Johnstone
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 November 2018 |
| Neutral Citation | [2018] UKFTT 689 (TC) |
| Date | 23 November 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0689 (TC)
Judge Heidi Poon, Noel Barrett
Mr Neil Johnstone in person, appeared for the appellant
Ms Claire Robertson, HMRC officer, appeared for the respondents
Income tax – High income child benefit charge (HICBC) – Discovery assessment under TMA 1970, s. 29 – Penalty for failure to notify liability – FA 2008, Sch. 41 – Case A and case B definition for reduction for disclosure – Whether reasonable excuse for being unaware of the change in legislation – Whether special reductions – The matter of interest charge – Appeal allowed in part.
The First-tier Tribunal (FTT) partly allowed a taxpayer's appeal against penalties for his failure to notify his liability to the high income child benefit charge (HICBC).
HMRC issued discovery assessments on the appellant (Mr Johnstone) under TMA 1970, s. 29 for 2012–13, 2013–14 and 2014–15 in respect of his liability to the HICBC. HMRC also issued penalties under FA 2008, Sch. 41 of 20% of the potential lost revenue for Mr Johnstone's failure to notify liability to the HICBC as he was required to do.
Initially Mr Johnstone appealed against the assessments, but at the hearing he confirmed that he no longer contended against the income tax assessments. This decision was therefore only in relation to the failure to notify penalties.
The FTT found that the failure to notify penalties had been correctly calculated at 20% in accordance with Sch. 41, para. 13. Mr Johnstone's failure was non-deliberate and he made a prompted disclosure under case B, allowing the standard penalty percentage of 30% to be reduced to a minimum of 20%.
On the issue of whether Mr Johnstone had a reasonable excuse for his failure, the FTT found that Mr Johnstone's main argument was that:
- neither he nor his wife were aware of the HICBC;
- he had no reason to become aware of the change in legislation;
- it was the responsibility of HMRC to make him aware that the change in legislation may apply to him;
- HMRC's failure to make him aware of the change in legislation was tantamount to abdicating their responsibility.
The FTT found that it was simply not arguable that it was HMRC's responsibility to notify all affected taxpayers of the HICBC before a failure to notify penalty could be imposed. There was no statutory duty to notify all taxpayers potentially affected by the HICBC.
The FTT also found that Mr Johnstone's ignorance of the change in legislation did not amount to a reasonable excuse under Sch. 42, para. 20. While there was not a formulaic rejection that ignorance of the law could, never ever, give rise to a reasonable excuse, it depended on at least two factors: (1) the particular legislation in question, and (2) the circumstances of the taxpayer.
On factor one, the FTT found that in this case the HICBC legislation was not difficult to understand. The charge applied where the taxable income of the higher earner in the household exceeded the annual threshold of £50,000. It was a change that was widely covered by the media after the relevant Budget announcement, and a change that HMRC had produced leaflets and made public on their official website.
On factor two, the FTT found that a prudent and reasonable taxpayer would have acquainted himself with the fundamental change to the basis of child benefit entitlement when the announcement in the Budget was made. Given that Mr Johnstone:
- was an IT specialist adept at using the internet as a source for information;
- was aware of his wife being in receipt of child benefit;
- had income well above the HICBC threshold;
- remained unaware of the change in legislation for several years; and
- was in a professional position that required him to take initiative and be pro-active,
the FTT found that his ignorance of his liability under the HICBC did not give rise to a reasonable excuse under Sch. 41.
The FTT did however reduce the penalties by 50% under Sch. 41, para. 14 because of special circumstances. The FTT found that because there was some evidence that HMRC could have sent letters to Mr Johnstone to make him aware of the introduction of the HICBC which may have been sent to the wrong address this amounted to something “exceptional, abnormal or unusual”, and “something out of the ordinary run of events”.
The FTT accordingly allowed the appeal in part and reduced the penalties by 50%.
Since this case was heard, but prior to the decision being released, HMRC announced a review of cases where a failure to notify penalty has been issued to taxpayers who did not register for the HICBC. The reviews are to look at whether taxpayers had a reasonable excuse for failing to notify.
The reviews are expected to repay penalties where:
- families made a claim for child benefit before the HICBC was introduced or one partner's income subsequently increased to over £50,000 in or after 2013–14; and
- the higher earner in a household was not the same person claiming child benefit on behalf of the household.
The review will not include anyone who received communications from HMRC about the HICBC or claimed Child Benefit after the charge was introduced in 2012–13.
