Prison presents no escape from HMRC

03 May 2024

The decision in the First-tier Tribunal case of Stanley Augustine Herrmann v HMRC, published on 10 April 2024, highlights that a taxpayer’s obligations extend beyond the bars of prison and that income received whilst in prison, or during any other extended period when they are unable to manage their business and resulting tax affairs in person, is still reportable to HMRC.

It may have taken HMRC some time to discover the unpaid tax due from Mr Herrmann, but this case demonstrates how far back HMRC can go. Mr Herrmann had failed to notify HMRC of rental income received during the tax years 2002/03 to 2017/18 and HMRC raised assessments and penalties in 2020 in relation to these tax years. During this period, Mr Herrmann was in prison between December 2002 and December 2012.

Mr Herrmann argued that he should not be chargeable to income tax whilst in prison. He contended that as he was not permitted to conduct business from prison, he should not pay tax on any business income. HMRC successfully argued that it is clear that statute contains no exemption for tax for persons in prison.

Mr Herrmann also argued that he had hired an agent to deal with everything to do with his properties whilst in prison and had assumed that his associated tax affairs were being looked after. As it turned out, Mr Herrmann had hired an estate agent to deal with the management of the properties before going to prison and had not appointed anyone to act as his tax agent.

The estate agent had passed away in 2014 and the tribunal made it clear that it did not consider that an estate agent should have been expected to be responsible for undertaking tax compliance duties for Mr Herrmann.

With a little under £22,000 tax at stake, HMRC charged penalties of 15% to 25% of the unpaid tax for each of the tax years in question. Mr Herrmann had a number of arguments for why these penalties should not have been levied, the first being that he was not served with a notice to file a tax return. However, the legislation is clear that it is the taxpayer’s obligation to notify HMRC of a tax liability incurred within six months of the end of the tax year in question. 

One potential escape route from penalties arises where the taxpayer has a reasonable excuse. In addition to his claims that his estate agent was responsible for the undisclosed income, Mr Herrmann further contended that he did not have time to ‘get to grips’ with his tax obligations before going into prison. This argument was countered by the fact that the first property was bought almost two years before he entered prison, and he had still found time to make arrangements for the management of the property in his absence. 

Unsurprisingly, the tribunal found in HMRC’s favour and upheld the penalties and assessments. As a result, those who experience an extended period when they are unable to actively manage their business and resulting tax affairs in person might want to ensure they are up to date with their tax obligations and that their tax returns are correct.