HMRC’s U-turn on the requirement to file tax returns by directors.

HMRC has made changes to its guidance on the requirement to file tax returns by directors. The guidance now makes a clearer statement that is more closely linked to the legislative requirement and the previous statements suggesting all directors’ have an obligation to file tax returns has been removed.

The recent amendments to HMRC’s guidance following the conclusion of Mohammed Salem Kadhem v HMRC [2017] TC05929, in which the tribunal ruled that ‘[The previous] government guidance notice [did] not accurately reflect what the law says’ will stop automatic self-assessment notices for directors.

When should a director submit tax return

Broadly, an individual (including a director) is required to fill in a tax return in three circumstances:

  1. notice to file was issued by HMRC
  2. there is statutory requirement to notify HMRC of his chargeability to income tax (section 7 TMA 1970)
  3. a tax relief or refund is to be claimed.

Notice to file issued by HMRC to tax payer

Under Taxes Management Act 1970 section 8(1):

Any person may be required by a notice given to him by an inspector or other officer of the Board to deliver to the officer within the time limited by the notice a return of his income, computed in accordance with the Income Tax Acts and specifying each separate source of income and the amount from each source.

What if the notice to file is not received?

HMRC may send a notice to file to a director who has not got any income to tax, and so does not expect it. If the notice is not received, and the director does not file the return, there is a risk of late filing penalties if HMRC can prove that the notice was in fact sent and was sent to the correct address. Precedent was established in Mohammed Salem Kadhem v HMRC [2017] TC05929 , when a director successfully appealed a late filing penalty as there was insufficient evidence to show that HMRC had sent him a notice to file.

2 Obligation on tax payer to notify HMRC

Taxes Management Act 1970  section 7 (1) and (2) refers to obligation to notify of liability to tax, as follows:

 (1) Every person who is chargeable to income tax for any year of assessment and who has not delivered a return of his profits or gains or his total income for that year in accordance with the provisions of the Income Tax Acts shall, not later than one year after the end of that year of assessment, give notice that he is so chargeable.

(2) A notice under this section shall be given to the inspector or, in the case of an individual who is not chargeable to income tax other than surtax, either to the inspector or to the Board.

 3 Tax relief or refund to be claimed

In circumstances when a director will only be able to obtain a tax refund or claim a tax relief via self-assessment tax return, a tax return submission will be necessary.

HMRC clarification

In Agent Update HMRC states that ‘If an individual has received a notice to file and has no other taxable income to report, they can ask for the notice to file to be withdrawn. However, HMRC may decide that they still require a return and if so, the return must be submitted, otherwise penalties may be incurred.’

Article from ACCA In Practice