Wilkes
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 June 2020 |
| Neutral Citation | [2020] UKFTT 256 (TC) |
| Date | 15 June 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 256 (TC)
Judge Zachary Citron, Ms Jane Shillaker
The Appellant was represented by his wife, Mrs Wilkes
Mr Wilby, litigator of HM Revenue and Customs' Solicitor's Office, appeared for the respondents
Income tax – High income child benefit charge (HICBC) – Taxpayer failed to complete a tax return – HMRC discovered liability and raised discovery assessment under TMA 1970, s. 29(1)(a) – Was there a discovery that income which ought to have been taxed had not been assessed? – No – HICBC is a self-standing liability to income tax, not income – Assessment invalid – Appeal allowed.
The FTT held that the high income child benefit charge (HICBC) was a separate standalone charge and although the taxpayer had failed to notify his chargeability to tax (under s. 7 TMA 1970) there had been no discovery of “income which ought to have been assessed”. Consequently the discovery provisions of s. 29(1)(a) TMA 1970 could not apply and HMRC's assessments were invalid.
Mr Wilkes had income (which had been subject to PAYE) in excess of £50,000 and his wife was the recipient of child benefit for the years in question. The HICBC was therefore applicable to those years. Mr Wilkes did not submit a self assessment tax return or notify HMRC that he was chargeable to tax under the HICBC until he received a letter from HMRC headed “Do you have to pay the [HICB charge]?”, at which point he telephoned HMRC and made a full disclosure of the circumstances. HMRC accepted that he had a reasonable excuse for not notifying them of his chargeability under s. 7 TMA 1970 and so no penalty was issued for the failure to notify. Instead, HMRC raised income tax assessments for the tax years in question under the discovery provisions in s. 29(1)(a) TMA 1970. Mr Wilkes appealed against these assessments.
None of the facts were in dispute. Mr Wilkes' grounds for appeal were wide-ranging and fell into three basic categories:
- Criticisms of the HICBCThat the charge itself was wrong in principle and inherently unfair, potentially a breach of confidentiality, that it went against the core principles underlying the abolition of aggregation of earnings for married couples in Finance Act 1988, and that it disproportionally impacted upon women.
- Criticisms of HMRC's administration of the HICB chargeThat HMRC had failed to sufficiently publicise or notify employees (who were otherwise not obliged to submit tax returns) of their liability to pay the HICBC, that the charge was not administered efficiently or fairly, that there was a dearth of compliance checks in the early years of the charge, and that in any event, extra-statutory concession A19 ought to have been applied in this instance.
- Validity of the discovery assessments under s. 29(1)(1)(a) TMA 1970That s. 29 was not engaged because neither child benefit nor the HICBC was income; that even if it was income, it belonged to a different person (Mr Wilkes' wife), not the taxpayer; and that HMRC already knew that Mr Wilkes' income exceeded £50,000 and checking with the Department for Work and Pensions would have told them that child benefit was in payment, therefore there was no discovery.
The first two categories of the appeal were dismissed quickly as being outside the powers or jurisdiction of the First Tier Tribunal (FTT). There was some discussion on the question as to whether any legal principles (for example, the European Convention on Human Rights) would require the FTT to depart from the plain meaning of the statute or require it to be interpreted in such a way as to prevent the HICBC from applying but again this was held to be outside the scope of the FTT.
This left a single question to be determined by the Tribunal: was the HICBC validly assessed under the discovery provisions of TMA 1970?
The relevant legislation for discovery assessments is s. 29 Taxes Management Act 1970. Sub-section 29(1) TMA provides that if an officer of the Board discovers:
- that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or
- that an assessment to tax is or has become insufficient, or
- that any relief that has been given is or has become excessive,
the officer or, as the case may be, the Board may … make an assessment in the amount, or further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.
In this case, neither (b) nor (c) was in question, since there had been no assessment (Mr Wilkes had not completed a tax return) and no relief had been given. The case therefore hinged entirely on the meaning of 29(1)(a).
Clearly there had been a discovery, because facts hitherto unknown by HMRC had come to light as a direct result of Mr Wilkes' telephone conversation in which he made the disclosure. The FTT therefore considered whether any “income” had not been assessed to income tax and concluded that it had not.
Firstly, child benefit itself is not income chargeable to tax within the meaning of the Income Tax Act 2007. The HICBC does not make a charge upon child benefit – it simply imposes an additional charge on whichever of the relevant individuals has the higher income (in this case, Mr Wilkes) where their income is in excess of £50,000.
