Taxpayers are required to notify HM Revenue and Customs (HMRC) of their liability to tax within certain time limits, such as where the taxpayer first becomes liable to pay tax, or conducts (or intends conducting) a business that needs to be registered with HMRC. Failure to notify HMRC of chargeability to tax can happen for a variety of reasons, ranging from an innocent oversight to deliberate concealment. Taxpayers who fail to comply with the notification requirement are generally liable to penalties (see below).
Owning upHopefully, taxpayers wishing to ‘come clean’ will have retained sufficient records to enable a complete and correct disclosure of their income and allowable expenditure. Failure to do so can be costly. For example, in Khan v Revenue and Customs [2024] UKFTT 615 (TC), HMRC held information that the taxpayer purchased four properties in addition to his residence. HMRC believed he had received undeclared rental income. The taxpayer was asked to provide income and expenditure details. However, the taxpayer did not provide the information requested. HMRC therefore estimated the rental income and issued discovery assessments. The taxpayer disputed HMRC’s tax calculations because: (1) One of the properties (GC) was occupied by family members and did not generate income; (2) The actual mortgage interest, maintenance costs and other allowable expenses were higher than HMRC’s 15% allowance. Despite many requests, the taxpayer did not provide mortgage interest statements or copy bank statements. In the absence of any evidence, HMRC assessed a full rent on GC. The First-tier Tribunal (FTT) held that HMRC’s discovery assessments relating to the taxpayer’s rental income for the tax years 2004/05 to 2012/13 were made to HMRC’s ‘best judgement’.
It’s a Penalty!
The taxpayer in Khan also faced penalties for failing to notify his rental income to HMRC (FA 2008, Sch 41). Failure to notify penalties range from 0% to 100% (or possibly 200% for an offshore liability). The penalty range is determined by the taxpayer’s behaviour that led to the failure to notify, and whether the disclosure was ‘prompted’ or ‘unprompted’. Reductions in the penalty percentage are given for the quality of the taxpayer’s disclosure in enabling HMRC to establish the amount of tax unpaid because of the failure. In Khan, HMRC sought penalties calculated on the basis that the taxpayer deliberately failed to notify his liability and that his disclosure was prompted. The minimum and maximum penalties faced by the taxpayer were:
- deliberate and unprompted disclosure – 20% to 70%; or
- deliberate and prompted disclosure – 35% to 70%.
The FTT found that the taxpayer’s failure to notify was deliberate but then had to decide whether the taxpayer’s disclosure was ‘prompted’ (as HMRC alleged) or ‘unprompted’ (as argued by the taxpayer). HMRC operates a ‘Let property campaign’ (tinyurl.com/HMRC-LPC), which offers an opportunity for landlords who owe tax from letting out residential property to bring their tax affairs up-to-date, and to take advantage of the best possible terms. The FTT noted that the taxpayer had asked to participate in HMRC’s let property campaign. In the FTT’s view, an approach to HMRC could constitute a ‘disclosure’ if the taxpayer informed HMRC that they had not complied with the relevant obligation. The FTT concluded that this disclosure was ‘unprompted’. The penalty rate was reduced accordingly.
Practical Tip
In the most serious cases, taxpayers can face criminal prosecution for failure to notify offences. Professional advice is strongly recommended on making disclosures to HMRC.