Giuliani
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 June 2021 |
| Neutral Citation | [2021] UKFTT 239 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 239 (TC)
Judge Rupert Jones, Ann Christian
Mr Thomas Chacko, Counsel, appeared for the appellant
Mr Lloyd Ellis and Ms Christine Cowan, HMRC litigators, appeared for the respondents
Income tax – PAYE – Application of the Income Tax (PAYE) Regulations 2003 – Delivery of P45/P46 to new employer – Basic rate tax code incorrectly applied by employer on a change of employment – Whether taxpayer is entitled to credit for tax treated as deducted – PAYE deductions that the employer should have made but did not – Whether TMA 1970, s. 29 discovery assessments validly raised – Carelessness in failing to declare income from employment on tax returns – Whether FTT has jurisdiction to consider PAYE deductions on appeal against a discovery assessment – Whether s. 8(5) TMA and reg. 188, PAYE Regulations apply to s. 29 TMA – Appeal dismissed.
The FTT found that the taxpayer had submitted a P45 (or in the alternative, a P46) to his employer who had then applied an incorrect tax code resulting in an underpayment of tax. However, because taxpayer carelessly failed to report employment income on his self assessment tax returns, discovery assessments raised by HMRC were valid. The FTT did not have jurisdiction to give credit in respect of tax which should have been deducted by his employer but which had not been so deducted.
Mr Giuliani commenced work for a new employer (a bank) that applied basic rate tax to his income as it had no record of a P45 or P46 being received. As Mr Giuliani was a highly paid individual who would otherwise have paid income tax at the additional rate, this resulted in a significant underpayment of income tax spanning two tax years.
HMRC raised discovery assessments under s. 29, Taxes Management Act 1970 (TMA) using the extended time limit of six years (under s. 36, TMA) on the basis that Mr Giuliani had been careless in failing to include any of his employment income in the self assessment tax returns submitted for the years in question. The discovery assessments gave no credit for PAYE income tax which ought to have been deducted at source by his employer (assuming he had supplied a P45/P46), but which had not been properly deducted.
There were therefore three issues to be decided by the Tribunal:
- Had Mr Giuliani supplied form P45 or P46 to his employer?
- Had Mr Giuliani been careless in failing to include employment income on his self assessment tax returns?
- Did the FTT have jurisdiction to award credit in respect of tax to be treated as deducted under s. 8(5) TMA or reg. 188 of the Income Tax (PAYE) Regulations 2001?
The first two points in issue are of relatively little importance (other than to the appellant) but the third is of significant wider interest.
In respect of the first issue, on balance of probabilities, the FTT found that Mr Giuliani had submitted a P45 (or a P46) to his employer, but that the employer seemingly failed to locate or correctly process it. In consequence the employer operated an inappropriate tax code resulting in a large under-deduction of PAYE over the period in question, amounting to approximately £130,000, though the precise amount is not material to the appeal.
On the second point, the FTT found that Mr Giuliani was careless in failing to report his employment income on self assessment tax returns. It was accepted that he had not acted deliberately or sought to gain a tax advantage, but by his own admission had not fully read the notes when making his submissions. The FTT cited Atherton v R & C Commrs [2019] BTC 507, that “the reasonable care which should be taken by a taxpayer is assessed by reference to a prudent and reasonable taxpayer in the position of the taxpayer in question” and Mr Giuliani fell short of this standard.
Section 8, TMA refers explicitly to self assessments and partnership returns but is not expressed to apply to discovery assessments and so this point could be quickly dismissed. In respect of the point before the FTT, reg. 188 of the Income Tax (PAYE) regulations, so far as is relevant to the matter, provides that:
188(1) In this regulation, “assessment” means an assessment other than one under s. 9 of TMA (self-assessment).
188(2) The tax payable by the employee is–
A − (B − C) where
- is the tax payable under the assessment;
- is the total net tax deducted in relation to the employee's relevant payments during the tax year for which the assessment is made, adjusted as required by paragraph (3); and
- is so much, if any, of B as is subsequently repaid.
