IHT & New Penalty Regime
For events on or after 1 April 2009 the liable person(s) may be charged penalties if they do not take reasonable care in preparing their IHT account or excepted estate return. Have you updated your practice and procedures to avoid penalties?
HMRC has developed one penalty regime for inaccuracies in tax returns and other tax documents that applies across most of the board. Schedule 24 FA 2007 introduced this new regime for Income Tax, CGT and some other major taxes and therefore please note the new regime applies to Trust & Estate Returns (SA900) filed after 1 April 2009.
Schedule 40 FA 2008 contained provisions to extend this regime to many other taxes including IHT and the commencement order [SI 2009 No 404] has been published indicating that the new penalty regime will apply to all chargeable events for IHT that occur on or after 1 April 2009. The provisions of s.247(1) & (2) IHTA 1984 applies to events occurring before that date see HMRC IHT & Trusts Newsletter for April 2009.
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The Finance Bill 2009 contains provisions in clause 105 and Schedule 55 to charge a penalty for late filing of returns for most taxes including IHT. Clause 106 and Schedule 56 contains provisions to create a new penalty regime for late payment of tax in respect of most taxes including IHT.
The new test
The test is now of ‘reasonable care’ rather than negligence. HMRC considers that PRs will have taken reasonable care where they:
- Follow the guidance provided about filling in forms such as IHT400 and IHT205/207/C5
- Make suitable enquiries of asset holders and other people to establish the extent of the deceased’s estate
- Ensure correct instructions are given to valuers when valuing assets
- Seek advice about anything they are unsure of
- Follow up inconsistencies in information they receive from asset holders, valuers and other people
- Identify any estimated values included on the form
Where the PRs leave all this to probate practitioners HMRC expects the PRs to check through the form before signing it and to question anything that does not accord with what they know about the deceased. Simply signing an account completed by an agent will not be seen as taking reasonable care.
Where IHT is payable other than on death HMRC expects the transferor (or trustees) to deliver a full and complete return of the transaction concerned and to have sought professional advice as necessary. Again, simply signing an account completed by an agent is not taking reasonable care.
The role of the tax agent
HMRC acknowledge that the work of tax agents for the most part assists HMRC in the correct collection of appropriate taxes. However, some agents do cause problems and HMRC are currently consulting on how the role of the tax agent should be viewed and whether penalties could be levied on the agent for failure to maintain good standards. You can find the consultation document at Modernising Powers, Deterrents & Safeguards: Working with Tax Agents.
There is even talk of a registration system for agents and the prospect of a referral by HMRC to a relevant regulatory body who supervises the agent where persistent inadequate service is provided in the hope and expectation that the regulatory authority will take disciplinary action against its member.
A recent case
In the light of the new penalty regime for IHT it would be interesting to know how the case of Gordon Cairns, a Scottish solicitor acting as tax agent, might be dealt with, assuming the summons was correctly drawn:
Gordon Cairns was a Scottish solicitor of experience and repute. In November 2003 he was appointed under Adults with Incapacity (Scotland) Act 2000 to act as Victor Webb’s (the deceased) guardian. He prepared an inventory of his assets which involved obtaining a valuation of Victor’s property Stonefield.
The valuers, Barr Brady valued the property on 23 January 2004 at in the region of £400,000 but couched their valuation with qualifications because of its serious state of disrepair.
Victor wanted to return to live in the property with his son Andrew, who suffered from learning difficulties. In order that this could happen Mr Cairns arranged for £10,000 to be spent on making the property wind and water tight and clearing the garden so that the property could be accessed. 20 skips of materials and rubbish were removed! Only one room was habitable, the kitchen was very basic and the water supply suspect. Mr Cairns was unable to obtain insurance for the property.
Victor did return to live in the property with Andrew and died on 12 October 2004 aged 89 years. Under his Will he left half of the residue of his estate to a family trust which has been set up in 1998 and the other half was left on life interest for one of his sons and on his death the reversion was also to pass to the family trust. Andrew remained at the property until Local Authority housing could be obtained.
Mr Cairns began the administration of the estate in the usual way; he obtained a bridging loan for the IHT and sent the IHT 200 dated 28 April 2005 to HMRC on 29 April 2005 with a cheque for £30,000 on account of the IHT due. The IHT 200 included Stonefield at £400,000. No later valuation was obtained because he felt it would be a waste of money given the market had not changed between January and October 2004 and it was going to be sold. The likelihood was that the District Valuer would accept the sale price as the date of death price and any adjustment to the IHT bill could be accounted for at that time. Mr Cairns was aware that interest would start to run on the IHT from 1 May 2005.
