Why did HMRC not charge Angela Rayner a penalty?

The Guardian reports this morning that HMRC have “cleared” Angela Rayner over her stamp duty affairs. She has paid the additional £40,000 of stamp duty¹ that was due on her Hove flat, but HMRC have decided she was not “careless”, and so no penalty is being charged. The article adds that one lawyer advised Ms Rayner that she would have a “realistic chance” of successfully appealing against HMRC’s decision, and not paying the £40,000, but that it could take years. She therefore accepted the decision and paid the tax.

That is a surprising outcome. We said last September that, on the facts as publicly stated, Ms Rayner was almost certainly “careless” within the meaning of Schedule 24 of the Finance Act 2007, and that a penalty of around 20% (about £8,000) was the likely outcome. We don’t understand why HMRC reached a different conclusion, and this short article explains our view.

We also include a technical note at the end discussing why, in our opinion, there was not in fact any realistic prospect of appealing the £40,000.

What happened

The full background is in our original article, and mostly comes from the report from Sir Laurie Magnus. In short:

• Ms Rayner sold her remaining interest in her Ashton-under-Lyne family home to a trust set up for her disabled son, and bought a flat in Hove.
• She paid stamp duty at the standard rate of around £30,000.
• Stamp duty is 5% higher if you are buying a second home; Ms Rayner didn’t pay that higher rate.
• Her conveyancer and a trusts lawyer had both told her standard rate applied – but both had explicitly said this was not specialist tax advice. One “suggested” she obtain specialist tax advice; the other “recommended” it. However Ms Rayner did not obtain tax advice.
• After the story broke in the press, Ms Rayner instructed a tax KC, who advised that the higher rate for additional dwellings did in fact apply, because a “deeming rule” meant that Ms Rayner was deemed to herself own the house that the trust held for her son.
• Ms Rayner therefore had to pay an additional £40,000 (and, we expect, about £3,000 of interest).

Why we don’t understand the “not careless” finding

The legal test is whether Ms Rayner failed to take the care a “prudent and reasonable person in her position” would have taken. The leading caselaw is clear that you can rely on professional advice – but, as the First-tier Tribunal said in Lithgow, not where the advice is “hedged about with substantial caveats”. Here, both advisers told her that they were not tax specialists, and that specialist advice should be obtained. She didn’t obtain it.

It is hard to see how a taxpayer, undertaking a complex transaction involving a court-ordered trust for a disabled child and the purchase of a second property, and twice told to obtain specialist tax advice, can be said to have taken reasonable care by not doing so. That conclusion is even harder where the taxpayer was Deputy Prime Minister and Secretary of State for Housing.

That is exactly the kind of situation in which the caselaw says reliance on the original advice falls away. So neither our usual team, nor the other senior lawyers we have spoken to (including a retired judge), understand why Ms Rayner was not “careless”.²

There are three possibilities:

• Our view of the law is wrong, and on the facts set out above, Ms Rayner was not “careless”. That of course is possible, but we remain confident of our position.
• HMRC have misapplied the law. That would be surprising – particularly in a high profile case. We don’t expect HMRC would be influenced by Ms Rayner’s position – they were, after all, able to independently investigate a sitting Chancellor of the Exchequer.
• There are facts of which we are unaware which mean that Ms Rayner was not careless. Perhaps the caveats were not as blunt as Sir Laurie’s summary suggests.³ Perhaps there were other circumstances which made it reasonable for Ms Rayner not to obtain specialist tax advice..

So we have to say at present we don’t know why HMRC accepted Ms Rayner was not “careless”. On the facts as they have been publicly stated, that conclusion seems generous.

What this means

None of this is to suggest any impropriety on Ms Rayner’s part. There is no evidence she tried to avoid or evade tax⁴ – this was (in our view, and on the facts as we know them) a careless mistake. The higher-rates-for-additional-dwellings regime is a mess in numerous respects, and this is far from the only time we’ve seen it produce results which appear unfair. Ms Rayner’s mistake looks like exactly the kind of thing that happens when people with complicated personal arrangements don’t obtain specialist tax advice.

But the “careless” test in Schedule 24 is not about morality, or the fairness of a policy. It asks a narrow, technical question: did the taxpayer take the care that a reasonable person in their position would take? On the publicly stated facts, the answer to that question still looks to us like “no”. HMRC’s contrary conclusion will be welcomed by Ms Rayner, but it raises a question of consistency: ordinary taxpayers who ignore explicit advice to consult a specialist routinely receive careless penalties. It is not obvious why this case is different.

Technical note – our view of the substantive legal argument

A leading KC, Jonathan Peacock, originally advised that higher-rate stamp duty was due. However, Ms Rayner subsequently obtained a second opinion from another KC who concluded that, on the better view, the standard rate was correct after all, and that stamp duty was never actually underpaid – he said there would be a “realistic chance” of successfully appealing HMRC’s decision. Ms Rayner agreed to pay the additional £40,000 anyway, to settle the HMRC enquiry.