188(3) For the purpose of determining the tax payable by the employee, and subject to paragraphs (4) and (5)–
- add to B any tax which–the employer was liable to deduct from relevant payments but failed to do so …
Mr Giuliani contended that the adjustment required by reg. 188(3) in respect of the tax which his employer had failed to deduct, should be reflected in the assessments so as to effectively reduce his tax to zero. It would then be for HMRC to pursue the employer for the underpaid amount.
HMRC argued that adjustments under reg. 188 do not apply to assessments made under s. 29, TMA and in any event cannot be considered in this appeal as it falls beyond the jurisdiction of the Tribunal, being a matter of collection rather than assessment. The significance of this distinction arises because it is a general principle that an assessment of the tax properly due is within the jurisdiction of the Tribunals, but that matters relating to the collection of that tax are not and would instead be a matter for the County Court.
In his submissions, Mr Giuliani cited Lancashire, Lee & Johnson [2020] TC 07884 in which the FTT found that it did have jurisdiction to award a credit in respect of tax not deducted by the employer under reg. 185 (an equivalent provision applying in self assessment cases, as opposed to reg. 188 which applies in other assessment cases). He also put forward a complex argument drawing parallels with the availability (or otherwise) of a credit and the interaction with reg. 72 where liability is transferred to the employee, citing R & C Commrs v West [2018] BTC 509 and R & C Commrs v Ali [2011] BTC 722. However, the FTT rejected these arguments as being not directly on point or of binding authority.
The decision in Lancashire which was directly relevant also derived from the FTT and consequently its precedent was not binding, being effectively overridden by the decision of the UT in Hoey v R & C Commrs [2021] BTC 519.
In Hoey, the UT looked at the issue of credit for tax not deducted by the employer under both reg. 185 and 188. In respect of reg. 185 it considered the concept of the “amount payable” as defined within s. 8 and 9 of the Taxes Management Act 1970 (TMA) and distinguished it from that of the “amount payable by the taxpayer” as set out in s. 59B TMA. This draws attention to the difference between the amount of tax which is to be collected (that is, the total amount of tax contained in a self assessment tax return) and the person from whom that tax should be collected. The operation of the credit under reg. 185 is explicitly stated in the regulation itself to be in respect of the s. 59B amount and is thus related to the collection, rather than the assessment of tax. Accordingly, the UT found that the question of whether HMRC was right or even entitled to apply discretion lay outside of its jurisdiction.
More pertinent to the current case, Hoey also considered the wording of reg. 188 and noted that it refers to:
two different notions of tax payable – that referred to under A: “tax payable under the assessment” and the end result of A-(B-C) which is the tax payable by the employee. The PAYE credit in issue here is added to “B” – showing it is something which is not considered to be part of the tax payable under the assessment.
Thus, reg. 188 makes a clear distinction between tax due under the discovery assessment (that is the “loss of tax” to HMRC) and the amount which is payable by the employee. The credit under reg. 188, if it is available, is not given in the discovery assessment, but may be given at the collection stage, though this would then be a matter for the County Court.
The FTT found that it was bound by the decision in Hoey and the matter of credit for tax not deducted was beyond its jurisdiction. The appeal was therefore dismissed.
The issue of a credit for tax not properly deducted by the employer under either reg. 185 or 188 can appear on first reading of the regulations to be relatively straightforward. However, the regulations cannot be read in isolation and are inextricably linked to the Taxes Management Act 1970, which should be read sequentially. The UT in Hoey (which proved so persuasive in this case) pointed out that the structure of TMA works in sequence through the parts relating to assessment, through to what HMRC can do with the assessment, and on to the FTT powers. Payment of tax follows in a separate part (immediately before that which deals with collection and recovery of tax) and in s. 59B takes the assessment as its starting point. On that basis, credit under regulations 185 or 188 must therefore come after the assessment is made, not as part of that assessment.
[1] This is a corrected decision pursuant to rule 37 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 amending the earlier decision released on 7 June 2021. We made an order pursuant to rule 14 of the Rules not to identify the Bank which is not a party to this decision for the reasons set out at paragraph 9 below. We decided it was neither just nor fair to identify a non-party in such circumstances and therefore not in accordance with the overriding objective to do so. The corrections to this decision are to remove a couple of references from the original decision which were included by...
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