Directors’ obligation to notify HMRC of chargeability under income tax self-assessment

Tue 20 Feb 2018

HMRC’s guidance on .GOV still says it is necessary to notify HMRC for personal tax self-assessment where:

“. . . you were a company director – unless it was for a non-profit organisation (such as a charity) and you didn’t get any pay or benefits, like a company car.”

Where HMRC attempt to charge penalties for not complying with this instructions on .GOV, the situation should be examined further to assess whether there is any basis in law for challenging the penalty.

The matter was highlighted in the recent First tier Tribunal case of Karen Symes who successfully contested a £100 penalty for not notifying a chargeability to tax under self-assessment for 2015/16 (having received the notice from HMRC on 15 December 2016).  She had previously received a P800 for that tax year showing a refund due to her.  Her income was such that she was also within the exception from having to notify a chargeability to tax.

A person chargeable to income tax or capital gains tax in a tax year must notify HMRC of their chargeability by 5 October following the tax year end, if they have not previously been registered and have not received a notice to file a self-assessment return (TMA 1970 s7). Typically there is no obligation to notify chargeability if all of the taxpayer’s income is subjected to tax and NI under PAYE.

However, there are some exceptions to the requirement to notify chargeability, including the situation where a UK resident’s income consists of dividend income which is not liable to tax at the dividend ordinary, upper or additional rates, nor the remittance basis (TMA 1970 s6A). Prior to 2016/17 TMA 1970 s.7 (6) was relevant, which excluded from notification the situation where the person’s income consisted of dividend income which was not liable to tax at anything other than the basic rate, the dividend ordinary rate, or the starting rate for savings.

Extracts from the decision include the following comments by the Tribunal Judge:

 “I do not understand what the “statutory obligation” HMRC refer to is.  No one has a statutory obligation to do anything in relation to income tax simply because they are a director of a company …  The statutory obligation on every person is to notify liability if they are chargeable to tax and their income and gains do not fall within at least one of the exceptions in subsections (4) to (7) of s 7 TMA.  A director is, in relation to any profits from their directorship, chargeable to tax on income falling within the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).  Prima facie all such income is within the scope of PAYE, either because it is PAYE income within the meaning given in ITEPA and the PAYE Regulations or it is taken into account in determining a code number, for example benefits in kind, and so falls within s 7(4) and (5) TMA.

Being a director per se does not entitle a person to dividends.  Being a shareholder is what does that.  Many small family companies will, mainly for reasons connected with National Insurance Contributions liability, pay dividends, which are not earnings for that purpose, rather than salary or fees which are.  Up to and including 2015-16 dividends still coming within the basic rate band when treated as they must be, as the top slice of income, fall within the s 7(6) TMA exclusion, as in this case.  If dividends from the company of which a person is a director fall within the higher rate band or above, then there was a liability to notify, but not because of being a director. What is said by HMRC in this case confuses the criteria by which HMRC exercise their discretion to issue a notice to file with the statutory obligation to notify liability.”

For a further discussion of how to handle disputes with HMRC, please get in touch with a member of the Mazars tax investigation team.