High Income Child Benefit Charge penalty for failure to notify chargeability

Not strictly an area of law we cover but may be of interest as a tax tribunal case relating to child benefit and tax penalty in connection with high income charge - the penalty was not overturned but reduced due to HMRC failings -judge’s comments include -

‘To my mind these penalties raise the uncomfortable spectacle of one arm of HMRC penalising a taxpayer for not telling them that another arm of HMRC made a payment to him or his partner…

… a taxpayer is potentially penalised for not letting HMRC know that he has chargeable income so that they can send him a tax return in which he can tell them what they already know.’

In addition to the Morrow case above, just came across another two ....

Durham v Revenue & Customs [2020] UKFTT 181 (TC) (08 April 2020)

McCarthy v Revenue & Customs [2020] UKFTT 182 (TC) (08 April 2020)

... another case showing you can succeed in appealing high income child benefit charge on ‘reasonable excuse’ grounds - Turley v Revenue and Customs [2021] UKFTT 123 (TC) (7 April 2021) - First-tier Tribunal accepts claimant’s reasons, including his having claimed child benefit before the charge was introduced, for being unaware of obligations.

Another HICBC case - this time at the UT…

In The Commissioners for HM Revenue and Customs v Jason Wilkes [2021] UKUT 0150 (TCC) the First-tier Tribunal found that, although the appellant was liable to the HICBC for the years in question, he had not been required to file a self-assessment tax return, and therefore the ‘discovery assessments’ made by the HMRC officer -

‘were not validly raised because the officer in question had not discovered any “income which ought to have been assessed to income tax” within section 29(1)(a) Taxes Management Act 1970’

HMRC argued that the word ‘income’ in section 29(1)(a) should be interpreted as meaning including any amount liable to income tax. However, dismissing HMRC’s appeal the Upper Tribunal concluded -

109. In our view, HMRC express the purpose of s 29(1)(a) TMA too broadly. For the reasons we have given above we cannot infer from the wording of the provision a broad intention to cover any shortfall in income tax.

110. Section 29(1)(a) TMA is not inextricably linked to the self-assessment regime. Further, as we have demonstrated there are other powers available to HMRC to ensure that the HICBC is assessed. The fact that in relation to some of those powers, particularly the power to require the filing of a self-assessment return, the relevant time limit may be shorter than that available in respect of a discovery assessment in our view is not sufficient to lead us to conclude that the absence of the power to raise a discovery assessment in certain circumstances makes the situation unworkable or absurd. Consequently, we can find no basis on which we should adopt a strained interpretation of the meaning of s 29(1)(a) TMA, either as contended by HMRC or as we think it would in fact need to be interpreted to apply to the HICBC.

The Guardian reports -

It is thought that 160,000 people have paid penalties for nonpayment. HMRC has been backdating claims as far as 2013, with more than £2.5bn raised.

Last week, one of those chased, Jason Wilkes, challenged HMRC’s right to claim the charge for previous years. It has pursued him for £4,000 based on the fact his wife had received child benefit between 2014 and 2017.

Wilkes said he was unaware of the new charge ‒ which HMRC accepted ‒ but also argued its use of the “discovery” powers was unfair in his situation.

A “discovery” is a power held by HMRC that allows it to reopen closed periods and issue bills for previous years where it wants to.

The upper tribunal found that the tax department could not impose the charge based on discovery assessments where the person liable had not filed a self-assessment tax return for the year in question. It followed a decision in favour of Wilkes by the first-tier tribunal.

James Austen, a partner at the law firm Collyer Bristow, which represented Wilkes, says the case has ramifications for thousands of others.

“The terrible design of the HICBC left many of the affected taxpayers – in particular those who paid tax by PAYE – simply unaware of it,” Austen says, adding that HMRC has until the end of July to decide whether or not to appeal. If it does not, Austen would expect HMRC to “do the right thing” and refund those in the same boat as Wilkes.

Article from LITRG on the Wilkes case:

High income child benefit charge: what the Wilkes decision means

Budget confirms that the government will legislate retrospectively to allow such ‘discovery assessments’ to be made. Only those who had already appealed prior to the Wilkes UT decision are not included (although HMRC are appealing that decision to the Court of Appeal anyway).

The Court of Appeal in HM Revenue and Customs v Wilkes [2022] EWCA Civ 1612 (7 December 2022) dismisses HMRC’s appeal against the UT decision, finding that it did not have a right to carry out a discovery assessment - for reasons including at paragraphs 36-37 -

36. The ability to assess is clearly tied to the basis on which HMRC have concluded that section 29(1)(a), section 29(1)(b) or section 29(1)(c) of the Taxes Management Act 1970 has been satisfied. Where the relevant condition is that found in section 29(1)(a), “the loss of tax” must, as it appears to me, be that arising from the fact that income has not been assessed to income tax when it ought to have been or chargeable gains have not been assessed to capital gains tax when they ought to have been. Section 29 allows HMRC to make an assessment only in respect of “the” loss of tax and, where what has been discovered is that there has been a failure to assess income to income tax, any assessment under section 29 must be designed to address the income tax lost on that income.

37. The assessments on Mr Wilkes did not perform that function. While HMRC may have learned that Mr Wilkes’ income should have been the subject of self-assessments but had not been, that did not mean that any more income tax was payable on the income. To the contrary, HMRC had no reason to think that the fact that Mr Wilkes had not delivered returns for the material years had occasioned any “loss of tax” on his income. HMRC concluded that there was outstanding HICBC, but HICBC was not “income which ought to have been assessed to income tax”.

NB - section 97 of the Finance Act 2022 has amended section 29 TMA 1970 retrospectively to allow such discovery assessments to be made (with the exception of cases where an appeal was already in progress prior to the Wilkes UT decision).