

The special circumstances must apply to the individual and not be general circumstances that apply to many taxpayers: see Collis, at [40] and Bluu Solutions Ltd v Commissioners for Her Majesty's Revenue & Customs [2015] UKFTT 95.

HMRC considered the Appellant’s case and found that no special circumstances apply. We have considered the Grounds of Appeal and the arguments presented by the Appellant therein. We hold that no special circumstances apply and HMRC’s decision is not flawed.

We have also considered the case of R & C Comrs v Hok Ltd [2012] UKUT 363 (TCC); [2013] STC 255. There, the Upper Tribunal similarly held that the FtT did not have power to discharge penalties on the ground that their imposition was unfair. In Rotberg v R & C Comrs [2014] UKFTT 657 (TC), it was accepted that the FtT’s jurisdiction went only to determining how much tax was lawfully due and not the question of whether HMRC should, by reason of some act or omission on their part, be prevented from collecting tax otherwise lawfully due. The Upper Tribunal held, at [109], that the FtT has no general supervisory jurisdiction. Applying Aspin v Estill [1987] STC 723, the Upper Tribunal found, at [116], that the jurisdiction of the FtT in cases of that nature was limited to considering the application of the tax provisions themselves.

These conclusions are not an indictment on the Appellant as an individual, but represent a balanced appraisal of the evidence. Having regard to the findings of fact, and in light of the relevant test, we are satisfied that the Appellant has not established a reasonable excuse. For all of the foregoing reasons, the appeal is dismissed.

We hold that:

In reaching these findings, the Tribunal has applied the test set out in Clean Car.

For the reasons set out above, 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.