Penalty Shoot-Out

Penalty Shoot-Out

What was the outcome when a personal representative became embroiled in a war of attrition with the Inland Revenue Trusts Office?

THE PERSONAL REPRESENTATIVE, a lawyer by profession, was acting for the estate in a personal capacity: he was the deceased's son. The lawyer's father had died in October 2001, but probate was not obtained until May 2003. Early in 2002, the son had prepared the deceased's tax return for the period from 6 April 2001 until the date of death, the deceased having submitted his own 2001 tax return several months before his death. The son enquired about the formalities for preparing tax returns for the estate, but was told that a return would be issued after the granting of probate.

Four-and-a-half months after probate was given, the son received a penalty notice regarding the alleged late submission of the 2002 tax return.

Responding to the notice

The son's initial reaction was that the Inland Revenue had overlooked the fact that a 2002 return (for the period to the date of death) had already been filed. But he then noticed that the unique taxpayer reference on the penalty notice differed from his late father's reference. He then supposed that the Revenue Trusts Office had not realised that the deceased previously had his own reference, and allocated a new one on receiving the files. But then, it dawned on him. Being more than three months after probate was granted, it was possible that a tax return covering the period from the date of death until the next 5 April had been issued by the Revenue, but was subsequently lost in the post. It would certainly not have been the first item of mail to go missing. The son therefore telephoned the tax office and his suspicions were confirmed: a tax return had indeed been posted to him, but not arrived. In fact, two returns had been posted and lost in the post, as the Revenue took the opportunity to send a 2003 return at the same time (presumably under the same cover).

Appealing against the penalty

The penalty notice helpfully stated that it was being issued under the provisions of section 93(2), Taxes Management Act 1970 . That applies if a person is served with a notice under section 8 (to file a tax return) and the person fails to comply with the notice.

The son therefore wrote back appealing against the penalty on the grounds that, by reason of the non-delivery of the return, no notice within the meaning of section 8 had been given.

Although non-delivery of a return is a sufficient ground for the penalty notice to be vacated, the son took the precaution to say that, on the basis that a return would in fact be submitted within a relatively short time, there would be a reasonable excuse for alleged non-compliance throughout the alleged period of default.

Appeal rejected

Within days, a letter came back from the Trusts Office saying that the officer '[did] not consider that there are grounds for appeal'. He continued by saying that the grounds stated in the son's appeal did not (in his opinion) 'appear to satisfy the requirements shown in the booklet SA/BK6' which was enclosed with the letter.

The officer also explained his reasoning: 'The 2001-02 Trust and Estate Tax Return (SA900) was issued to the personal representatives on 17 June 2003. It has neither been lodged with the Inland Revenue, nor has it been returned as undelivered'.

So, according to this particular officer, all items of mail which (although correctly addressed) fail to reach the addressee do, nevertheless, make their way back to the sender. What is more, the officer thought he had caught out the crafty non-compliant personal representative:

'By your own admission, both the penalty notice and duplicate returns were safely delivered to the same address [as shown on the original return].'

The officer then responded to the specific ground of appeal, i.e. that the section 8 notice had not been received, by pointing out that the notice can be found on the front page of the return.

Having felt that the personal representative was now in a hole, the officer suggested that the appeal be reconsidered. Failing that, the officer would arrange for the appeal to be heard by the General Commissioners.

As a parting shot, the officer explained that:

• he would be unable to consider the appeal unless the return was sent back with the son's reply to his letter; and

• a reply was expected within 30 days. Failing that, the penalty would be released for collection.

You cannot be serious, man!

The son's immediate reaction was to write back expressing anger and disbelief. He also added the comment that he knew full well that the section 8 notice usually appears on the front of a tax return, but since he had not received any return, he could not have received any such notice, and it was the delivery of the notice that was crucial for the purposes of section 93.

That letter, however, did not see the light of day and a more measured response was instead sent. In this final version, the son asserted that his protestations of innocence were in fact truthful. He also raised the stakes by suggesting that any appeal be heard by the Special Commissioners (on the basis that it turned on the meaning of 'served' in section 93 rather than being a case of 'reasonable excuse'). Finally, the son asked for the statutory authority for the bar on appeals being considered in the absence of the return.

The red herring

The officer replied almost as quickly as the previous occasion — it took a week. This explained why the officer would not consider the appeal until the return was received. This was a practical measure arising from the fact that the amount of the penalty would be capped if the tax outstanding was less than £100.

By this time, the son had completed the tax return in question, as well as the 2003 return. He then filed both returns requesting that the Revenue calculate any tax liability, on the basis that the effective notice to make returns had been given within the two preceding months (section 9(2)( b )).

The tax bill

The Revenue processed the return with surprising speed. The 2002 return showed a tax liability of £115, a liability of which the son was well aware and which had been paid to the Collector of Taxes as soon as the issue blew up. So the capping concession would be of no benefit to the estate.

But the letter which accompanied the calculation made no reference to the appeal on the penalty.

Where is the appeal?

A telephone call followed. The son explained that he wished to proceed with the appeal, and that he wished it to be heard by the Special Commissioners. The Revenue confirmed this instruction and notified the son that a full review was being made of this case.

Two months later, the son received confirmation that the Trusts Office had been advised to abandon its position and it cancelled the penalty.

Room for improvement

Once the matter was resolved, we wrote to the director of the Trusts Office setting out areas where we felt that the Revenue officers' standards fell below the level one would expect. We fully accept that there are some taxpayers who ignore returns, and whose reaction to a penalty notice would, nevertheless, be to protest innocence. Consequently, the Revenue must strike a balance. We submitted that it had got it wrong in this case and set out a number of examples.

The director wrote back and, having read the files, gave an unqualified apology. He reinforced the point that some individuals 'try it on' and the Revenue has to bear this behaviour in mind. However, he gave assurances that lessons would be learnt, and that a repetition of the above events should not occur.

Is it worth it?

Whether it would be worth denting the rain forests for the sake of £100 depends on one's perspective. If professional fees are to be incurred, one must seriously question the benefit of going to all this trouble.

The son had deliberately adopted the route of challenging the validity of the penalty rather than merely argue that he had a reasonable excuse. Although both ultimately derive from the fact that the return was lost in the post, the former in the circumstances is more advantageous. This is because finding that the return was not issued until the duplicate was received by the taxpayer means that any tax due is postponed until three months after this later date. Although not significant in this case (where only £115 tax was at stake), the interest savings can mount up where the estate is in receipt of substantial amounts of untaxed income. In addition, the 'reasonable excuse' route relies ultimately on the discretion of the Commissioners: how soon after the duplicate return is issued is a taxpayer expected to file? Arguably, it can be as much as three months (the normal statutory period set by section 8(1A)( b )). But that is by no means certain.

Learning points

For most taxpayers, the non-receipt of a tax return or the notice to file a return, would be of little significance as they would make the effort to file a return in any event by the following 31 January. This case, however, concerns a situation where a new record was being set up. In such a case, the taxpayer (or the taxpayer's adviser) would not necessarily know the timetable that is expected to be adhered to. Readers who notify the Revenue of a new case, or who are dealing with an estate, should therefore be aware of the potential problems that can occur if the return is lost in the post.

In this case, the problem was exacerbated by the fact that there was no correspondence issued between the issue of the return and the penalty notice. Had the Revenue issued a reminder notice (or even a payslip showing the new unique taxpayer reference), the son would have been on notice that a return had been issued, and his assertions at that stage might have been more sympathetically received. However, if the Revenue does improve its act as promised, a sympathetic reception may be more forthcoming in any event.

The writer of this article wishes to remain anonymous.

Issue: 3966 / Categories: