Executor’s late penalty struck down due to legislative flaw

A flaw in the Taxes Management Act 1970 has led to penalties imposed on an executor being struck down.

Acting as an executor for Betty Dodd, David Hogg completed Form R27 which he had received from HM Revenue & Customs (HMRC). Whilst he had sent it back to declare her income for the tax year, it had been interpreted by HMRC as needing Mr Hogg to file a trust and estate return for the period of estate administration.

His solicitors received a late-filing penalty assessment eight months later, to the sum of £100. This was brought under Schedule 55 of the Finance Act 2009. Relating to the failure to the declare the taxable income on the estate, as well as any gains made over the administration’s course, the penalty was paid by the solicitors. However, they did not believe that since Mrs Dodd’s death, any of these had arisen – something which they pointed out to HMRC before sending on a tax return for the annual income tax liability base rate of £12.03.

A month later, a so called daily penalty of £580 was sent to the firm, which they claimed was ‘unconscionable and unfair’. Once again, it objected to the initial penalty of £100.

After rejecting the penalty appeals, HMRC sent the solicitors an additional penalty, this time for £820. At this stage, the solicitors appealed to the First-Tier Tax Tribunal.

As set out in Schedule 55 of the Finance Act, section 8(1)(a) or (b) of the Taxes Management Act 1970 requires tax returns for income tax or capital gains tax.

Previously, the Act clearly distinguished between returns relating to an individual’s personal income and returns made by someone else in another capacity. Under its original draft, the Act required both trustees and personal representatives to file a return, specifically on form SA900. However, in 1990 and 1994, changes were made to the 1970 Act, resulting in a legal inconsistency. The penalty-imposing power which HMRC had under the Finance Act 2009 was no longer in line with the requirements of the Taxes Management Act.

It was held by the Thomas J that in the majority of cases, a form SA900 trusts and estates return will be under the 1970 Act. However, as the tribunal judge stated, s.8 only applies to trustees. HMRC was unable to issue the penalties as the burden of showing that someone other than a trustee needed to file a return had not been discharged.

As a result, the daily penalties were cancelled by the judge on the basis that they had been issued invalidly.

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