For too long now HMRC have been telling directors of limited companies that they have a duty to register for Self- Assessment and file tax returns annually. This advice is contained in the Government guidance notice on running a limited company. This, however, is at odds with what the actual legislation says.
Section 7(1) of the Taxes Management Act 1970 states that a person who is chargeable to income tax or capital gains tax in a tax year must notify HMRC within six months from the end of the relevant tax year and effectively register for Self- Assessment.
By the letter of the law therefore, a director who is a non-taxpayer should not be compelled to register for Self-Assessment and file annual tax returns unless they receive a notice to do so from HMRC.
In the recent First Tier Tax Tribunal case of Mohammed Salem Kadhem v HMRC, the taxpayer appealed against penalty notices totalling £1,300 imposed on him by HMRC for not filing his 2015 tax return on time. Part of his appeal was that the legislation does not state that an individual has to file a tax return purely on the basis that they are a company director. He contended that tax returns are required to be submitted by individuals who receive income from several sources (not completely true) but he only received a salary from his directorship that was taxed at source under PAYE.
Mr Kadhem was appointed a director of Tadmor Property Services Ltd on 27th May 2014. HMRC maintained that Kadhem registered for Self-Assessment which was denied by the taxpayer and it was suggested that HMRC had set up a Self-Assessment record independently on 18th December 2014.
HMRC maintained that they sent Kadhem a notice to file a 2015 tax return on 6th April 2015 which the taxpayer denied receiving. Eventually he submitted the return on or around 21st September 2016, nearly eight months after the filing deadline. This was however in response to receiving two penalty notices totalling £1,200 in August 2016 which was the first time Kadhem realised that HMRC required him to submit a tax return.
There were two issues for the Tribunal to consider:
The Tribunal did not consider that the guidance HMRC relied upon to support their argument that all company directors must register for Self-Assessment and file tax returns each year did not have the force of law and therefore Kadhem was under no obligation to follow it. It was accepted however that where a person receives a notice to file a return then they under an obligation to do so, but that is not what the Government guidance says.
HMRC could not satisfy the Tribunal that a notice to file a tax return had been sent to Kadhem but even if they had there was no certainty it had been sent to the correct address. It was therefore concluded that the taxpayer had a reasonable excuse for not filing his 2015 by the legislative date and his appeal was allowed in full.