Introduction

Lau v. Revenue and Customs ([2018] UKFTT 230 (TC)) is a pivotal case adjudicated by the First-tier Tribunal (Tax) on April 23, 2018. The appellant, David Lau, contested a penalty of £155.20 imposed under Schedule 41 of the Finance Act 2008 concerning the High Income Child Benefit Charge (HICBC) for the tax year 2014/15. The crux of the matter was Lau's failure to notify Her Majesty's Revenue and Customs (HMRC) that his income had surpassed the £50,000 threshold, thereby incurring the HICBC liability. The respondents, representing HMRC, upheld the penalty, leading Lau to appeal the decision.

Summary of the Judgment

The Tribunal dismissed Lau's appeal, affirming the penalty imposed for failing to notify HMRC of his HICBC liability. Lau argued that his lack of awareness regarding the HICBC obligations, attributed to his limited engagement with news media, constituted a reasonable excuse. However, the Tribunal found that ignorance of the law does not exempt one from compliance. The decision emphasized that taxpayers must proactively ascertain their tax obligations, especially when significant income thresholds are crossed. The Tribunal also highlighted that HMRC is not obligated to notify individual taxpayers directly about such changes unless their income meets the specified criteria at the relevant time.

Analysis

Precedents Cited

The judgment references several key precedents that shaped its reasoning:

• Robertson v HMRC [2018] UKFTT 158 (TCC): Discussed the validity of assessments under Section 29 TMA.
• Whitney v Commissioners of Inland Revenue [1926] AC 37: Highlighted the stages of tax imposition, emphasizing the distinction between liability and assessment.
• Bloomsbury Verlag GmBH v HMRC [2015] UKFTT 660 (TC): Reinforced the principles laid out in Whitney regarding tax liability and assessment.
• Rowland v HMRC [2006] STC (SCD) 536: Clarified that a reasonable excuse must be assessed based on all circumstances of the case.
• Schola UK Limited v HMRC [2011] UKFTT 130 (TC): Stated that consideration of reasonable excuse involves evaluating the taxpayer's actions from a prudent perspective.
• Julie Aston v HMRC [2013] UKFTT 140 (TC): Asserted that ignorance of the law is not a valid excuse for non-compliance.
• Qualapharm [2016] UKFTT 100 (TC): Supported the stance that ignorance of the law cannot be a reasonable excuse.
• Crabtree v Hinchcliffe (Inspector of Taxes) [1971] 3 All ER 967: Defined "special circumstances" in the context of penalty reductions.
• HMRC v Anthony Bosher [2013] UKUT 579 (TCC): Clarified the Tribunal's lack of jurisdiction in assessing proportionality of fixed penalties.
• HMRC v Hok [2012] UKUT 363: Reinforced the Tribunal's inability to discharge penalties on the grounds of unfairness.

Legal Reasoning

The Tribunal's legal reasoning centered on the interpretation of Schedule 41 of the Finance Act 2008, which stipulates penalties for failing to notify HMRC of tax liabilities under Section 7 of the Taxes Management Act 1970 (TMA), as amended. The key points include:

• Liability vs. Assessment: Drawing from Whitney and Bloomsbury Verlag, the Tribunal emphasized that liability to tax exists independently of any formal assessment. In Lau's case, his income exceeded the HICBC threshold, establishing liability regardless of whether HMRC had formally assessed the tax.
• Potential Lost Revenue (PLR): The penalty was calculated based on 20% of the unpaid tax, as per Schedule 41 Paragraph 6 and 7(2), considering the PLR resulting from Lau's failure to notify.
• Reasonable Excuse: Applying precedents from Rowland and Schola UK Limited, the Tribunal assessed Lau's claim of ignorance. It concluded that ignorance of the law, especially when the taxpayer's income status unequivocally triggers HICBC obligations, does not constitute a reasonable excuse.
• Special Circumstances: Referencing Crabtree v Hinchcliffe, the Tribunal determined that Lau's situation did not present any unusual or uncommon factors that would warrant a reduction of the penalty.
• Proportionality and Tribunal Jurisdiction: The Tribunal acknowledged that, per HMRC v Anthony Bosher and HMRC v Hok, it lacks the jurisdiction to assess the proportionality or fairness of fixed penalties, thereby affirming HMRC's decision.

Impact

The judgment reinforces the strict adherence required by taxpayers to notify HMRC of their HICBC liabilities upon exceeding the income threshold. It underscores that:

• Taxpayers cannot rely on ignorance or passive awareness to fulfill their tax obligations.
• HMRC is not mandated to provide individualized notifications unless specific income criteria are met at the time of legislative changes.
• Penalties for non-compliance are robust and not easily circumvented by claims of unawareness.

Future cases involving HICBC will likely follow this precedent, emphasizing proactive taxpayer responsibility and reinforcing HMRC's enforcement mechanisms.

Complex Concepts Simplified

High Income Child Benefit Charge (HICBC)

HICBC is a tax charge applicable to individuals or their partners earning over £50,000 annually who receive child benefit. It is designed to taper off child benefits for higher earners, effectively withdrawing the benefit through taxation. Taxpayers must notify HMRC if their income exceeds the threshold to ensure correct tax calculations and avoid penalties.

Schedule 41 of the Finance Act 2008

This schedule outlines penalties for taxpayers who fail to notify HMRC of their tax liabilities. Specifically, Paragraph 1 imposes a penalty if a taxpayer doesn't inform HMRC of their chargeable income within six months after the tax year ends, unless there is no liability under certain conditions.

Potential Lost Revenue (PLR)

PLR refers to the estimated amount of tax revenue HMRC could have potentially collected had the taxpayer complied with notification obligations. In this case, it's calculated as 20% of the unpaid tax resulting from Lau's failure to notify HMRC about his HICBC liability.

Reasonable Excuse

A reasonable excuse is a valid justification for failing to comply with tax obligations, assessed based on the taxpayer's specific circumstances. It requires demonstrating that all reasonable steps were taken to comply with the law and that non-compliance was beyond the taxpayer's control.

Conclusion

The Lau v Revenue and Customs case underscores the imperative for taxpayers to remain vigilant and proactive in managing their tax obligations, especially in light of legislative changes like the HICBC. The Tribunal's decision reaffirms that ignorance of the law is not an acceptable defense against non-compliance penalties. By upholding the penalty, the Tribunal reinforces HMRC's authority to enforce tax notifications and ensures that the enforcement of tax laws remains stringent. This judgment serves as a critical reminder to all taxpayers about the importance of understanding and adhering to their tax responsibilities to avoid similar penalties in the future.