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HMRC internal manual

Enquiry Manual

Penalties: Culpability - Defences: Failure to Notify - Already known to HMRC

The taxpayer may plead that HMRC knew all about him or her because, he or she

  • had written notifying the commencement of the business or other source of income
  • had previously received return forms which had stopped without any reason or explanation
  • had been trading and operating a PAYE scheme for some time
  • had been an employee for years and paying tax on his earnings under PAYE.

Every taxpayer is obliged to tell us that they are chargeable to tax for a year of assessment or accounting period if

  • they have not received a notice to make a return, and
  • they have tax to pay.

This obligation exists whether or not we already know about the taxpayer and it arises each and every year.

Written notice of commencement

The obligation to notify chargeability is not the same as telling us about the start of a business or a new source of income. It’s about telling us that there is tax to pay. After all, the business may make losses or the taxpayer’s total income (including the new income) may be less than their personal allowances. In each case there is no tax to pay so there is no obligation to notify chargeability.

If a person

  • tells us promptly that they have started a new business, and
  • we do not send them a notice to make a return for the first year, and
  • the business later turns out to be profitable,

they will not have notified chargeability. Once they become aware that there is tax to pay they must give us a separate notice that tells us that.

In these circumstances, telling us that they had started in business might well amount to a reasonable excuse for not notifying chargeability for Year 1. However, this would be a less convincing excuse if, having not received a return for Year 2, the person continued to do nothing. The excuse would be less reasonable for Year 2 and the delay in correcting Year 1’s failure would be more unreasonable. It would not be a reasonable excuse for failing to notify chargeability for Year 3.

Returns stopped or PAYE scheme in existence

These two explanations might be regarded as a reasonable excuse for a short period, until a time when the taxpayer should have realised that

  • they were not being called upon to make returns, and
  • they were not paying tax on their income and/or gains.

At that point the excuse ceases and the taxpayer has a reasonable period to notify chargeability for all the years concerned.

This view was confirmed in Barney v Pybus, 37TC106. The fact that the taxpayer had made a return for an earlier year was not considered to be an excuse. If anything, it was a factor in the Crown’s favour as it showed that the taxpayer was aware of the obligation to make returns.

The fact that we know about a taxpayer in one capacity (perhaps as an employer or VAT registered trader) does not relieve them of their obligations in another capacity, for example to notify chargeability. See EM5173 and the judgement in Nicholson v Morris, 51TC95 for further guidance.

Employee under PAYE

The legislation, TMA/S7, recognises that employees whose tax liability is fully accounted for under the PAYE system do not need to make a return and do not need to notify chargeability. They have no further tax to pay.

However, an employee who

  • has not been asked to make a return, but
  • has further tax to pay on non-PAYE income or capital gains

cannot reasonably do nothing. He or she has an obligation to notify so that a return can be issued and the tax assessed and paid. That obligation arises afresh each year. Merely pointing to the fact that in past years all tax was deducted under PAYE so that they had nothing more to pay does not amount to a reasonable excuse for failure to notify after their circumstances have changed.