Mr Cairns property manager (this being a Scottish firm) was asked to market the property for sale and she recommended advertising the property at offers over £500,000. Stonefield was so marketed in April 2005. There were a number of interested parties as the property had a lot of potential. Six offers were received ranging from £425,000 to £695,000. Although the highest offer was accepted it fell through and the property was eventually sold for £600,000.
HMRC was kept informed of developments. After the sale a cheque for £158,860.04 was sent to HMRC for their estimated figure for the tax due even though the extent of the deceased’s estate was not formally concluded. In the end some tax was refunded.
By mid-December 2006 the District Valuer agreed the date of death value of Stonefield at £600,000.
HMRC issued a penalty notice for £33,559.51 arguing that Mr Cairns had furnished an incorrect account and did so negligently. It was agreed that it would have been prudent to have indicated on IHT 200 that the valuation of Stonefield was an estimate but this was said to be a narrow technical failure of no consequence whatsoever and did not justify a penalty or at least only a nominal one.
The Special Commissioner actually found the summons to be insufficient but took the trouble to consider the substantive matter in case he was overruled on the question of the validity of the summons. He concluded that Mr Cairns acted in good faith and any finding of negligence would have been the merest technicality. There was no loss to HMRC, in fact there was a repayment made. HMRC was kept fully informed throughout and Mr Cairns co-operated with them.
Imposing a penalty under the new system
Two conditions must be satisfied before HMRC can charge a penalty
The document given to HMRC contains an inaccuracy that leads to:
- an understatement of the person’s liability to tax
- a false or inflated statement of a loss by the person
- a false or inflated claim to repayment of tax
The inaccuracy must be careless, deliberate or deliberate and concealed.
The new regime will increase penalties for the more serious offences while taking out of the scope for a penalty a mistake made despite taking reasonable care.
Penalties are applied in addition to the tax due as a result of correcting the error as follows:
|Customer can demonstrate reasonable care, yet submits incorrect return||No penalty|
|Careless/under-assessed because no return||30%|
Unprompted disclosures by the tax payer can result in a substantial reduction – these are disclosures made at a time when the person making them has no reason to believe that HMRC has discovered or are about to discover the inaccuracy or underassessment.
To calculate the reductions HMRC will consider 3 elements: Is the customer
- telling them about the error
- helping them work out what extra tax is due
- giving them access to their records to check the figures
It is possible that under the new regime a penalty of 30% may have been threatened for being careless but surely there would be no penalty because Mr Cairns could demonstrate that reasonable care had been taken even though an ultimately incorrect return was submitted.
The HMRC IHT & Trusts Newsletter for April 2009 says that HMRC will continue to discuss any case in which it is considered that a penalty may be charged. The extent to which the taxpayer is able to help HMRC with their enquiries and provide copies of any documents requested will govern the extent to which the maximum penalty payable can be reduced. The aim is to settle the majority of penalty cases through discussion.
The New tax tribunal system
If a penalty or its reduction cannot be agreed then a penalty assessment will be issued against which a liable person can appeal. The new processes for dealing with appeals within the Tribunal system will also apply to IHT from 1 April 2009. The relevant fact sheet which explains how to appeal can be found at here: Factsheet download
The new Tribunal system will include the option of asking HMRC to conduct an internal review of the decision to charge a penalty. The review officer will be able to uphold the original decision but also to vary or quash it. If the internal review upholds the decision to charge a penalty, the liable person will be able to ask for the case to be heard before the Tax Chamber of the First Tier Tribunal [which replaces the General & Special Commissioners].
Where appeals from the General & Special Commissioners formerly went to the High court those appeals will now be heard by the Tax Chamber of the Upper Tribunal although for IHT there will remain a right to apply to the High Court for an appeal to be heard where the issue is substantially confined to questions of law. Appeals from the Upper Tribunal or the High Court will be to the Court of Appeal. Appeals relating to the value of land will continue to be heard by the Lands Tribunal.
- The new test is one of carelessness not negligence and therefore simple mistakes can cause a penalty to arise
- The difference between providing an estimate as opposed to a formal valuation is crucial and anytime you are not providing a valuation you must indicate on the tax form
- The review of the role of tax agents could result in you as well as the PRs receiving a penalty for a mistake made by you
© Gill Steel, LawSkills Ltd. 2009
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