In Usher & Perkins, Executors of Terence J Guy (deceased) v HMRC [2016] (TC04849), the First-tier Tribunal (FTT), allowed the executors' appeal against a penalty.

Background

The taxpayer died on 15 October 2012. The estate was estimated to be valued at some £1.5million. An inheritance tax return was filed in January 2013 and probate applied for in February 2013.

On 10 August 2013, the executors filed the taxpayer's self-assessment return for 2012/2013, which under-declared the taxpayer's income for the period from 6 April 2012 to the date of death.

On 26 September 2013, one of the executors wrote to HMRC enclosing a cheque for £15,332.92, representing what they believed to be the outstanding income tax due. The letter stated that 'I will have to presume that this is in full and final settlement, as I am now proceeding to finalise and distribute the estate'.

The executors proceeded to distribute the estate but failed to publish the statutory notice in the London Gazette notifying potential creditors that they intended to distribute the estate. This would have given creditors a period of two months in which to lodge any claim.

In September 2014, HMRC queried whether there had been an under declaration of the deceased's income in the 2012/13 return. HMRC issued a discovery assessment under section 29, Taxes Management Act 1970.

In addition to the assessment, HMRC issued a penalty of £5,060.18 for failure to disclose income, under Schedule 27, Finance Act 2007 (FA 2007), for conduct that was 'deliberate but not concealed'.

The executors accepted that their conduct had been careless since the figures in the self-assessment tax return did not match those in the inheritance tax return they had filed, which had contained the correct figure for the deceased's investment income, but they did not accept that their conduct had been deliberate. The executors felt aggrieved that HMRC had taken a year to raise its query and after it had been given explicit notice that the estate was to be distributed. Although HMRC admitted poor customer service, it maintained the penalty.

The executors appealed to the FTT.

FTT's decision

The executors argued that they had no reason to attempt to evade the relatively small amount of tax in issue. The error made in the return had been a genuine error and the correct amount of income tax could have been paid had HMRC simply asked for it in good time following the executor's letter of 26 September 2013. HMRC's delay in responding to the letter was the cause of the predicament in which the executors now found themselves: having distributed all the estate and having no legal right of reimbursement against the beneficiaries.

The executors accepted that their error had been 'careless' but it was not reckless or with intent to cause loss to HMRC. They accepted that the tax was lawfully due, but argued that due to the mistake being genuine and unintentional, a penalty should not have been levied against them.

The FTT agreed and commented that under paragraph 11, Schedule 24, FA 2007, HMRC could have reduced the penalty 'because of special circumstances'. HMRC's admitted delays in dealing with the case (including poor and untimely customer service), warranted 'some consideration of special circumstances'. Had HMRC's delays not occurred, it 'might well have spared [the executors] the difficulty they are in now'. Accordingly, the appeal was allowed.

Comment

The FTT pointed out that it did not have jurisdiction to deal with matters of maladministration on the part of HMRC, but it was clearly influenced by HMRC's delay in dealing with the case and considered this partly the reason for the executors' difficulties and consequently it reduced the penalty to nil.

Sadly, such delay on the part of HMRC is not uncommon. It is not unreasonable for taxpayers to expect a more efficient service from HMRC and it is to be hoped that decisions such as this will encourage HMRC to raise its level of customer service.

This case is also a useful reminder of the protection afforded by section 27, Trustee Act 1925. Section 27 enables trustees or personal representatives to protect themselves from liability against any claims from creditors and/or beneficiaries that they have not had any notice of at the time that they convey or distribute the property in question, provided that the notice placed complies with the requirements of that section. This includes, among other things, advertising the intention to convey or distribute the property through a notice placed in the London Gazette. Though it is not a legal requirement, any trustee or personal representative placing a notice in accordance with section 27 will not be liable to any such creditors or beneficiaries.