Some technical traps for those claiming Gift Aid carry back relief were brought sharply into focus in the High Court judgment in Re Webster [2020] EWHC 2275 (Ch) on 25 August 2020.

Mr Webster sought rectification of his tax return after he made an error in his 2016/17 return, stating he had made a gift of £400,000 (the amount he had originally intended to give) rather than £800,000.  The apparently simple error in a single digit had significant implications for Mr Webster, causing him to be liable for £215,000 in tax, interest and penalties.

Background

Mr Webster made the £800,000 donation on 4 August 2017, together with a gift aid declaration, to a charitable fund he had established in memory of his wife after her death on 4 August 2016.  Having realised gains of £5.3 million on the sale of his business interests in the 2016/17 tax year, he intended to carry back his claim for tax relief on the charitable gift to the 2016/17 tax year.  In the 2017/18 tax year, he had not paid sufficient tax to cover the £200,000 Gift Aid relief claimed by the charity on his donation.

Mr Webster submitted his 2016/17 tax return electronically on 28 November 2017.  He had used software to help him calculate his tax liability and had originally entered a donation of £400,000 and forgot to change the figure when he doubled his donation to £800,000.  Due to the substantial gains he had made selling his businesses and the use of Capital Gains Tax Entrepreneurs Relief, it made no difference to his personal tax whether he donated and carried back £400,000 or £800,000 and he gave this as the reason for failing to spot the error in the amount of the donation before submitting the tax return.

Once Mr Webster realised the error, he submitted an amended tax return on 9 February 2018 (the software treated the change as an amended return) and emailed HMRC to explain it was a transposition error and a genuine mistake, not an amendment.  Mr Webster’s evidence was that he also spoke to an officer at HMRC who explained that HMRC might raise an inquiry later but that he did not see it as a problem.  Mr Webster was surprised subsequently when HMRC denied tax relief on the donation, saying that the election to carry back the claim for Gift Aid relief could only be made on the original tax return, which had not happened in this case because the amount in the tax return did not correspond with the amount of the donation (as you cannot carry back part of a gift).

As a result, HMRC treated the charitable donation as nil in 2016/17 and the full amount in 2017/18, making Mr Webster liable to cover the £200,000 Gift Aid relief claimed by the charity on his donation.

In addition, having given Mr Webster an opportunity to explain what checks he had carried out before signing and submitting the tax return to ensure it was correct and complete and whether he had sought any professional advice, HMRC concluded that the error arose from a failure to take reasonable care in the preparation of the tax return and classed it as “careless”.

The tax return error

s426 Income Tax Act 2007 allows a taxpayer to elect to carry back a donation to be treated as made in the previous tax year for tax purposes.  However, s426 requires an election to be made “on or before the date on which the individual delivers a return” for the previous tax year and “not later than the normal self-assessment filing date”.  In Cameron v HMRC [2010] UKFTT 104 (TC) it was found that a Gift Aid carry-back election could only be made in the original tax return, something which the judge in that case found “odd” but “neither absurd, repugnant, or inconsistent”.  While a taxpayer may amend a tax return, the amendment does not have retrospective effect.

The result was that, as soon as Mr Webster pressed “submit” on his tax return with the wrong amount for the donation, his election to carry back his claim for relief failed.

Rectification of a tax return

The all or nothing effect of s426 may explain why Mr Webster took the unusual step of seeking rectification of the tax return (although he is also following the normal appeal routes through the Tax Tribunal).  No authority was offered where a tax return had been rectified before, but Mr Webster asked the court to exercise its inherent discretion given the absence of any other means of correction.

The judge found himself unable to sympathise with Mr Webster’s error – it appeared to be based on his only having checked the tax liability, rather than the whole document, before signing it as being correct and complete and submitting it; it was “not a particularly long or complex document”.  His failure to check the document was all the more surprising given his evidence of the importance of being able to treat the donation as made in 2016/17 for tax purposes.  The court did not regard the error to be a small error – it was “difficult to imagine he would not have spotted the error … given the importance to him” had he read the document before submitting it.  The judge agreed with HMRC’s finding of carelessness.

The judge in any case expressed doubts whether there was jurisdiction to rectify the tax return (although made clear that, if there were, he would not exercise any such discretion in Mr Webster’s favour).  Relying on Knibbs v HMRC [2018] EWHC 136 (Ch) and [2019] EWCA Civ 1719, the judge considered that the proper jurisdiction to appeal decisions made by HMRC, including in relation to Gift Aid, was via the statutory appeal process laid down by Parliament – the “taxpayer must use the remedies provided by the tax legislation” and “it would be an odd and a surprising result and contrary to public policy if the statutory regime, which cannot be displaced in other circumstances  …, could be displaced and circumvented by the use of the equitable remedy of rectification”.  Mr Webster is appealing against HMRC’s closure notices and those proceedings were not yet concluded.

A case for reform?

Mr Webster’s case serves as a reminder to taxpayers of their responsibilities – and as a horrible warning of the risks of getting it wrong.

The taxpayer signs off their tax return as being “correct and complete” and runs the risk of being found careless (with resulting penalties) if they fail to check the tax return carefully before submitting it.  The taxpayer is also responsible for the effects of any Gift Aid declaration they make if they fail to pay sufficient tax in the tax year to cover the Gift Aid relief claimed by the charity.

In this case, Mr Webster appears to have been fully aware of the need to cover the tax reclaimed by the charity on his £800,000 donation – hence his attempt to elect that his claim for relief should be treated as made in the previous tax year.  The problem for Mr Webster lies in the rigid terms of s426 Income Tax Act 2007.  While the decision in Cameron supports the strict interpretation, the judge in that case was moved to state that “common sense and fairness appear to be on the taxpayer’s side” and that if “permitted to use only those concepts as my guides I would find for the taxpayer”.

Of course, it might be said, as indicated by the judge in his case, that Mr Webster has only himself to blame for submitting a return with an error – but corrections can be made in other respects without the same dramatic outcome.  It is also the case that incentives for charitable giving come with conditions attached and the requirement to elect only in the original return is just one such condition.  However, such conditions are expected to be for policy reasons; the judge in Cameron noted that there appeared to be no clear policy reason for this condition.

Although these technical traps in s426 are not new, they indicate an argument for reform.  Imposing a £215,000 levy on a donor for an honest and swiftly corrected mistake is not necessarily the best incentive for generous charitable giving.  In Cameron, the taxpayer’s “undoing” was his “prompt compliance” in the “prompt and diligent” submission of his tax return.  A simple tweak could allow an election to be made (or corrected) after submission of the return, but still within sensible time limits.  There is an argument on the other side, however, that s426 is a general concession which is overly complex and should be removed entirely.

September 2020

Nicola Evans

Charities Counsel, BDB Pitmans