[2011] UKFTT 182 (TC)

TC01051
	Appeal number:  TC/2010/04980

Income tax – interest taxed at source – whether interest should be taken into account in computing taxpayer’s liability to income tax at the upper dividend rate – yes – whether that conclusion affected by allegedly discriminatory rules concerning liability of a director taxpayer to submit a self-assessment tax return – no discrimination found  – appeal dismissed	

FIRST-TIER TRIBUNAL
TAX

	RONALD FARRELL	Appellant	

-and-

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS (INCOME TAX)	Respondents	

TRIBUNAL:	KEVIN POOLE  (TRIBUNAL JUDGE)
RICHARD THOMAS	

Sitting in public in Oxford on 11 March 2011

The Appellant appeared in person
Colin Williams, Higher Officer of HMRC for the Respondents

© CROWN COPYRIGHT 2011

DECISION

Introduction
1.	This appeal concerns the liability of the Appellant to income tax at the dividend upper rate arising in consequence of his receipt of interest from UK banks and a building society during the tax year 2007-08.
2.	The Appellant essentially argues that he is not required to include such interest in his self-assessment tax return for the year, with the result that the income tax deducted at source from that interest (at the rate of 20%) constitutes his entire tax liability on that interest.  He further argues that the amount of such interest should be left out of account when calculating the income tax liability on the remainder of his income, with the result that less of his overall income is taxable at the dividend upper rate.
3.	The Appellant’s argument is based on an assertion that he would be discriminated against unfairly if he were required to include his bank and building society interest in his return, when considered in comparison with the rules applicable to the body of taxpayers generally.  This argument is considered in more detail below.
Background and history
4.	The Appellant was for many years an employee, paid subject to PAYE.  He had never been asked to submit a tax return until he received a letter from HMRC requiring him to fill in and submit a self-assessment tax return for the tax year 2005-06.  He duly did so, using the services of a firm of accountants.  He then received a letter dated 20 November 2006 from HMRC, telling him that they had reviewed his return and did not propose to send him returns in future.
5.	Shortly after that time, the Appellant set up his own company in March 2007.  He is a chartered engineer by profession, and that was the business of the company.  He became a director of the company.  On 29 May 2007 HMRC wrote to him again, informing him that in future they would require him to complete tax returns.  The letter included the following: “On the reverse of this letter you will see why we ask some of our customers, including you, to fill in returns.”  On the reverse of the letter, the relevant sections were as follows:
“We need a Tax Return each year if you
•	work for yourself – that is, you are self-employed or in partnership (we will also require Partnership Tax Returns)
•	are a company director
•	are a Name or member of Lloyd’s
•	are a minister of religion (of any faith or denomination)
•	have income from letting any property or land you own (but if you are an employee and this income is less than £2,500 a year a Tax Return may not be necessary)
•	receive other untaxed income and the tax due on it cannot be collected through a PAYE tax code
•	receive annually (or can be treated as receiving) income from a trust or settlement, or any income from the estate of a deceased person, and further tax is due on that income
•	have taxable foreign income, even if you are claiming that you are not normally resident in the UK (this includes non-resident landlords).
Additionally, if you are an employee or pensioner we need a Tax Return if you
•	have annual income from savings or investments of £10,000 or more (before tax)
•	have annual income of £100,000 or more
•	have tax due at the year end that cannot be collected through your PAYE tax code for the following year
•	have untaxed income of £2,500 or more annually (but some pensioners may be able to pay the tax on this through their PAYE tax code)
•	have annual claims against tax for expenses or professional subscriptions of £2,500 or more
•	are 65 and over and entitled to some higher personal allowance (but not the full amount) we may need a Tax Return to work out how much.
Capital Gains
	[Not relevant for present purposes]
Finally
•	we may sometimes want a Tax Return for other reasons – perhaps to check if the correct tax has been paid overall.  And you can ask us for a Tax Return at any time – for example, if you want to claim a particular tax relief or exemption.”
6.	It was not made clear to us at the hearing precisely what had prompted HMRC to send this letter but the Appellant, as a company director, clearly fell within the class of people from whom HMRC said they would require a tax return every year.