We have reviewed a paper prepared by the second KC (unfortunately we are not able to publish it). The argument is that paragraph 12 of Schedule 4ZA should be read more broadly than its actual words, so as to cover any court-ordered trust for any disabled child – not just trusts under the Mental Capacity Act 2005 for children who lack mental capacity.

In our view, the argument is well beyond anything the existing caselaw on Pepper v Hart and Inco Europe would support. It is the kind of argument an advocate can in good faith run on instructions, but in our view it is not – with respect – the “better view” of the law. The better view is the one taken by Ms Rayner’s first KC and by HMRC.

To get there, the argument has two limbs. First, Pepper v Hart [1993] AC 593: where statutory language is ambiguous, obscure or leads to absurdity, a court may consider statements by the sponsoring minister in Parliament. The sponsoring minister (Mel Stride) said in 2017 that the relief was intended to help “disabled children where a court appointed trustee buys a home for such a child” – wider than the enacted words. Second, Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586: where Parliament has clearly made a drafting mistake, the courts may rectify the statute by reading in or substituting words, provided the court is “abundantly sure” of (i) the intended purpose, (ii) the inadvertence of the drafter, and (iii) the substance of what Parliament would have enacted. The argument is that paragraph 12(1A) refers to a trust “appointed” by the Court of Protection, which is incoherent (the Court of Protection appoints deputies, not trusts), and that the rational reading is therefore the wider one described by the minister.

We think this is well beyond anything the caselaw supports. Pepper v Hart is a famously narrow doctrine which the courts have spent the last thirty years restricting, not expanding – see for example Wilson v First County Trust [2003] UKHL 40 at [56]-[67] and R (O) v Home Secretary [2022] UKSC 3. It does not allow Hansard to extend a relief to a class of taxpayers Parliament did not actually legislate for. We don’t think Mr Stride’s statement can be read as a clear statement that the provision applies to all disabled children – it was one sentence in a summary of Finance Bill clauses, and we see its natural reading as an imprecise statement of the Parliamentary drafting. We therefore don’t think this is a Minister “clearly stating the effect of a provision” within Pepper v Hart, even in its widest formulation. The various explanatory notes are imprecisely drafted, but not clearly contradicted by the text of the legislation.

Inco Europe is narrower still: it permits the correction of obvious drafting slips, not the wholesale rewriting of an exemption to cover a category of disability the statute simply doesn’t address. Paragraph 12(1A) on its face deals with mental incapacity under the MCA 2005.

The argument that paragraph 12(1A) “fails to cover anything” because the Court of Protection doesn’t “appoint” trusts also seems to us to be a stretch. The provision plainly contemplates a trust over property held by a deputy appointed by the Court of Protection. That is a perfectly workable, if inelegantly drafted, category – and HMRC’s own guidance has been applying it on that basis for years. A court would certainly “fix” minor defects to ensure that the provision does in fact apply to MCA cases. However to stretch it to cover all physical and other disabilities would be to make policy. We believe that would require the Supreme Court making a significant and (in our view) implausible extension to Pepper v Hart.

It’s important to repeat that this is not relevant to the careless penalty point. The question is not whether a clever argument could later be constructed; it’s what care Ms Rayner took at the time the SDLT return was filed.

Disclosure

Our founder, Dan Neidle, is a member of the Labour Party. He was a member of its senior disciplinary body (the National Constitutional Committee) but has stood down. He has no formal role in the Labour Party, advises policymakers in all parties, and is a member of the SNP Scottish Government’s tax advisory group.

Further reading

Why Angela Rayner is likely to pay £8,000 in stamp duty penalties

We now have enough information to be able to answer the question of whether Angela Rayner will be subject to HMRC penalties, and how…

Tenancy reform: the accidental stamp duty headache for 150,000+ tenants

The Renters’ Rights Act unintentionally turns hundreds of thousands of ordinary residential tenancies into an annual stamp duty reporting obligation, often for tax bills…

The Angela Rayner tax proposals – how much sense do they make?

Angela Rayner’s leaked tax memo to Rachel Reeves outlines a raft of new revenue raisers. In this post, I look at each proposal, and…

The tax longlist – 35 ways Rachel Reeves could raise £22bn

Rachel Reeves has said there is a £22bn “black hole” in the public finances, and that she’ll have to raise tax to fill it….

How to reform property tax

Property taxes are probably more in need of reform than any other area of UK tax. We have three taxes on property: stamp duty…

Property118 – more hopelessly wrong tax advice for landlords

We have previously reported on a high profile unregulated firm called “Property118”, which promoted a series of landlord tax avoidance schemes. HMRC took action,…