Penalty case highlights need for continuous self-assessment

Over the last couple of years, HMRC has removed hundreds of thousands of individuals from the self-assessment tax return (SATR) filing system, by increasing and then abolishing the income threshold at which point individuals were required to file a SATR.

In attempts to further simplify the UK personal tax landscape, HMRC has announced plans to remove more taxpayers from the SATR filing system in the future by introducing new online services for side-hustlers and employees in receipt of child benefit.

We previously wrote about some potential tax traps for individuals removed from self-assessment. A recent case has highlighted the importance of staying on top of your compliance obligations, particularly as your circumstances change.

The First-tier Tribunal (FTT) case of Asim Hussain v HMRC, an appeal brought by Mr Hussain against failure to notify penalties, raises some important points for those individuals whose circumstances subsequently change following removal from self-assessment.

Mr Hussain submitted annual SATRs for more than a decade until he received a letter from HMRC informing him that he was no longer required to do so.

Although neither Mr Hussain, nor HMRC had a record of such letter, HMRC accepted that a standard computer-generated letter was likely to have been sent. The opening line of such letters stated that, “based on the information you gave us, that was the last year that you needed to send us a return.” As a result of this, Mr Hussain thought he was removed from self-assessment forever and future liabilities would be collected through PAYE.

An enquiry was subsequently opened into Mr Hussain’s rental income in November 2021. Following correspondence, in which Mr Hussain provided details of his rental income, HMRC issued a tax assessment of £3,166.60 and failure to notify penalties of £757.87. Mr Hussain was willing to pay the tax assessment but lodged an appeal against the failure to notify penalties.

Ordinarily, penalties for failure to notify apply unless the individual has a reasonable excuse. Whilst the tribunal judge noted that the opening line of the standard HMRC letter could be misleading, if read in isolation, the decision was that Mr Hussain did not have a reasonable excuse, given the overall context of the letter. Specific reference was made to the section titled “if your circumstances change” where taxpayers are directed online to check if they need to fill in a tax return.

HMRC had taken into account Mr Hussain’s circumstances and reduced the potential penalty which could have been charged by 75%, recognising his cooperation throughout HMRC’s enquiry process and on the basis that his failure to notify was not deliberate. It is worth noting that these penalties are calculated based on potential lost tax revenue. HMRC can charge penalties of up to 100% of the tax when a taxpayer has failed to notify HMRC of their chargeability to tax. Mitigation is achieved based on the taxpayer’s behaviour and cooperation with HMRC, so quantum of penalties can vary significantly on a case-by-case basis.

What this case highlights, a concept that is not always obvious, is that the UK tax system is self-assessment meaning that taxpayers are responsible for identifying whether or not a tax return is required and when tax is due. Every person has a statutory obligation to notify HMRC if they have a liability to pay tax in a tax year.

Individuals should therefore check the requirements to file a tax return annually. If in doubt, individuals should seek advice to ensure they remain compliant in their tax affairs.