7.	In due course HMRC sent the Appellant a tax return for the tax year 2007-08.  The Appellant decided that in his new role as director of his own company, he should deal with filing his own return (along with the relevant company filings – corporation tax and PAYE) in order to become familiar with the detail.  As a director he felt it was incumbent on him to acknowledge his increased responsibility by taking a close personal interest in the detail of all these matters.  By that time, the HMRC online filing system had also improved significantly, even compared with just two years earlier (when he had engaged an accountant to help him deal with his personal return).
8.	A problem arose in relation to his filing of the P11D return (employees’ expense payments) on behalf of the company.  At that time, the return related solely to the expenses paid to himself.  After several attempts to file online showing his expenses (travel & subsistence and professional subscriptions) as non-taxable (as they should have been), he was only able to reach the point where, immediately prior to submission of the return to HMRC, they were showing on the system as taxable.  He rang HMRC’s helpline, who were unable to help – at that time the P11D filing system was still new and the staff were unfamiliar with it.  He was concerned that the filing deadline was fast approaching so he made an appointment to visit his local tax office in Swindon to resolve it – but they explained that he would have to actually submit the form online in its present state before they would be able to see it on the system and advise him on it.  He did so then attended the meeting.  He explained everything and the local staff, although very helpful, were unable to correct the problem but simply added some notes to the HMRC computer system to record the position and the fact that he had shown them all his receipts etc and generally satisfied them that the expenses were non-taxable.
9.	As soon as this issue had been resolved, the Appellant was in a position to file his personal tax return for 2007-08 – which he did on 13 September 2008.
10.	The next relevant contact from HMRC was a letter from them to the Appellant dated 14 July 2009.  That letter informed him they were opening an enquiry under s 9A Taxes Management Act 1970 (“TMA 1970”) into two aspects of the Appellant’s 2007-08 tax return, namely “benefits and interest received”.
11.	In due course (after more time and effort on the Appellant’s part than should have needed to be the case) the Appellant was able to satisfy HMRC that his tax return was accurate in recording no taxable benefits.  It appears the enquiry was initiated at least in part because of the discrepancy between his own “zero” declaration and the company’s P11D return which had showed nearly £9,000 of taxable expense payments.
12.	The situation in relation to the interest was less easy to resolve, however, and culminated in the present appeal.
13.	During the tax year 2007-08, the Appellant had received a total of £6,235 of interest from banks and a building society, from which income tax of £1,247 had been deducted at source.  The Appellant had not included this interest in his tax return, and maintains to this day that he was not obliged to do so.
14.	After ascertaining details of the amount involved, HMRC issued a closure notice dated 17 September 2009 in which they amended the Appellant’s self-assessment tax return to include the undeclared interest.  After recalculating his tax liability, they effectively increased his overall income tax by £1,402.87.  The precise method of calculation of this figure was complicated by the fact that the Appellant took most of his income from the company in the form of dividend rather than salary, but there is no dispute that if HMRC are correct on the legal basis for the liability then this figure is correct.
15.	Matters were also complicated by an adjustment to the Appellant’s liability to payments on account for the 2008-09 tax year as a result of the amendment to his 2007-08 return, but we were informed that this adjustment has been cancelled, so we are not called upon to consider it.
The Appellant’s submissions
16.	The Appellant argued that all taxpayers must be treated equally without discrimination.  He pointed to the note issued by HMRC setting out the situations in which taxpayers would be required to complete tax returns (see [5] above).  He pointed out that it would mean that ordinary (i.e. non-director) company employees who receive less than £10,000 of savings income in a year will not be required to make a return of that income and therefore there will be no mechanism for recovering from them any more tax than that deducted at source.
17.	He said there were other factors that convinced him that there was no need to declare interest under £10,000 on a tax return.  In particular:
(1)	when he used the services of accountants to fill in his tax return for 2005-06, they had not asked him any questions about his interest income; 
(2)	he said he had rung HMRC’s helpline to ask about inclusion of interest on his returns, to be told that there was no need to do so if tax had been deducted at source; 
(3)	all the friends and acquaintances to whom he had spoken about the issue confirmed they did not include interest in their returns; and 