[1] This is an appeal by Mr Neil Johnstone (“the appellant”) against assessments to income tax raised under section 29 of the Taxes Management Act 1970 (“TMA”), and penalties charged under Schedule 41 to the Finance Act 2008 (“Sch 41”) for failure to notify the respondents (“HMRC”) of his liability to Higher Income Child Benefit Charge (“HICBC”).
[2] The s 29 assessments and Sch 41 penalties for the relevant years are as follows:
- 2012–13: tax charge of £438; penalty £87.60;
- 2013–14: tax charge of £1,337; penalty £267.40;
- 2014–15: tax charge of £1,066; penalty £213.20.
[3] The issues for the Tribunal to determine in respect of this appeal are:
- Whether the discovery assessments under s 29 TMA are valid and made in accordance with the legislation;
- Whether the HICBC for each of the relevant years is correctly quantified;
- Whether the Sch 41 penalties as imposed are due.
[4] At the hearing, Mr Johnstone confirmed that he no longer contends against the income tax assessments. The first two issues in this appeal therefore fall away.
[5] This decision is in relation to the Sch 41 penalties only. The Tribunal indicated its intention to issue a summary decision to dispose of these proceedings. Ms Robertson, however, requested that a full decision so that the respondents can have a judicial ruling on the application of the Sch 41 penalty regime in relation to a failure to notify a liability for HICBC.
[6] The statutory provisions referred to in this decision are set out in the Appendix under the following headings:
- The High Income Child Benefit Charge arises under s 681B of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). The HICBC came into effect from 7 January 2013, under para 7 of Sch 1 to Finance Act 2012.
- The meaning of Adjusted net income or the purposes of HICBC is defined by reference to sub-s58(1) of the Income Tax Act 2007 (ITA 2007).
- The obligation to notify a liability to HICBC is provided under s 7 of the Taxes Management Act 1970 (TMA 1970).
- The provision for interest charge on any outstanding tax liability after the due date of payment is under s 86 of TMA.
- The penalty regime for failure to notify a relevant obligation, including one as defined by s 7 of TMA 1970 is provided under Schedule 41 to the Finance Act 2008 (Sch 41).
[7] Mr Johnstone works in the Information Technology industry, and his gross employment income, and taxable income after the applicable annual personal allowance (“PA”), for the relevant years are as follows:
- For 2012–13 – gross at £65,226, taxable at £57,121, (PA £8,105).
- For 2013–14 – gross £72,064, taxable £62,000 (PA £9,440).
- For 2014–15 – gross £70,938.11, taxable £60,938.11 (PA £10,000).
[8] On 17 February 2017, HMRC issued a letter, addressed to a Mr N R Johnstone at an address in Daventry, Northants, to advise that recent changes to Child Benefit for people on higher income may apply to him for the tax years ended 5 April 2013, 2014, and 2015.
[9] The body of the letter of 17 February 2017 is addressed to a Mr Colbourne, with an NI number beginning with “JB”, while the case reference is “CFSS-2159228”.
[10] Apart from the case reference, which remains the same in all subsequent correspondence between HMRC and Mr Johnstone, the “JB” I number would appear to belong to Mr Colbourne, as Mr Johnstone's NI number is altogether different.
[11] The February 2017 letter includes a calculation of the amounts outstanding in consequence of the HICBC, based on the benefit received for one child. These amounts of HICBC for the relevant years are listed as follows:
- For 2012–13, estimated income (including employer taxable benefits) at £65,222; HICBC at £263; penalty at £100.74.
- For 2013–14, estimated income at £72,064.69; HICBC at £1,055; penalty at £307.51.
- For 2014–15, estimated income at £70,938.11; HICBC at £1,066; penalty at £245.18.
[12] On 27 March 2017, HMRC wrote to Mr Johnstone again, this time to a Glasgow address held on the system to confirm that s 29 assessments would be issued, together with a penalty under Sch 41. The amounts of HICBC and penalty were stated at:
- 2012–13, HICBC increased to £438; but penalty unchanged at £100.74.
- 2013–14, HICBC increased to £1,337; but penalty unchanged at £307.51.
- 2014–15, HICBC unchanged at £1,066; penalty unchanged at £245.18.
[13] On 5 April 2017, a duplicate copy of the letter dated 17 February 2017 was re-sent to the Glasgow address, and HMRC requested a reply by 5 May 2017.
[14] On 13 April 2017, Mr Johnstone called HMRC to advise that he was not aware of the HICBC and the tax implications on receiving child benefit and earning over £50,000. HMRC advised that a penalty of 20% would be charged.
[15] On 19 April 2017, HMRC issued assessments under s 29 TMA for 2013, 2014, and 2015, together with penalty assessments under...
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