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To file or not to file

Should directors always complete a tax return?

The filing date for submission of 2017 Self-Assessment tax returns is imminent, i.e. 31st January 2018, and there will be some company directors frantically starting to prepare their returns in time to meet the deadline. Is it however incumbent on a director to file a return when they have no liability to Income Tax?

HMRC’s guidance notice on running a limited company instructs that it is a director’s duty to register for Self-Assessment and file an annual tax return. In contrast, Section 7(1) of the Taxes Management Act (TMA) 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. A non-taxpayer therefore should not be obliged to follow HMRC’s guidance unless they receive a notice to do so.

Three contrasting First Tier Tax Tribunal cases from last year highlight this very point. In 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 only received a salary from his directorship that was taxed at source under PAYE. 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 in September 2016, nearly eight months after the filing deadline.

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 had the force of law and therefore Kadhem was under no obligation to follow it. As such, Mr Kadhem had a ‘reasonable excuse’ and his appeal was upheld.

In Malinovskaya v HMRC and Kaczmarczyk v HMRC, both were directors of dormant companies and had penalties imposed upon them for late filing of tax returns of £2,250 and £3,342 respectively. Neither had a tax liability but their appeals were dismissed because they had been issued with a notice to file tax returns under Section 8 TMA 1970.

Under Section 8B TMA 1970, HMRC has the power to withdraw notices to file tax returns. It is therefore possible for contractors who are not liable to tax to ask the Revenue to withdraw a filing notice.

Very broadly, there is no requirement to notify HMRC if all of a person’s income and gains have been included in a ‘simple assessment’, or their income consists of certain sources like PAYE income and they have no chargeable gains and are not liable to the high-income child benefit charge.

By Andy Vessey

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