Where HMRC’s guidance for directors is still just plain wrong

There’s quite a bit of tax law on HMRC’s side stipulating that ‘reasonable care’ should be taken by you, writes Amanda Swales, director of GoSimple Software.

The phrase makes into April 2017’s updated IR35 legislation. It also shows up when it comes to contractors and tax returns -- they must always take ‘reasonable care’ to get their tax right.

Well, it might be equitable if the tax authority itself had to pass a ‘reasonable care’ test when composing its own materials. Surely it’s reasonable that it’s not one rule for taxpayers, and another for HMRC?

We ask because currently, there’s grounds to suggest that HMRC’s guidance is just plain wrong. And it’s a shame, because it’s guidance that newcomer PSCs have cause to read.

We got to wondering how much 'reasonable care' the Revenue is taking since its official guidance suggested that all company directors must file a tax return. It says as much here, too.

The problem is, the recent case of Kadhem v HMRC (2017) contradicts this guidance, as it was ruled that there is actually no requirement in law for a company director to file a tax return, where the taxpayer is not otherwise required to file a tax return.

As such, being a company director alone does not create a legal requirement to register with HMRC for Self-Assessment. It’s a point worth repeating (as we just did) because this statement of fact is not at all reflected in HMRC’s guidance materials.

If the director is in receipt of other income, as the Revenue has outlined here, then they will have to register for Self-Assessment and complete the required tax returns.

What confuses the situation is where HMRC issues a tax return or ‘Notice to file a tax return’ to a company director. Even though being a company director alone does not itself create a legal requirement to file a tax return (as per Kadhem v HMRC), the issuing of a tax return or ‘Notice to file…’ does create a legal requirement to complete a tax return. Failure to submit on time will result in automatic penalties. We know this thanks to Malinovskaya v HMRC and Kaczmarczyk v HMRC -- two cases similar to the Kadhem case but which went in favour of HMRC.

So despite what HMRC would have you believe, if you or newcomers to PSC contracting read its guidance, being a company director with income from PAYE and a small amount of dividends, less than £5,000 for 2017/18 does not itself create a legal requirement to register for Self-Assessment. It is also true that other circumstances may require registration.

The reality though, in practice, is different. If you are sent a tax return or notice to file then this MUST be returned before the prescribed deadline to avoid penalties. If you feel that as per the Kadhem case, you are not required to complete a tax return, then you must request to HMRC that its ‘Notice to file…’ is withdrawn under the Taxes Management Act (1970), section 8b.

However, as the guidance available to HMRC staff is still indicating a tax return for directors is required, be prepared that your request may be rejected. You can appeal this decision and go to tribunal, but the practical reality is that it would be more cost-effective to submit a Self-Assessment tax return than appeal. You also need to consider that for 2017/18 if you have dividend income in excess of £5,000 (£2,000 for 2018/19), you must file a tax return to pay the dividend taxes due.

Ultimately, what taxpayers, contracting and their advisers really need is for HMRC to accept the situation that being a company director is not by itself a reason for issuing a tax return and update their guidance accordingly to stop this confusion. Or of course they could have just taken ‘reasonable care’ in the first place to get this right, or employed these two words (which it usually likes so much) since the Kadhem verdict in 2017 when the courts clarified the law.