Negligence, Private Residence Relief and Penalties

In the recent case of J Day & A Dalgety, two taxpayers had sold three properties that they owned together. The case concerned negligence and penalties for carelessness, as they did not include any details of capital gains relating to the property sales on their returns.  They argued that this was because the gains were below the annual exemption and therefore did not realise that they needed to be included.

One of the taxpayers also claimed that one of the houses sold was their only or main residence and that Private Residence Relief (PRR) should have been available.

HMRC raised discovery assessments and levied penalties for carelessness on both taxpayers, which they appealed.

The First-tier Tribunal agreed that the taxpayers had been careless in not including details on the returns.  The taxpayers made a number of errors in their calculations, including attempting to deduct mortgage fees, claiming they were deductible under TCGA 1992, s 38(1)(c).  However, the tribunal found that such costs were not included in the list of “incidental costs” in s 38(2) and were therefore not allowable.

In terms of the PRR claim, the tribunal found that the first taxpayer had not lived in the property with any degree of permanence or continuity as required by the relevant case law (Goodwin v Curtis [1998] STC 475).  No notice had been given to HMRC or to his employers that he had moved house and no invoices were addressed to him at the property.

The Tribunal dismissed the taxpayers’ appeals, agreeing with HMRC that both taxpayers had been negligent in preparing their tax returns by not including details of the property disposals.

It is important to ensure that proper care is taken with filing self-assessment tax returns and all relevant sources of income or gains are included where required in order to mitigate the risk of penalties.    Eaves and Co would be happy to assist if you or your clients have any concerns.

Sympathy for the Devil

More cases on the scope of HMRC powers.

The first concerns a current successful barrister.  His penalty for failing to react to HMRC information notices was £1.2m+.  Many would say “Ouch!  That hurt!”  However, in this case, the judge in the Upper Tribunal pointed out that some of the information requested went back over 9 years to the death of the taxpayer’s father and his Inheritance Tax affairs.

The judge found it “difficult, if not impossible to understand why a man of the Taxpayer’s means had not appointed a professional advisor to help him deal with all his tax affairs”.  The judge felt the money spent on penalties could have been far better used! (CRC v Ronnie Tager).

With the background to the case and the incredibly lengthy delays in getting information, it is difficult to avoid thinking HMRC were on the side of the angels in this case.

In the case of J Dyson, the taxpayer appealed against a penalty for late filing of a partnership return.  He said he had done all he could to ensure compliance, but it was held that he had no right of appeal whatsoever, because only the ‘representative partner’ had any rights of appeal.

Whilst it seems reasonable that the ‘representative partner’ should generally be the main point of contact for HMRC, to deny altogether the rights of other partners would seem a trifle un-sporting.  The First Tier Tribunal thought so and felt it was in breach of his civil rights that he had no right to a fair hearing.  However, their conclusion was that they had no powers to overrule the legislation.  As the first case notes, individual taxpayers can be unco-operative, and that must be frustrating for Revenue Officers.  However, does that make it appropriate for them to take action against other taxpayers, where the position is perhaps unfair?

The final ‘powers’ case shows that repayments of excess tax paid in earlier years, under self- assessment may be reclaimed in appropriate circumstances.  Andrew Michael Higgs overpaid tax on account.  The courts held the taxpayer was not limited by the 4 year time limit generally applying on claims.

A fair summary of the line of cases would seem to be that:

a)     Circumstances alter cases.  If unfortunately you find yourself amidst disaster, then look carefully at the facts to try to detect an escape hatch.

b)    Investing in timely reporting and good professional advice to keep matters up to date is likely to be money well spent, both financially and emotionally.

 A TAX IN TIME SAVES NINE.