Don’t Let HMRC Reject You!

Mark McLaughlin highlights two recent cases in which HMRC incorrectly attempted to reject taxpayers’ tax returns.

Tax returns can be difficult and complicated. Mistakes often happen when completing returns. Can HM Revenue and Customs (HMRC) reject an incomplete or incorrect tax return, send it back to the taxpayer for correction and treat it as never having been received, possibly resulting in late filing penalties? HMRC seem to think so. However, that is not necessarily the case. 

For example, in Pidgeon v Revenue and Customs [2017] UKFTT 438 (TC), the taxpayer submitted a ‘paper’ tax return for 2011/12 after 31 October 2012 but before 31 December 2012. HMRC rejected the return as being insufficient for their purposes and sent it back to the taxpayer on 31 December 2012. HMRC treated the return as though it had not been filed but did not notify the taxpayer it had taken that view. HMRC subsequently imposed late filing penalties and eventually made contact with the taxpayer (who was in Dubai) on 16 January 2014. On 20 January 2014, HMRC received the return.

The taxpayer appealed against the late filing penalties (apart from the first penalty of £100, as his paper tax return was not sent to HMRC by 31 October 2012). The First-tier Tribunal stated that whether a return sent to HMRC amounted to a ‘tax return’ was ‘a matter of fact and degree’. The tribunal considered that it was not open to HMRC to reject a return simply because it contended that there may be some detail lacking from it (which might automatically give rise to penalties being incurred), unless the omissions were so serious to allow it to be said that the return was not, in reality, a return. The tribunal concluded that HMRC had failed to prove the alleged filing default giving rise to the disputed penalties and allowed the taxpayer’s appeal.

If a tax return contains an obvious error (e.g. an arithmetical mistake) or omission, HMRC may amend the return to correct it, within statutory time limits (e.g. see TMA 1970, s 9ZB (individuals) or s 12ABB (partnerships)). However, in practice, HMRC does not always seem to do so. 

For example, in Akhtar (t/a Crawley News and Post Office) v Revenue and Customs [2017] UKFTT 651 (TC), HMRC issued the appellant partner with a partnership tax return for 2014/15. The due date for filing a ‘paper’ return was 31 October 2015, but HMRC logged the return on 10 November 2015. HMRC ‘unlogged’ the return and sent it back to the appellant on 3 February 2016, as the expenses claimed did not total £39,366.20 as shown on the return, but instead totalled £39,362.20 (a difference of £4, or £2 per partner!). The return was subsequently (re)logged as having been received on 17 March 2016. HMRC imposed fixed and daily late filing penalties. 

The First-tier Tribunal stated that HMRC cannot charge a late filing penalty (under FA 2009, Sch 55) if they subsequently unlog a tax return and return it to the taxpayer on the basis that they believe it contains a computational error. HMRC can charge a penalty for errors in a return (under FA 2007, Sch 24), but those provisions were clearly inapplicable in this case.

The Akhtar case raised a further issue about the date on which paper tax returns are treated as having been received by HMRC, in the absence of evidence about the actual date of receipt. The appellant’s agent provided evidence to the tribunal that she posted the return first class on Thursday 29 October 2015, and had put enough stamps on the envelope. She also provided a schedule setting out when she had dispatched her clients’ returns; the partnership’s return was listed as sent on 29 October 2015. The agent submitted that it must have been received by the due date of 31 October 2015. 

The tribunal referred to the law concerning the time of delivery in the ordinary course of post (Interpretation Act 1978, s 7). It found that the agent properly addressed, prepaid and posted the appellant’s return by first class post on 29 October 2015. In the ordinary course of post, the return had been received by HMRC on 30 October 2015. Thus, it was deemed to have been received on time unless ‘the contrary is proved’; HMRC had not done so.

HMRC guidance instructs its staff to ‘attempt to solve simple omissions or missing totals’ from ‘unsatisfactory’ tax returns for individuals and to unlog the return only if it is unable to be repaired (see HMRC’s Self-Assessment manual at SAM121261). A tax return is ‘unsatisfactory’, broadly, if it does not satisfy the statutory requirements to constitute a return (SAM121260). If HMRC sends back a return resulting in a late filing penalty, make sure that HMRC has followed its own guidance and be prepared to challenge the penalty, if appropriate.