Failure to notify - beware the time limits!

This article was first published in Taxation magazine on 17 July 2023 as a response to a readers’ forum query. The tax in question was minimal but the non-declaration of income was for over twenty years.

Failure to notify a tax liability arises where a person makes taxable profits and fails to notify HMRC of their liability to tax. The first step is to identify whether such a failure arose. If the client was not making profits (particularly in early years, when interest rates were higher and mortgage interest was fully deductible), then failure to notify will not apply until the first period that tax was due.

If there was a failure to notify and there is no reasonable excuse, HMRC can in the first instance go back up to 2009/10 onwards.

If the failure to notify was due to the taxpayer’s ‘negligent conduct’ or similar by someone acting on their behalf, then HMRC can raise assessments going back the full 20 years.

However, if the client has a reasonable excuse for the failure to notify and the notification was made without delay once the excuse ceased, then the client is deemed not to have failed to notify and the time limits are restricted to four years from the end of the tax year in which the client had the reasonable excuse.

The second step therefore is to determine the reason for failure to notify. Does/did the client have a reasonable excuse for not declaring the tax? There is no statutory definition of reasonable excuse and each case will be taken on its own facts and merits. HMRC tends to set the bar high so if going down this route, you would need strong circumstantial evidence, if not concrete proof, of the reasonable excuse. For example, written advice to the client stating that the rental profits did not need to be declared.

Penalties will be between 10% and 30% as a failure to notify that is not corrected within a year of the tax falling due has restricted mitigation of penalties. If you can show that the client had a reasonable excuse, penalties will not be charged. There is no scope for suspension of penalties for failure to notify.

Penalties are fairly prescriptive and the stickier issues come about when HMRC are asked to use their discretion. Here, potentially, you would be asking HMRC to consider whether your client had a reasonable excuse for failure to notify.

Where limited information is available, HMRC tends to take a reasonable stance providing any assumptions made in determining the estimated tax liability are reasonable and based on supporting documentation where relevant. You have to assume HMRC will check the assumptions against what was known about the property at the time, for example rental income to property value ratios and check whether the available data broadly agrees with your estimates. HMRC’s aim is to obtain maximum revenues from the past but also ensure that going forward everything that needs to be declared is. Providing the disclosure addresses rental figures, reasons for previous non disclosure and reassurance that going forward the tax position will be kept up to date, the penalties and queries should be minimal.

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