£1k penalties quashed as taxpayer ‘genuinely mistaken’

Sara White, Editor, Business & Accountancy Daily @ Croner-i

A property owner had penalties for late payment cancelled after an HMRC letter about her ex-husband who had left the country caused a misunderstanding.

Sayrun Lamuth appealed against late payment penalties totalling £1,050 for the tax years ending April 2021, 2022 and 2023 issued by HMRC under schedule 56 Finance Act 2009 and represented herself at the tribunal.

The penalties related to rental income from a property, which was jointly owned with her former husband, and continued to be paid to her in the UK after the couple were divorced back in 2011 and he moved abroad.

The First Tier Tribunal (FTT) acknowledged that ‘the nature of the ownership post 2015 was difficult to determine, the appellant having stated both that it was put into trust for her three children in 2015 and that she and her ex-husband were each 50% owners’, but the ownership status was not disputed by HMRC.

The appellant received a letter from HMRC dated 17 March 2017, addressed to her ex-husband, Mr Lao, which granted him approval to receive rental income with no tax deducted.

Upon reading this letter Lao assumed that rents he received were not liable to tax in the UK because he was not British and not resident in the UK.

But Lamuth misunderstood the letter and assumed that the rental income she was receiving was also not liable to tax.

The tribunal heard that two years later, on 31 July 2019, Mrs Lamuth phoned HMRC and was told she did not need to file any tax returns from tax year 2018-19 onwards. With the understanding that she did not have to file tax returns, for five years this was the case.

Although she earned rental income, she had sent the money directly to Lao ‘via acquaintances of his in Cambodia’ since 2017. As a result, she thought she was not ‘personally in receipt of it and did not need to declare it’.

The tribunal accepted that ‘this was her genuine belief’ and found Lamuth a ‘willing and truthful witness that was not seeking to mislead’.

Then on 27 March 2024, Lamuth, now retired, again phoned HMRC to check the status of her taxes and was told that she did not need to complete returns from 2018-19 onwards and that there would not be any interest and penalties for late payments. Transcripts of the phone calls were provided and the tribunal indicated they were an ’accurate record of the conversation that took place’.

However, when she explained about the property income, HMRC told the appellant that ‘if she was receiving half of the rental income it needed to be declared and tax paid upon it, even if she chose to give it away’.

So the appellant immediately set to completing her tax returns and sent them to HMRC by post on 18 May 2024 and on 8 June 2024. She received a self assessment tax calculation letter dated 28 August 2024 on 5 September 2024, and after contacting the debt management team at HMRC to find out how to pay, she immediately paid the full amount due for £11,797.24 on 6 September, covering the bill for three tax years.

At the tribunal, HMRC litigator Tracey Francis argued that Lamuth could not rely on the letter of March 2017 to overturn the penalties, and if she was unclear about her tax position ‘she should have sought advice from HMRC or a tax professional’.

Although the tribunal accepted that HMRC had calculated the penalties correctly as the payments were late, they were not persuaded that Lamuth’s behaviour was deliberate.

Applying the test set out in the Perrin case about the tribunal’s approach when considering a ‘reasonable excuse’, Judge Rupert Davies said: ‘We accept that the appellant was genuinely mistaken when she thought that there was no tax due on her rental income.

‘We consider that the appellant’s mistaken belief that she did not need to declare her share of the rental income, in combination with an attempt to enquire as to the correctness of her assumption, amounts to a reasonable excuse.’

Lamuth had made a number of attempts to clarify her tax situation with HMRC, and then, following the 2024 call with HMRC, she filed the necessary tax returns but was not told that she risked late payment penalties.

Judge Davies added: ‘Having attempted to set out the position in respect of the rental income, having asked for advice in respect of the 2016-17 return, and having received no response, it was objectively reasonable for the appellant to conclude that the respondents [HMRC] did not consider that she ought to have declared the rental income in her 2016-17 return and therefore that she did not need to declare it going forwards.’

The tribunal acknowledged that ‘the information about making payments is readily available online’ but said it was ‘objectively reasonable for the appellant to wait to receive her tax calculation from the respondent before making payment’.

Judge Davies said: ‘All the penalties were raised during the period of reasonable excuse. We therefore allow the appeal and quash the penalties.’

The appeal was allowed.