High Income Child Benefit Charge Appeal Highlights Importance of ‘Reasonable Excuse’ in Tax Penalties

Citation: [2024] UKFTT 46 (TC)
Judgment on

Introduction

The case of Jonathan Harwood v The Commissioners for HMRC revolves around the High Income Child Benefit Charge (HICBC) and appeals against both the chargeability for one tax period and the associated penalties for failure to notify under section 7 Taxes Management Act 1970 (TMA). This case explores the application of HICBC, the concept of “reasonable excuse” in the context of penalties, and the retrospective application of legislation following a precedent.

Key Facts

Jonathan Harwood, the appellant, was assessed for HICBC for the tax years 2016/2017 to 2018/2019 and subsequently penalized for not notifying his liability. The assessments and penalties in question amounted to £5,752 and £1,150.40, respectively. The key contention arises due to Harwood’s lack of knowledge regarding the HICBC, despite his wife’s previous claim for child benefit, and the alleged non-receipt of reminder letters from HMRC.

Several legal principles played pivotal roles:

Discovery Assessment and the Principle of Retrospective Legislation

  • Under section 29 of the TMA, HMRC has the authority to issue a discovery assessment for unassessed income tax amounts. This principle was clarified by the Upper Tribunal in the case of HMRC v Jason Wilkes [2020] UKUT 0150 (TCC), declaring HICBC as a “free-standing charge to tax” rather than income to be assessed.
  • Subsequent legislation, namely section 97 Finance Act 2022, responded to Wilkes by enabling retrospective assessment for HICBC, thus affecting the current case. Assessments made before the introduction of section 97 and not appealed against on specific grounds before set deadlines were termed “protected assessments” and benefited from this amendment.

Reasonable Excuse

  • The concept of a “reasonable excuse” in the context of failure to notify HMRC about tax liability was crucial. Established case law, including Christine Perrin v HMRC [2018] UKUT 156 and William Archer v HMRC [2023] EWCA Civ 626, allowed ignorance of the law to be considered a legitimate excuse in certain circumstances. This principle was applied to consider whether it was reasonable for Harwood and his wife to remain unaware of the HICBC given their income history and receipt of child benefits.

The Burden of Proof in Receipt of Notices

  • The Interpretation Act 1978, section 7, guided the tribunal on the presumption of receipt of documents through the correct postal procedure. The onus was on Harwood to prove he did not receive the HMRC reminder letters.

Penalties for Failing to Notify

  • Schedule 41 Finance Act 2008 outlines the grounds for setting and reducing penalties related to tax notification failures. It emphasizes the taxpayer’s responsibility to act without unreasonable delay after their excuse ceases to be reasonable.

Outcomes

The tribunal concluded:

  • Harwood was liable for HICBC for the tax years 2017/2018 and 2018/2019 but not for 2016/2017, as the assessment for that year fell outside the ordinary four-year time limit.
  • The appeal against penalties was upheld based on a reasonable excuse from non-receipt of notices. Harwood’s ignorance was deemed reasonable, and upon notification of his HICBC liability, he acted without undue delay. This applied to both the penalties and the assessment for 2016/2017.

Conclusion

The First-tier Tribunal’s decision in Jonathan Harwood v The Commissioners for HMRC underscores the delicate balance between statutory duties to notify HMRC of chargeability and the taxation authorities’ obligations to communicate effectively with taxpayers. The case reiterates the significance of proven facts and objective reasoning when establishing “reasonable excuses” for seemingly failing to meet tax obligations. It also confirms that legislating retrospectively will not always override the individual’s rights when they have acted reasonably and without undue delay upon gaining knowledge. This decision demonstrates the courts’ willingness to consider the taxpayers’ perspective within the boundaries of the existing legislative framework.

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