(4)	when he had again not included interest in his tax return for 2008-09 (the year subsequent to the year under appeal) and HMRC had once again taken up the return for enquiry, they had only raised the issue of P11D expenses and had not mentioned the issue of interest.
18.	In summary, therefore, the Appellant argued that:
(1)	there did not seem to be any mechanism for recovering higher rate tax on interest from taxpayers who did not fall within the list of people to whom HMRC said they would send tax returns; 
(2)	the only reason he had been sent a return to fill out was because he was a company director; 
(3)	the effect of this would be to disadvantage him substantially (compared to non-director taxpayers in a similar position) if he was required to include his interest income in his return solely because he was a company director; and 
(4)	it must therefore be right that in order to maintain his equality of treatment with other taxpayers, he should not be required to include his interest income in his return or have it taken into account for the purpose of calculating his higher rate tax liability.
19.	The Appellant also pointed to a large number of mistakes and inaccuracies littered through the correspondence he had received from HMRC.  Mr Williams rightly accepted that there were a great number of such mistakes, far more than would be acceptable in line with normal human error.  HMRC had also failed to comply with the procedure rules of the Tribunal in conducting the appeal – in particular by taking nearly 130 days to deliver their Statement of Case rather than the required period of 60 days.  The Appellant was also disturbed by the fact that HMRC had used the credit balance on his account with them to pay what they regarded as his outstanding liability even though he had quite clearly appealed against their decision.  He explained that in his professional life he did a great deal of work on nuclear installations and attention to detail was crucial.  When testing what was being told to him by his clients, experience told him that the level of attention to apparently small details was strongly indicative of overall reliability.  The cumulative effect of the large number of small mistakes contained throughout the correspondence he had received from HMRC and their clear failure to observe the Tribunal’s procedure rules had been to undermine his confidence in what they were telling him about the key issues in his case, which was another reason why he felt it was appropriate to appeal their decision to a truly independent tribunal hearing.
HMRC’s arguments
20.	Mr Williams accepted that the mistakes that had been made in correspondence with the Appellant were “unfortunate”, and the accumulation of such mistakes was “very unfortunate”.  He also apologised for the unacceptable delay in delivery of HMRC’s statement of case.  However he pointed out that these issues were matters to be dealt with through complaint procedures rather than being directly relevant to the matters which the Tribunal must decide.
21.	He pointed out (and the Appellant accepted) that there was no dispute about the calculation of the figures shown in HMRC’s amended self-assessment.  It was simply a matter of law whether the Appellant was subject to the liability in question.  The burden lay on the Appellant to show that the amendment to his self-assessment was wrong, and he had failed to discharge that burden.
22.	Mr Williams pointed out that the Appellant would have been under a duty to notify his liability to tax under s 7 TMA even if he had not been sent a tax return by HMRC, and he referred to the subsequent calculation of liability as relying on “trite law”.  The amount of the Appellant’s dividend income already brought him into higher rates of tax and the “top slicing” rule meant that his dividend income was treated as the highest part of his income in applying the relevant tax rates – with the result that the extra tax liability arising as a result of adding the gross interest to his declared income was calculated at an effective rate of 22.5% (the dividend higher rate of 32.5% less the 10% tax credit) rather than 20% (the standard higher rate of 40% on interest income less the 20% already deducted at source).  
23.	Unfortunately HMRC had not set out the full legal arguments in the (much delayed) statement of case, nor had Mr Williams come armed with the legislation to support his assertion that the Tribunal was dealing with “trite law” so we felt it necessary to reserve our decision in order to ensure that the Appellant received at least one document in which a clear statement of the relevant law was set out.
The law
24.	The following summary applies to the tax year 2007-08, the year under appeal in this case.
The calculation of the tax liability
25.	A taxpayer was liable to income tax on his income at a “starting rate” of 10% (up to the “starting rate limit” of £2,230), at a “basic rate” of 22% (from the starting rate limit up to the basic rate limit of £36,000) and at a “higher rate” of 40% (from the basic rate limit) – ss 6, 10 & 20 Income Tax Act 2007 (“ITA 2007”).
