HICBC is not income under the Discovery rules

In HMRC v Jason Wilkes [2021] UKUT150, the Upper Tribunal (UT) agreed that the High-Income Child Benefit Charge was not income to be Discovered under s.29 TMA 1970. HMRC had interpreted s.29 too broadly and could have used other powers to collect the tax due.

This was a case relating to the High-Income Child Benefit Charge (HICBC) which turned on the statutory construction of the Discovery assessment rules under s.29 TMA 1970. The amount of tax involved was small, however, the case has wider significance about when the discovery provisions can, and should, be used by HMRC. Hence the taxpayer’s legal team agreed to act on a pro bono basis.

Mr Wilkes had been assessed to the HICBC under the discovery provisions at s.29(1)(a) TMA 1970 for three tax years.

• For the relevant years his wife had claimed child benefit and his Adjusted Net income exceeded £50,000 in each year but he had not submitted a tax return or been issued with a notice to file.
• He Appealed the assessments. The First Tier Tribunal (FTT) held that whilst he was liable to the HICBC and HMRC had made a discovery, the assessments were not validly raised. The officer in question had not discovered any “income which ought to have been assessed to Income Tax” within s.29(1)(a) TMA.
• HMRC appealed:
  • As no return was submitted, Mr Wilkes’s income was not assessed to the HICBC. HMRC made a discovery that there was income that ought to have been assessed to Income Tax and had not been so assessed, and s.29(1)(a) TMA applied.
  • S.29 should be interpreted purposively such that it permitted a discovery assessment of “amounts liable to income tax” rather than 'income'.
  • There was an obvious drafting error in s.29 and the FTT had erred in law by failing to correct it. If a taxpayer submitted a tax return but omitted the HICBC a discovery assessment could be raised. It would be unjust if discovery could not apply if the same taxpayer had Failed to notify chargeability and had not filed a return at all.

The Upper Tribunal (UT) dismissed HMRC’s appeal.

• HMRC had expressed the purpose of s.29 too widely. Its purpose is to assess income and not amounts of Income Tax and is not intended to cover any shortfall Income Tax.
• S.29 stands apart from and predates the Self Assessment (SA) system and is not intended to be an integral part of that system. When SA was introduced changes were made to s.29 yet parliament did not choose to amend it to assess ‘amounts of Income Tax’ instead of just profits or income’.
• Since HMRC administer child benefit they were better placed than in other circumstances, to identify from their records when additional tax was due and issue a notice to file. In fact, they identified the discrepancy with Mr Wilkes in this way and did so within the four-year window for issuing a notice to file.
  • HMRC could have issued a Notice to file and then if one was not filed a determination to Income Tax could have been made under s.28C TMA.
  • Alternatively, a Simple Assessment could have been issued under s.28H which would have had a twenty-year time limit as there was a failure to notify liability to tax.
• There was no discovery of income that ought to have been assessed. The discovery was of a failure to pay the HICBC.
• There was no obvious drafting error. If s.29 required amendment this would be more than correcting an error, it would be judicial legislation and outside the powers of the FTT. Considering parliament’s intention and the fact that s.29 is not part of SA, the UT was not satisfied that any such amendment was required.

UPDATE: HMRC is appealing the decision to the Court of Appeal.

Finance Act 2022 Update

Note that Finance Act 2022 has changed the discovery provisions retrospectively such that they can be used to collect taxes on omitted High-Income Child Benefit Charge.

Useful guides on this topic

High-Income Child Benefit Tax Charge
What is the High-Income Child Benefit Charge? Who pays it? Can you appeal against an assessment? Are there any useful cases from the tax tribunals? 

Discovery assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences? Case law tracker.

S.8(1) notice to file a tax return
This guide examines the implications of a notice sent to an individual under s.8(1) TMA 1970 to file a tax return.

Penalties: Failure to Notify
What tax penalties apply if you fail to notify HMRC that you are chargeable to tax? Can they be appealed or reduced?

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Grounds for Appeal: HMRC error or flaw
When can an error, mistake or procedural flaw made by HMRC provide a valid ground for making an appeal?

Do I have to file a tax return?
When does an individual need to file a tax return? In what circumstances do HMRC need to be notified that a tax return is required?

External link

HMRC v Jason Wilkes [2021] UKUT150