Case: Taxpayer partly successful in appeal against a closure notice and related inaccuracy penalty

[2018] UKFTT 0729 (TC)

Judge Anne Redston

Decision released 12 December 2018

Income tax – HMRC enquiry – Closure notice and amendment to self-assessment return – Penalty – Appeal allowed in part and penalty reduced – ITTOIA 2005, s 34 - FA 2007, Sch. 24.

Carter [2019] TC 06862


The appellant (Mrs Carter) ran a childminding business, provided a tax advice and return filing service (which she described as ‘assisting and consulting’) and rented out property. HMRC issued Mrs Carter with a closure notice increasing her tax liability on the basis that her tax return had omitted an amount of turnover in relation to her assisting and consulting business, she had incorrectly calculated capital allowances on her car and had over-claimed ‘home as office’ expenses. HMRC also issued Mrs Carter with an inaccuracy penalty under FA 2007, Sch. 24 on the basis that she had acted deliberately.

HMRC believed that Mrs Carter had omitted turnover when she did work for clients who had been transferred to another accountancy firm when HMRC told Mrs Carter that they would no longer allow her to act as an authorised agent. Mrs Carter had invoiced the work to the new accountancy firm but the invoice was returned and never paid. The FTT found that the sum was a bad debt and therefore agreed with HMRC that the sum should be added to turnover, but that an equal amount should be deducted as a bad debt.

The FTT agreed with HMRC that Mrs Carter had been wrong to claim that she used five out of eight rooms in her home for her assistance and consulting business. This was on the basis that the FTT concluded that at least four of the rooms were used wholly personally. The FTT accepted HMRC’s assertion that Mrs Carter used only one room for her assisting and consulting business as Mrs Carter had not provided detailed evidence, such as pictures of the rooms, or an analysis of time spent, to support anything else.

The FTT agreed with HMRC that Mrs Carter had over-claimed the capital allowances on the car she used for business because her calculation was not in accordance with the capital allowance legislation.

Following HMRC’s issue of the assessment Mrs Carter claimed that she should be allowed to deduct expenses relating to work carried out for her transferred clients, but HMRC refused and the FTT found as fact that no such expenses were incurred.

HMRC calculated the inaccuracy penalty on the basis that the error in declared turnover was deliberate but not concealed and the disclosure prompted. HMRC reduced the maximum penalty from 70% of the potential lost revenue to 45.5% based on the quality of the disclosure. As the FTT had already found that Mrs Carter had not deliberately manipulated her profits it followed that HMRC were wrong to base their penalty decision on that purported error. The FTT decided that the over-claimed use of ‘home as office’ was a deliberate error, the disclosure was prompted and Mrs Carter had fully co-operated with HMRC, therefore the penalty should be 35%. In relation to the car capital allowances, the FTT found that Mrs Carter did not understand the rules and therefore she was not acting deliberately, but had been careless, for which the FTT considered the appropriate penalty to be 15%. The FTT declined to suspend the penalty because Mrs Carter considered herself capable of running her own tax affairs and it was therefore very unlikely that she would comply with a suspension condition.


Although the taxpayer had written to HMRC within 30 days of receiving the closure notice and inaccuracy penalty, and the letter said that it was in response to a letter sent by HMRC on the date the closure notice and penalty were issued, HMRC refused to treat the letter as an appeal. Luckily, the FTT thought it was fair to read the letter as an appeal against the closure notice and to also treat it as including an appeal against the penalty, so the appeal could be heard.

For commentary on inaccuracy penalties, see In-Depth at ¶184-850.

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