After a taxpayer successfully appealed a £182.40 penalty, is the cost to HMRC of administering the HICBC tax barnacle in danger of outweighing the benefits?
Michael Barrett, the appellant in this first tier tribunal (FTT) case, was liable to pay the high income child benefit charge (HICBC) for the tax year 2018/19. However, he did not notify HMRC of this liability and did not pay the charge.
The reason for this, according to Mr Barrett, was that nudge letters had been sent by HMRC to his previous address and he had not received them.
Mr Barrett accepted that he was liable to pay the HICBC but did not accept the penalty as he claimed that not receiving the letters was a reasonable excuse for his failure to notify. As such it was only the £182.40 penalty that the FTT had to decide on.
The burden of the tax barnacle
This will not be new information to regular readers of the site, but a brief reminder of the legislation may be helpful to some.
Mr Barrett was liable to the HICBC for tax year 2018/19 because:
His adjusted net income for the year was greater than £50,000;
Mrs Barrett’s adjusted net income was less than his; and
Mrs Barrett was receiving child benefit.
Under section 7 TMA 1970, Mr Barrett should have notified HMRC of his HICBC liability by 5 October 2019. He failed to do so and HMRC charged a penalty of 20%, on the basis that the behaviour was not deliberate, disclosure was prompted, and giving the maximum reduction for telling, helping and giving.
Mr Barrett argued that as his children were born in 2010 and 2012, before the HICBC was introduced by Finance Act 2012 (with effect for child benefit payments made after 7 January 2013), he was not aware of the subsequent legislative change which meant that he was liable to pay the charge.
Complying with the letter of the law
HMRC successfully proved that letters, which set out the circumstances under which a person has to pay the HICBC and how to notify HMRC, had been sent to Mr Barrett on 29 November 2019 and 4 June 2021, so the burden of roof fell to Mr Barrett to show the FTT that he had not received them.
The letters were sent to Mr Barrett’s old address where he had not lived since May 2019. Although forwarding had been set up, Mr Barrett denied receiving them. The judge recognised that, although re-direction should have meant that the letters arrived, the system is “not infallible”.
It was only when Mr Barrett submitted an online form on 20 April 2021 claiming tax relief on allowable expenses for the tax year 2020/21 that HMRC became aware of his new address. This prompted HMRC to update its records and on 14 September 2022 HMRC sent a letter to Mr Barrett at his new address at “Bicknacre” about the HICBC.
Mr Barrett responded by way of a phone call to HMRC on 27 September 2022. This strengthened his case, showing that he had a willingness to comply with the requirements of the legislation and that had he received the previous letters he most likely would have acted on them. The judge commented “I place particular weight on the actions Mr Barrett did take following receipt of the letters later sent to him at Bicknacre (this demonstrating his intention to deal with HMRC to resolve his tax position)”.
The FTT was satisfied that Mr Barrett did not receive the letters and that gave him a reasonable excuse for the failure to notify. The penalty was cancelled.
Is £182.40 worth the time and effort?
Aside from the extra compliance burden and financial and emotional stress for taxpayers who fall foul of the charge, there is a cost to HMRC of pursuing HICBC cases for amounts that often may not be worth the trouble.
In the Barrett case the disputed penalty was just £182.40. While that may well be a significant amount for some individual taxpayers, one has to wonder whether it is really worth the time, effort and cost involved for HMRC to pursue the penalty to tribunal.
In upholding the legislation, it could be argued, HMRC must be consistent. Letting one taxpayer off the hook could have a ripple effect and suddenly the 180 quids start to add up. Simpler, then, for all involved, would be to land the first swipe of Tom Herbert’s “chainsaw of tax reform” on the “tax barnacle” that is the HICBC.