Late payment surcharge – M E England Discretionary Will Trust [2010] UK FTT 188

 In Tax

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Should a lay trustee whose co-trustee was the Executor and Trust Company of a solicitor’s firm be entitled to argue that he had a reasonable excuse for the late payment of capital gains tax (CGT) on a share sale because HMRC had not drawn the payment on account feature to his attention?

The facts

Mr England was appointed joint executor and trustee with Veale Wasborough Executors and Trustee Company under the Will of his late mother. On the conclusion of the administration of her estate the discretionary trust arose and in the capacity of trustees shares were sold in February/March 2008 which resulted in a gain for the trust.

A final executor’s tax return was submitted to HMRC on 28 October 2008 and in this return it was indicated that there was a continuing trust. The Tribunal held that this was sufficient notification to HMRC of the existence of the trust.

Having had no reaction to this notification Mr England wrote to HMRC on 23 February 2009 enclosing Form 41G (Trust) which was acknowledged by HMRC on 11 March 2009 giving a reference number for the trust and confirming that arrangements had been made for a 2008 tax return to be sent to Mr England as the first named trustee.

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A return was sent to him and he completed it and sent it to HMRC on 21 April 2009. HMRC acknowledged the return and enclosed a calculation of the CGT liability for 2007/8 with that letter dated 19 May 2009. In that letter HMRC did warn him that “you may need to make payments now. Tax due but paid late can lead to interest and surcharges.” The letter also indicated that payslips would normally be sent before each payment was due.

A Late Payment Surcharge notice was issued on 23 June 2009 and on 1 July 2009 Mr England wrote to HMRC saying that he had made arrangements to pay the tax (which was paid on 7 July 2009) but appealing against the surcharge on the grounds that he had not been sent a statement or payslip to enable him to pay the bill and therefore the surcharge was unreasonable.

The law

CGT is due on the 31 January following the end of the tax year in which the disposal giving rise to the gain ends. Where tax remains unpaid 28 days after the due date a taxpayer is liable to a surcharge equal to 5% of the unpaid tax and a further surcharge of 5% if the tax remains unpaid after six months.

A Tribunal can set aside a surcharge if it appears that the taxpayer has a reasonable excuse for not paying the tax throughout the period of default. There is no definition of ‘reasonable excuse’ in the legislation and it is a matter to be considered in the light of all the circumstances of the particular case – see Rowland v HMRC [2006] STC 536.

The findings of the Tribunal

The Tribunal noted that Mr England was not the sole trustee but he had a professional co-trustee to whom he sent draft accounts and returns for comment and approval and who was actually involved in the share sale in February 2008. As professional trustees they should have been aware of the due date for the payment of the tax.

Equally, Mr England knew of the trust’s liability when he received HMRC’s letter with the calculation of 19 May 2009 and he could have taken steps to discharge the tax bill sooner than 7 July 2009.

The Tribunal therefore decided that the surcharge should stand.

Practice points

  1. When you conclude an estate where there is a continuing trust be careful to terminate your retainer for acting in the estate and agree a new retainer for acting in the trust.
  2. If you are co-trustee with a lay trustee take especial care to agree who will be responsible for the completion of tax matters and determine at the outset what information the administrator will need in order to manage the tax affairs of the trust, after all as co-trustee you will be jointly and severally liable for any tax, penalties, interest and surcharges the latter of which a beneficiary of the trust may regard you as personal liable for, and not the trust fund, if the reason for it arising is due to a mistake on the part of the trustees – be it a commission or omission to act correctly.

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