26.	Insofar as income which would otherwise be chargeable at the basic rate was “savings income” (which included most interest), that income was chargeable at the “savings rate” of 20% rather than the basic rate of 22% - s 12 ITA 2007.
27.	Insofar as income which would otherwise be chargeable at the starting rate or the basic rate was “dividend income”, that income was chargeable at “the dividend ordinary rate” – s 13 ITA 2007.
28.	Insofar as income which would otherwise be chargeable at the higher rate was “dividend income”, that income was chargeable at the “dividend upper rate” – s 13 ITA 2007.
29.	When an individual taxpayer received a dividend, he received with it a tax credit of one ninth of the amount of the dividend, and any tax liability was calculated on the aggregate of the dividend and the tax credit – ss 397 & 398 Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”).  The “dividend ordinary rate” of income tax was 10%, so that for a basic rate taxpayer the tax credit satisfied the taxpayer’s liability to income tax on the dividend.  For a higher rate tax payer, the “dividend upper rate” was 32.5% (but this came to 22.5% after taking account of the tax credit).  So a basic rate taxpayer receiving a £90 dividend would receive a £10 tax credit and suffer a 10% tax liability on the sum of the dividend and the tax credit (£100 x 10% = £10) – which would be met by the tax credit.  A higher rate taxpayer receiving the same dividend would suffer a £32.50 tax liability but would receive the £10 tax credit, thus reducing his tax liability to £22.50.
30.	For the purposes of applying the rates, a taxpayer’s dividend income was treated as the “top slice” of his income, with his savings income being treated as the slice immediately below – s 16(5) ITA 2007.
31.	Any deposit-taker or building society making a payment of interest on a “relevant investment” (including most savings accounts) was subject to an obligation to deduct tax under s 851(2) ITA 2007, which provided:
“(2) The deposit-taker or building society must, on making the payment, deduct from it a sum representing income tax on it at the savings rate in force for the tax year in which it is made.”
32.	A credit was given to the taxpayer concerned for this deduction under s 848(1) ITA 2007, which provided:
“(1)  A sum representing income tax which is deducted (or treated as deducted) under this Part from a payment is treated as income tax paid by the recipient.”
33.	Thus when HMRC brought into account the total of £6,235 of previously undeclared interest income, the effect was to impose a liability for tax at the upper dividend rate of 32.5% (less the tax credit of 10%) on that amount, where that part of the dividend had previously been subject to tax only at the dividend ordinary rate (and therefore the tax had been balanced out entirely by the tax credit).  There was no further liability on the interest itself, as it would have been subject only to basic rate tax if it was not interest, and was therefore only liable to tax at the savings rate – which had already been deducted at source.
34.	The Appellant has indicated no disagreement with the figures put forward by HMRC and therefore the above summary simply provides the legislative authority to support the correctness of HMRC’s approach in carrying out its calculations.
The obligation to include the interest in the Appellant’s return
35.	The Appellant’s starting point for his “discrimination” argument was that the information circulated with HMRC’s letter dated 29 May 2007 (when they told him they would be asking him to submit a tax return) showed which taxpayers would be asked to deliver tax returns.  Whilst this may be so, it does not take account of the point briefly touched on by Mr Williams at the hearing: whatever statements were made by HMRC in that letter about the reasons why they asked some customers to fill in tax returns, s 7 TMA 1970 contains the following obligation:
“(1)  Every person who-
(a)  is chargeable to income tax or capital gains tax for any year of assessment, and
(b)  has not received a notice under section 8 of this Act requiring a return for that year of his total income and chargeable gains,
shall, subject to subsection (3) below, within six months from the end of that year, give notice to an officer of the Board that he is so chargeable.”
36.	S 7(3) TMA 1970 provides as follows:
“(3) A person shall not be required to give notice under subsection (1) above in respect of a year of assessment if for that year his total income consists of income from sources falling within subsection (4) to (7) below and he has no chargeable gains.”
37.	This subsection therefore broadly provides an exemption from the obligation to notify if a taxpayer has no chargeable gains and all his sources of income fall within the list in subsections (4) to (7) of s 7 TMA 1970, which at that time provided as follows:
“ (4) A source of income falls within this subsection in relation to a year of assessment if—
(a)	all payments of, or on account of, income from it during that year, and
(b)	all income from it for that year which does not consist of payments,
