Self-assessment means trustees must know when to pay their tax bill on time

 In Tax, Trusts

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Lay trustees often rely on tax and trust professionals to deal with the tax side of the trust’s affairs. However, the duty and responsibility to pay the tax by the due dates for payment rests with the trustees and it will not be a reasonable excuse to say that the trustees relied on professional advisers. However, the failure of the professional advisers to pay the tax on time will doubtless colour the trustees’ view as to whether they wish the said professional to handle the trust in future.

Income tax on trust funds is payable in instalments: partly on the 31 January during the tax year; then on 31 July following the end of the tax year and finally any balance for the year on the 31 January following the tax year.

Capital Gains Tax (CGT) is payable on the 31 January following the end of the tax year in which the disposal is made.

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These due dates for payment must be met failing a reasonable excuse or otherwise interest, penalties and surcharges can be levied. A surcharge would only be charged if the time which had elapsed between the due date and actual payment was beyond the surcharge trigger date.

The case of the Trustees of the D R Shanks Discretionary Trust v HMRC [2011] UK FTT 332 explores whether it was appropriate to apply the surcharge or whether the Tribunal was able to set it aside on the basis of reasonable excuse.

The facts

Mrs Muirhead took over as the lead trustees of the D R Shanks Discretionary Trust following the death of her mother. It was her mother’s death which triggered the sale of a trust property at a sizeable gain subject to CGT in the tax year 2008/09.

The trust tax return was filed online on 18 January 2010 by the trust’s accountants i.e. before the filing deadline and the due date of payment of tax of 31 January 2010. It contained a self-calculation of the tax due. No tax was paid by the due date. A payment was made on 5 February 2010 of £46,398.54 which reduced the sum due to £490,787.31. This amount remained outstanding until after 28 February – the exact date when it was paid is unknown but it was sometime after 20 April 2010.

When HMRC processed the trustees’ tax return it agreed with the tax calculation so did not issue one of its own. There was a subsequent amendment to the return submitted by fax to claim some management expenses and this amendment was also processed.

On 13 May 2010 HMRC issued a surcharge notice imposing a surcharge of £24, 539.36 (i.e. a statutory rate of 5%) for the late payment of the tax due.

The professional advisers wrote asking for the surcharge to be set aside and gave over time various reasons. The tax was paid immediately from funds held by the trust’s solicitors.

HMRC rejected the appeal.

The decision

The Tribunal Chair noted that the Tribunal had the power to set aside the surcharge under s.59C Taxes Management Act 1979 if it appears there was a reasonable excuse for the late payment of tax. He did not find this to be the case here.

The taxpayer variously argued:

  1. There was no intention on their part to withhold or delay payment – the money was in the hands of the lawyers awaiting transfer to HMRC. Interest should be sufficient compensation for the delay – this said the Tribunal whilst may be true is not relevant as to whether the surcharge had been properly imposed.
  2. Mrs Muirhead relied on well-paid professional advisers to ensure compliance with all relevant obligations, including payment of tax. It was alleged that their negligence should give rise to a reasonable excuse for the trustees’ default – the Tribunal said that as a matter of policy if they agreed to that argument the surcharge regime could be circumvented every time professionals were involved. It might be relevant in a highly complex or technical case but this was a simple straightforward late payment case.
  3. HMRC failed to issue reminders or statements – it may have resulted in earlier payment if there had been a reminder issued but the fact is it is a self-assessment system under which the taxpayer is required to assess his own liability and pay it without any reminder being issued.
  4. Mrs Muirhead as a new trustees was unfamiliar with the rules and procedures – this argument was inconsistent with saying she was reliant on professional advisers but even if one ignored the conflict it did not amount to reasonable excuse because the tax had been self-calculated and the due payment date was quite clear.

Practice points

  1. Whenever a new trustee is appointed acquaint them with their duties and obligations in particular with regard to the self-assessment tax system in operation.
  2. Whenever more than one professional is involved in the administration of a trust have clear reporting guidelines between them to ensure that due dates are met by the appropriate professional.
  3. Always use a central diary system and post when and how much money needs to be available to pay the tax – this is particularly relevant with CGT when the disposal may be many months away from the due date of payment for the tax and the taxpayer may usefully earn interest on the funds until the payment date nears.
  4. Even though it may be difficult for a taxpayer to ever claim the tax due from a negligent professional adviser there are cases where the taxpayer has successfully obtained the penalties and interest payments if they only arose because of the adviser’s negligence. Whether or not the tax payer chooses to pursue litigation it may be the trigger to move the administration of the trust elsewhere if there is no longer ‘trust’ between client and adviser.
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