Ignorance is Not a Special Circumstance in Tax Penalty Regime
The First-tier tribunal (tax chamber) has held that ignorance of the law was not a special circumstance which would allow the tribunal to reduce a HMRC penalty for under-declared income tax.
In Usher & Another v HMRC lay executors completed a self-assessment return for the deceased which underdeclared the deceased’s income to the date of death. At the tribunal the executors accepted that they had been careless in doing so and HMRC accepted that it had not been deliberate.
However, under Schedule 24 of the Finance Act 2007, HMRC is entitled to levy a penalty whether an error is careless or deliberate and more so where such error is both careless and concealed by the taxpayer. The penalty tariff is 30% of potential lost revenue for a careless action, 70% of the potential lost revenue for a deliberate but not concealed action and 100% of potential lost revenue for a deliberate and concealed action.
As the executors had little knowledge of the administration of an estate, they failed to publish a notice to creditors in the London Gazette or local newspapers advertising their intention to distribute the estate. Failure to do so meant that the executors themselves were personally liable to creditors, HMRC in the instant case, if the estate was over-distributed.
A year after payment of the income tax by the executors, HMRC raised queries on the accuracy of the return, sent a revised statement and levied a penalty of £5,060.18 for the inaccurate return. The executor’s complained about the delay in HMRC’s query however both the revised statement and penalty were maintained by HMRC. The executors therefore appealed to the tribunal.
Whilst the assessment of outstanding tax was correctly calculated and the amount due plus interest was payable, the tribunal considered the issue of the penalty charge.
The tribunal has the power to substitute the Revenue’s decision as to the amount of the penalty to impose for “another decision that HMRC had power to make”. HMRC have the power to reduce the penalty due to special circumstances although it had declined to do so.
The tribunal considered whether to make a reduction in place of HMRC. In making a decision, the tribunal expressly disregarded the executor’s ignorance of the procedure to guard against late claims and their inexperience in handling accounts. The tribunal was however persuaded to make a reduction of the penalty charge on the basis that the executors were personally liable for the tax for which they were unlikely to be reimbursed by the beneficiaries in any event and because the delay in the Revenue dealing with the case was considered blameworthy.
Whilst the penalty was reduced to nil, the executors were personally liable for £14,457.67 in respect of the underpaid tax and accrued interest.
The case illustrates the court’s dim view of ignorance and inexperience in dealing with the administration of estates and highlights the importance of seeking professional held in the administration of more complicated estates.