The Basics
Since 6th April 2015, non-resident individuals have been subject to a UK capital gains tax charge on disposals of UK residential properties. Non-resident sellers must file a return with HMRC within 30 days of completion of the disposal (unless it is a no gain/no loss disposal – e.g. a gift made to a spouse).
Taxpayers already within the self-assessment regime must note the gain on their self-assessment return and pay any tax due on the usual due dates. However, taxpayers outside of the scope of self-assessment must make payment of any tax due as a result of the disposal at the same time as submitting their non-resident capital gains tax (“NRCGT”) return.
Failure to submit an NRCGT return is subject to late filing penalties as set out in Schedule 55 of the Finance Act 2009.
Case Analysis
In the recent cases of Hesketh v HMRC and Welland v HMRC late filing penalties were upheld. The First-Tier tribunal departed from the previous (and arguably generous) approach adopted in McGreevy v HMRC and Saunders v HMRC whereby the penalties applied for late NRCGT returns were cancelled. It appears that ignorance of the NRCGT regime can no longer be relied upon as a reasonable excuse to mitigate payment of late filing penalties.
In the cases of Hesketh and Welland, Judge Mosedale confirmed First-Tier Tribunal decisions do not create binding precedents and, therefore, she was at liberty not to follow the previous decision of Judge Thomas in the case of McGreevy. Mosedale J went on to disagree with the analysis of Thomas J and held that the late filing penalties incurred applied and were payable by the taxpayer. Principally, Mosedale disagreed with the reasoning of Thomas J in relation to ignorance of the law.
In McGreevy, Thomas J criticised the argument advanced by counsel for HMRC that taxpayers have an obligation to keep themselves informed of changes to tax laws and ignorance of such changes is not a reasonable excuse stating:
“the arguments advanced by HMRC about knowledge of the law are little short of preposterous. To say that information about NRCGT returns is ‘well within the public domain’…is…claptrap. It is also preposterous to expect that a document on HMRC’s website which is not easy to find for a tax judge makes invalid all possible excuses about not knowing of the NRCGT deadlines. There is a serious deficiency exhibited here in common sense proportion and an ability to consider the position of what HMRC calls its customer”.
In contrast, Mosedale J reasoned in Hesketh that HMRC could not possibly be obligated to notify all taxpayers who would be potentially be affected by new regimes of changes to the law noting:
“…Parliament cannot have intended to give HMRC such an onerous (not to mention expensive) duty. On the contrary, parliament must expect citizens to be proactive in taking responsibility for ensuring they obey the law”.
It was held that ignorance of the introduction of the NRCGT regime (and the associated deadlines) was not an excuse and the penalties in the cases of Hesketh and Welland were upheld. However, Mosedale J decided that the “special circumstances” rule prevailed in the case of Welland where he had disposed of three separate properties in one tax year. Mosedale J held that all three NRCGT late filing penalties were not payable by the taxpayer as he did not have time to learn from his late filing error until it was too late.
Where Are We Now?
This leaves the taxpayer in a precarious position when considering the likely outcome of NRCGT penalty appeals. Four cases have considered ignorance as a reasonable excuse for late filing of NRCGT returns with differing outcomes. Although McGreevy and Saunders were held in favour of the tax payer, the more recent cases of Hesketh and Welland upheld and applied the penalties. Consistency will only be achieved by a decision (and binding precedent) of the Upper Tribunal. However, on the sums often involved with NRCGT penalties, it is unlikely such appeals will be pursued this far due to the extensive costs involved with litigating an appeal.
If you have any questions on this briefing note or require advice in relation to appealing penalties applied by HMRC, please contact Katie Underhill who will be able to assist.
This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force in January 2018.
This briefing was posted on 2 February 2018
