David Wald v HMRC (2011): a warning to taxpayers

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09 May 2011

The Appellant, Mr Wald, appealed against a penalty imposed on him under s. 95 Taxes Management Act 1970 (the "TMA") for negligently delivering to an officer of HMRC an incorrect return under s. 8 TMA, for the tax year 2006/2007.  The Appellant appealed to the First-Tier Tribunal, where the judgment was given on 17 March 2011.

BACKGROUND

The Appellant was a US citizen who worked for an eminent London hospital as a specialist consultant surgeon.  During the tax year 2006/2007, the Appellant was paid £14,617 by his employer (the London Hospital) in settlement of relocation removal expenses.  The part of the earnings in excess of £8,000 (that is, the amount of £6,617) was taxable under the Income Tax (Earnings and Pensions) Act 2003, and should therefore have been declared in the Appellant's 2006/2007 tax return but was omitted.  The return was prepared by a firm of accountants on behalf of the Appellant.  

An enquiry was opened by HMRC into the Appellant's 2006/2007 tax return, leading to a closure notice being issued on 3 August 2009 advising the Appellant that £2,646.80 was due to be paid, being the difference between the tax due as returned and as amended by the closure notice.  HMRC subsequently issued a penalty notice (being 10% of the outstanding amount of tax due) which the Appellant appealed.

The Appellant argued that HMRC had "lost perspective" in this case, and had treated the Appellant "shoddily".  Even though the amount of tax in question was small, the Appellant pursued litigation against HMRC because he felt that HMRC had treated him unreasonably and that the accusations were highly damaging to his career.  

The Appellant argued that he had not been negligent, and that the incorrect amount stated on the tax return was an innocent error.  Immediately upon being informed of the error, he had acted with the utmost urgency to rectify and pay the correct amount of tax with interest.  The Appellant went on to say that HMRC's own enquiry manual indicated that a penalty would not be imposed in the case of a wholly innocent error which was remedied without unreasonable delay.  

Reference was also made to an internal HMRC document that had been included in the HMRC bundle, showing that two HMRC officials had suggested to the compliance officer that this might be a case where a decision could be taken not to impose a penalty.  

HMRC's submission was that the guidance notes accompanying a tax return make it clear that relocation packages expenses from the employer are part of the employee's taxable income, and thus must be declared in the employee's tax return.  HMRC argued in light of the Appellant having received form P11D from his employer, failing to submit details of the relocation expenses was negligent on behalf of the Appellant.  HMRC also referred to a letter from the Appellant's accountants contending that the Appellant was under the impression that the expenses reimbursed would be handled through PAYE procedures.  A reasonable man would have recalled the relocation expenses reimbursed and alerted his accountant to them, even if he thought they were already dealt with through PAYE.  

JUDGMENT

The Tribunal decided that there were two issues to be determined in the appeal: 1) whether the Appellant was "negligent" within the meaning of s.95(1) TMA in failing to include the amount of the relocation expenses in his tax return, and 2) if negligence was proved, the level of the penalty to be imposed.

In response to issue one, the burden on proof was on HMRC to establish that there was negligence on behalf of the Appellant, the standard of proof being a balance of probabilities.  The fact that the Appellant had failed to include in his tax return a payment which was within the Appellant's knowledge amounted to prima facie evidence of negligence.  The Appellant was also not able to transfer responsibility of the obligation to file a correct return to his accountant.

Therefore, the Tribunal held that the Appellant had been negligent in filing his return.  It was judged that a reasonable Appellant, especially one assisted by professional accountants, would have been in a position to include the relocation expenses in the tax return, and would have done so.  

In response to the second issue, the Tribunal held that the 10% penalty was not excessive in this case.

ANALYSIS

The Tribunal stated in their judgment that they had some sympathy for the Appellant, and accepted that he did not deliberately fail to include the removal expenses in his tax return, and that he had rectified the error and paid the outstanding tax as soon as the error was brought to his attention.

However, this case highlights HMRC's and the courts' strict approach to omissions in tax returns, even when the taxpayer has not deliberately made the error and sought to rectify as soon as possible.

Therefore, the case should be taken as a warning to taxpayers to make sure they are thorough and detailed in the information they include in their tax returns.  Also, it is important to note that responsibility for the accuracy of the return lies with the taxpayer, and cannot be transferred to a professional advisor.

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