have or has been taken into account in the making of deductions or repayments of tax under PAYE regulations.
(5) A source of income falls within this subsection in relation to any person and any year of assessment if all income from it for that year has been or will be taken into account—  
(a)	in determining that person's liability to tax, or
(b)	in the making of deductions or repayments of tax under PAYE regulations.
(6) A source of income falls within this subsection in relation to any person and any year of assessment if all income from it for that year is—
(a)	income from which income tax has been deducted;
(b)	income from or on which income tax is treated as having been deducted or paid; or
(c)	income chargeable under Chapter 3 of Part 4 of ITTOIA 2005 (dividends etc from UK resident companies etc),
and that person is not for that year liable to tax at a rate other than the basic rate, the dividend ordinary rate, the savings rate or the starting rate.
(7) A source of income falls within this subsection in relation to any person and any year of assessment if all income from it for that year is income on which he could not become liable to tax under a self-assessment made under section 9 of this Act in respect of that year.”
Analysis and conclusion
38.	As summarised above, the Appellant was clearly chargeable to income tax for the year 2007-08.  Therefore, even if he had not been required by HMRC to deliver a tax return, he would still have been required to notify them of his chargeability to tax under s 7 TMA 1970 unless all of his income came from sources falling within s 7(4) to 7(7) TMA 1970 set out above. (He would also have been required to notify them of his chargeability to tax if he had made a chargeable gain, but that is not relevant here).
39.	The Appellant’s difficulty in this case is that part of his dividend income for the year was (as summarised above) subject to income tax at the dividend upper rate.  He would therefore not be able to satisfy s 7(6) TMA 1970 in relation to that dividend income and he was therefore under an obligation to notify HMRC of his chargeability to income tax.  Even if they had not already sent him a return under the criteria set out on the reverse of their letter dated 29 May 2007, they would have responded to his notice by requiring him to submit a tax return with the relevant information.
40.	The legal position would be the same in relation to any non-director in the Appellant’s position.  Such a person is required to notify HMRC of their chargeability to tax and will, in consequence, receive a return to submit to HMRC.  There is therefore no discrimination between the position of a taxpayer who is a director and one who is not.  The only difference is that HMRC will generally send a director a tax return (which incorporates a notice requiring the completion and delivery of that return) of their own volition whereas a non-director will only be sent a return after he or she complies with the statutory obligation to notify his/her chargeability to tax.
41.	We find that the tax system operated by HMRC does not involve any discrimination against taxpayers in the special position of the Appellant.  It follows that we do not need to consider his argument that such discrimination should result in the cancellation of his liability to include any information about his savings income in his return (or to have that income taken into account in calculating his overall tax liability).  
42.	We feel some comment is worth making about HMRC’s policy on requiring tax returns as set out on the reverse of their letter dated 29 May 2007 to the Appellant.  The UK is one (if not the only one) of at most a very few developed countries that deliberately seeks to discourage many of its residents from submitting a tax return, relying instead on the obligation to notify.  The Appellant is clearly a conscientious and careful person and anxious to do the right thing, but he was unaware of this obligation.  It would not be surprising if most people who were employees in the higher rate bracket but earning less than £100,000 a year and who had up to £10,000 of savings income did not, through ignorance, notify liability to higher rate tax on that income.  It would seem to be a large hostage to fortune not to require every higher rate taxpayer to submit a tax return.
43.	We have considered the further points raised by the Appellant at [17] above, but those points can only be regarded as extrinsic evidence in support of his assertion that HMRC’s position in this appeal cannot legally be sustained.  For the reasons set out above, as a matter of legal analysis we do not agree with this assertion.
44.	We therefore find that the Appellant has not discharged the burden of showing that HMRC’s amendment to the Appellant’s self-assessment for the year ended 5 April 2008 contained in their closure notice dated 17 September 2009 is incorrect.  We must therefore uphold that amendment and dismiss the appeal.
45.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

KEVIN POOLE
TRIBUNAL JUDGE
RELEASE DATE: 17 MARCH 2011