Taxpayer who owes zero tax is heavily fined

Today’s Blog concerns a taxpayer who recently lost his appeal at the first-tier tax tribunal against a £1,600 late filing penalty for not submitting his 2020/21 SA tax return, despite his argument that he did not owe any tax and had been unaware of his responsibility to submit a return as he’d been living abroad.

Background to the case

Taxpayer Mohammad Osman had received a series of late filing penalties, totalling £1,600 after he was over twelve months late in filing his 2020/21 tax return. However, Mr Osman decided to appeal the various late filing penalties on the grounds that he was living abroad and did not receive a notice from HMRC to submit his return, plus he also did not owe any tax. 

He first of all appealed the fines with HMRC, and when that appeal was rejected, he decided to take his case to the first tier tax tribunal (FTT), maintaining that he had a reasonable excuse for the delay in submitting his tax return. His grounds for appeal were that not only had he been living abroad at the time the return should have been submitted, but also that as he did not in fact owe any tax, he had assumed that he was not required to submit a return. 

He added that he had been visiting his sick mother who lives in Juba (South Sudan), and that shortly after his arrival the civil war had re-ignited resulting in a lack of internet access and causing severe disruption to telephone and postal services. As a result, he was unable to receive any letters or emails alerting him of his penalties, and his situation was further aggravated by the ongoing Covid-19 restrictions at the time. 

HMRC rejected Osman’s initial late appeal letter, stating that after a review they did not consider that he had a valid reasonable excuse for appealing against the penalty notice and subsequently upheld the decision in a statutory review pursued by the taxpayer’s accountant.

Is it reasonable to be ignorant?

Whilst the taxpayer asserted that he did not receive a notice from HMRC, a statutory notice to submit a tax return for2020/21 had been sent to his last known address and it had not been returned undelivered, also the address held by HMRC was the same address held by his accountant.

The tribunal accepted that the notice was correctly served, stating that, whether or not the taxpayer had physically received the notice or not, was irrelevant. They also said that as a matter of law, the taxpayer had a legal obligation to submit his return by the due date.

The next point of contention was whether the taxpayer had a reasonable excuse for failing to submit on time. HMRC didn’t think so, but the FTT, in making its decision, had to weigh up whether it was “objectively reasonable” for the taxpayer to have been ignorant of their requirements.

Ignorance is not a reasonable excuse

The FTT first looked at the taxpayer’s previous self-assessment submissions. Osman had filed tax returns for 2019/20, where he declared taxable property income of £14,400 and then £11,500 in 2020/21. Therefore, the tribunal concluded that if the taxpayer “carried out a very basic internet search he would have easily discovered the SATR filing obligations of overseas landlords of UK property”.

They also noted that Mr Osman did not inform HMRC that he was spending time abroad and that he had ceased self-employment. The tribunal concluded that the taxpayer’s ignorance was not a reasonable excuse and a “diligent taxpayer would have put arrangements in place before he left the UK to ensure that his tax affairs were dealt with while he was abroad”. The tribunal agreed with HMRC’s decision and found that the taxpayer’s excuse did not constitute a special circumstance and dismissed his appeal.

Late filing numbers and costs

This isn’t the first and most certainly won’t be the last time a taxpayer has a difficulty in understanding that they’ve been fined because they didn’t file a tax return, even though they had no tax to pay. A freedom of information request last year, found that nearly 160,000 taxpayers received a late filing penalty for the 2021/22 tax year, even though no tax liability was due, with 60,000 of the fines subsequently cancelled.

These figures demonstrate just how many taxpayers are unaware of their obligations, and it can become an expensive obligation to miss, too. Taxpayers incur an initial late filing penalty of £100, three months later HMRC start charging daily penalties of £10 for each day the filing remains overdue to a maximum of £900, plus a further penalty of 5% of the tax due or £300, whichever is greater. Finally, there’s another 5% or £300 charge after 12 months.

As the taxpayer in this tax tribunal case now realises, the penalties can soon add up and for anyone on a low income, this is a huge cost. As the 31st January approaches once again, there will no doubt be others with zero tax liability or who have not updated HMRC of their circumstances who will miss the deadline. Unfortunately, as the tribunal has demonstrated, there can be a significant cost to this ignorance.

Accountant’s view

In my experience, most individuals who are fined for sending in their tax returns late, have had multiple reminders and I have no sympathy for them. There are however some, whose personal circumstances are such that HMRC and tax tribunals, could and should show some flexibility and leniency.

I have a friend who works for UNHCR and has spent much of the last 2 years in South Sudan. He’s told me that even for the UN, communications from outside the country are an ongoing nightmare, so if I’d been the FTT chair on this case, I would have shown some sympathy for Mr Osman.