Secondly, in calculating income tax, the procedure is set out in s. 23Income Tax Act 2007 as a series of steps to be taken in strict sequence. The first of these steps is to “identify the amounts of income on which the taxpayer is charged to tax” and steps 2–6 go on to deduct the appropriate reliefs and allowances then apply the relevant rates of income tax to the various components of that income. The relevance of these steps is that it is not until step 7 that there is a requirement to “add to the amount of tax left after step 6 any amounts for which the taxpayer is liable” under certain provisions – which include the HICBC.
The FTT therefore found that HMRC did not discover any income which had not been assessed to income tax. The whole of Mr Wilkes income was known to HMRC at the outset, as it had been charged (and reported) under PAYE. The HICBC was a separate standalone charge which ought to have been applied to that income, but which had not. There was therefore no newly discovered income.
The FTT accepted that this gave rise to a potential anomaly: if a taxpayer completed a tax return but failed to apply the HICBC then a discovery could be made under s. 29(b), whereas if taxpayer failed (as Mr Wilkes had) to complete a tax return (and HMRC had not issued a requirement to file a return under s. 8 TMA 1970) then no discovery assessment could be made under s. 29(1)(a).
HMRC contended that this anomaly was unjust and that the statutory interpretation of s. 29 should be taken to mean not just “income” but “amounts” which ought to be assessed. However the FTT found that there was not a sufficient absurdity or injustice to warrant such interpretation given that other avenues had been open to HMRC. For example, the FTT noted that rather than issuing a discovery assessment, HMRC could have issued a s. 8 notice requiring the taxpayer to complete self assessment tax returns. Further, given the intricacies of the legislation in respect of HMRC powers and enforcement, it was not clear that there had been any obvious drafting error which would allow a “corrected” version of the statute to be applied.
The appeal was allowed and the assessments were reduced to nil.
The HICBC has always been contentious and is arguably an anomalous tax charge – it is well known that a charge may arise where only one partner has income in excess of £50,000, yet no charge may arise where a couple have combined income of up to £100,000.
This case highlights an anomaly in the legislation which prevents HMRC from using the discovery provisions to assess the HICBC in certain circumstances, and in which some may find an ironic justice.
However HMRC may take this as a lesson that other avenues of enforcement are available – had they issued a s. 8 requirement to file tax returns instead of issuing assessments, the outcome may have been very different.
[1] This was an appeal against income tax assessments raised under s29 Taxes Management Act 1970 (“TMA”) in respect of Mr Wilkes' liability to a high income child benefit (“HICB”) charge for three tax years.
[2] On 20 December 2018, HMRC issued income tax assessments (relating to HICB charge liabilities) on Mr Wilkes under s29 TMA as follows:
(1) 2014–15: £1,770
(2) 2015–16: £1,398
(3) 2016–17: £1,076
(an assessment for 2013-14 was later withdrawn)
[3] Mr Wilkes notified HMRC of an appeal against these assessments by letter dated 12 January 2019.
[4] By letter dated 25 February 2019, HMRC explained their view of the matter to Mr Wilkes, being that the assessments were due and payable.
[5] Mr Wilkes notified his appeal to the Tribunal by notice of appeal dated 16 March 2019.
[6] We had a document bundle prepared by HMRC with correspondence and other papers. We also had witness statements, and heard oral evidence, from two HMRC officers, Mr Pickett, who dealt with Mr Wilkes' case, and Mr Thomas, who provided technical support to caseworkers regarding the HICB charge.
[7] During the tax years in question
- Mrs Wilkes was entitled to receive child benefit;
- Mrs Wilkes was married to Mr Wilkes; they were not separated;
- Mr Wilkes' adjusted net income for income tax purposes (ANI) exceeded £50,000, and was greater than Mrs Wilkes'; and
- Mr Wilkes did not submit a tax return, and HMRC did not issue him a notice to file.
[8] HMRC wrote to Mr Wilkes in a letter dated 30 November 2018 under the heading “Do you have to...
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Wiseman
...the straightforward and literal reading of the legislation in TMA 1970, s. 29(1)(a). Previously in Robertson [2018] TC 06410 and Wilkes [2020] TC 07740 the FTT decided that TMA 1970, s. 29(1)(a) did not empower discovery assessments in relation to the HICBC. Whereas in Haslam [2020] TC 0778......
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