It does not go without saying

Director was not compelled to file tax return

Most recently there has been a number of First-tier Tax Tribunal rulings concerning whether directors of limited companies have to register for Self-Assessment and file tax returns regardless of their income tax position.

In Kadhem v HMRC (2017), Mr Kadhem managed to successfully overturn penalties totalling £1,300 for late submission of his 2015 tax return, partly on the grounds that there is no legislative authority to support HMRC’s insistence that all directors should file returns. This was however in contrast to a couple of earlier Tribunal decisions that same year in Malinovskaya v HMRC and Kaczmarczyk v HMRC.

Both directors in the latter two cases were directors of dormant companies who failed to have their penalties waived despite the fact they did not have a tax liability, because they had been issued with a notice to file a tax return under Section 8 Taxes Management Act (TMA) 1970.

A judgment released this month in Symes v HMRC evens the score. Mrs Karen Symes, a director of her own company, appealed against a £100 penalty imposed on for failing to file her 2016 tax return by the required date.

Mrs Symes became a director of NSymes Ltd on 20th June 2014, i.e. in the tax year 2014/15. In November 2016, her accountant registered her for Self-Assessment because she would become liable to tax on her dividend income in 2016/17. HMRC, however, issued her with a paper tax return for 2016 and told her to file this by 22nd March 2017. The return was not filed until 7th April 2017 and therefore HMRC imposed a penalty of £100 for late filing.

Previously, Mrs Symes had received a tax calculation for 2015/16 from HMRC showing that she was entitled to a small tax repayment. This calculation only included PAYE income although she had been in receipt of dividends in excess of £25,000. Nevertheless, the additional dividend income was covered by her basic rate band and did not alter her tax position.

Symes had assumed that the notice to file a return related to the tax year 2016/17. As soon as she realised her error, she remedied this, but it was too late by then.

HMRC would not accept that Symes had a reasonable excuse for failing to file the 2016 tax return on time because:

1. She had a statutory obligation to notify HMRC of her requirement to complete a tax return by reason of her being a director of a company;
2. The return clearly showed the date it had to be filed;
3. Whilst the law in S.8 TMA 1970 does not specify which taxpayers are obliged to file a return, HMRC selects them according to criteria of which Symes met two, namely she was a director in 2015/16 and was in receipt of dividend income of over £10,000 from a UK company;
4. The tax calculation for the year ended 5th April 2016 invited taxpayers to tell HMRC about “in-year changes”. Anyway, as Symes was a director she was required to complete a 2016 tax return regardless of the tax calculation;
5. Self-Assessment registration showed she started as a director on 6th April 2015, so Symes was aware this fell in the 2015/16 tax year; and
6. When she received the 2016 tax return she should have contacted HMRC to confirm whether or not it needed to be completed as this is what a reasonable and prudent taxpayer would have done.

The judge took HMRC to task over its rationale that every company director has a statutory obligation to complete a tax return. The only statutory obligation here was that every person must notify HMRC if they are chargeable to income tax and capital gains on their income.

Directors’ earnings fall within the scope of PAYE and being a director per se does not entitle that person to dividends. Being a shareholder is what does that, up to and including 2015/16 dividends that fell within the basic rate band and were only subject to further taxation when they fell within the higher rate band. Only at that point would a director have a duty to notify HMRC of a liability to tax but not just because they were a director.

Karen Symes had no tax liability to notify for 2015/16 and relied upon the correct advice of her accountant when she registered for Self-Assessment for 2016/17. She therefore had a reasonable excuse for not filing the 2016 return on time and her appeal was allowed.

HMRC’s guidance ‘Who must send a tax return’ is wrong with reference to directors and the Revenue should be aware of this and do something about it quickly, as it needs to reflect what the legislation says not what they arrogantly believe to be the position.

Whilst dividend taxation is now likely to mean that most director-shareholders will fall within the tax net, those that don’t and are not liable to tax should be able to rely on the law. However, it might be easier to ask HMRC to withdraw a notice to file a tax return under S.8 TMA 1970.