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Cite as: [2009] UKFTT 328 (TC)

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The Research & Development Partnership Ltd v The Commissioners for Revenue & Customs [2009] UKFTT 328 (TC) (30 November 2009)
INCOME TAX/CORPORATION TAX
Penalty

[2009] UKFTT 328 (TC)

TC00271

Appeal number TC/2009/10993

Penalty – Failure to provide information and documents – reliance on accountant to provide information and documents – Whether reasonable excuse – Yes – Appeal allowed – Paragraph 29 schedule 18 Finance Act 1998

FIRST-TIER TRIBUNAL

TAX

THE RESEARCH & DEVELOPMENT

PARTNERSHIP LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Corporation Tax)

Respondents

TRIBUNAL: John Brooks (Judge)

George Miles (Member)

Sitting in public in Cardiff on 24 September 2009, further written representations received 10 November 2009

John Dyer of Marriotts Business Consultants for the Appellant

Caryl Thompson Officer of HM Revenue and Customs for the Respondents

DECISION

1. The Research and Development Partnership Limited appeals against fixed and daily penalties imposed under paragraph 29, schedule 18 of the Finance Act 1998 in respect of the failure to comply with Notices, issued under paragraph 27 of that schedule, requiring the Appellant to provide documents and information to HM Revenue and Customs (“HMRC”) for the purposes of enquiries into its tax returns for the accounting period to 30 April 2005 and the accounting period to 30 April 2007.

2. A fixed penalty of £50 and daily penalties at a rate of £30 a day, amounting to £1,440, were imposed in respect of the accounting period to 30 April 2005 and a fixed penalty of £50 was imposed in respect of the accounting period to 30 April 2007.

3. The facts which led to the imposition of these penalties are not disputed.

Accounting Period to 30 April 2005

4. By a letter dated 11 August 2008, sent to the Appellant and copied to its accountants, Marriotts Business Consultants (“Marriotts”), HMRC opened an enquiry into the Appellant’s tax return for the accounting period to 30 April 2005 which had been submitted to HMRC on 19 February 2008, some 17 months late.

5. A letter, also dated 11 August 2008, from HMRC to Marriotts (and copied to the Appellants), sought information and documents relating to the research and development (“R&D”) activities carried on by the Appellant on behalf of White Page Limited; an analysis of the Appellant’s staffing costs; a detailed explanation of its R&D Tax Relief claim; copies of its invoices and bank statements; an analysis of “other debtors”; copies of board minutes authorising the payment of dividends; returns and accounts for the accounting periods to 30 April 2002 and 2003 copy of the related nominal ledger; and whether it was agreed that the Appellant and White Page Limited were associated companies or a detailed explanation (with reference to relevant legislation) if it was not agreed.

6. In the absence of any response, despite a request in the letter for a reply by 15 September 2008, a Notice under paragraph 27, schedule 18 Finance Act 1998 was issued to the Appellant (and copied to Marriotts) by HMRC on 16 September 2008. This required the Appellant to produce the information and documents requested in the 11 August 2008 letter within 30 days from the date the letter was received.

7. Although Marriotts wrote to HMRC on 17 September 2008 apologising for the delay and seeking an extension of time to comply with the request for information due “to the large number of enquiries currently in process” no appeal was made against the Notice to produce the information and documents. Mr Dyer explained that when he joined the firm in July 2008 the practice was in disarray as there were some 50 ongoing tax enquiries in progress for which he was required, by Marriotts senior partners, to take sole responsibility.

8. On 29 October 2008 HMRC sent a “penalty warning” letter to the Appellant which was copied to Marriotts. The letter stated that unless the information and documents requested in the letter of 11 August 2008 was received by HMRC within the next 14 days a formal notice would be issued charging an initial fixed penalty of £50 and warning of further daily penalties “for each day on which the failure to comply with the notice continues”.

9. Following telephone conversations between Mr Dyer of Marriotts and Roger Grindle of HMRC on 11 and 12 November 2008 the Appellant was given a further seven days to provide the information and documents requested. However, despite a further telephone call by Mr Dyer to HMRC on 19 November 2008 to say that “a letter would be put in the post either today or tomorrow” the information and documents requested were not produced. Consequently a £50 Penalty Notice was issued on 21 November 2008.

10. Marriotts appealed against the penalty on behalf of the Appellant by a letter dated 26 November 2008. This letter explained that the “situation described” in the letter of 17 September 2008 (that the firm was having difficulty dealing with the number of tax enquiries) had “not abated” and that given “the subjective nature of substantively proving a claim for R&D credit and the highly complex business activities conducted by our client, it is only appropriate that a FULL and unequivocal submission of relevant information be made.”

11. Although HMRC accepted that Mr Dyer was overwhelmed with enquiry work and telephoned the Appellant directly speaking to Mr Marsland one of its directors to explain the urgency situation on 7 January 2009, as the information and documents had still not been received by HMRC a Penalty Notice in the sum of £1,440 imposing daily penalties at a rate of £30 a day was issued on 9 January 2009. An appeal against this Notice was made on 4 February 2009.

Accounting Period to 30 April 2007

12. On 2 October 2008 HMRC opened an enquiry into the Appellant’s tax return for the accounting period to 30 April 2007. A letter from HMRC to Marriotts, dated 2 October 2008 enclosing a copy of the notice of enquiry, requested information and documents regarding the Appellants R&D activities; amended R&D expenditure; R&D Tax Relief Claim; copies of invoices and bank statements; an analysis of the cost of sales; details of amounts owed by group undertakings; copies of board minutes authorising payment of dividends and copy of the related nominal ledger; and whether it was agreed that the Appellant and White Page Limited were associated companies or a detailed explanation (with reference to relevant legislation) if it was not agreed.

13. The information and documents were not provided to HMRC which issued a notice under paragraph 27, schedule 18 Finance Act on 10 November 2008. This required the Appellant to produce the documents requested in the letter of 2 October 2008. There was no appeal against the Notice to produce the documents and information.

14. A “penalty warning” letter was sent to the Appellant (and copied to Marriotts) on 17 December 2008 requiring the production of the information and documents within 14 days failing which a Penalty Notice would be issued.

15. As the information and documents were not produced to HMRC a £50 Penalty Notice was issued on 9 January 2009. Marriotts appealed against the penalty on behalf of the Appellant by a letter dated 4 February 2009.

Legislation

16. The legislation requiring the production of information from a company is contained in schedule 18 of the Finance Act 1998. Unless otherwise stated the following references to paragraphs are to those contained in that schedule.

17. Paragraph 24 provides that an officer of HMRC may “enquire into a company tax return if they give notice to do so (“notice of enquiry”) within the time allowed”.

18. If a notice of enquiry is given an officer of HMRC may under paragraph 27 “by notice require the company—

(a) to produce to them such documents in the company’s possession or power, and

(b) to provide them with such information and in such form

as [the officer] may reasonably require for the purposes of the enquiry.”

19. Paragraph 29(1) provides that a company which fails to comply with a notice under paragraph 27 is liable to:

(a) a penalty of £50 and

(b) if the failure continues after a penalty is imposed under paragraph (a) above, to a further penalty not exceeding the amount specified in sub-paragraph (2) for each day on which the failure continues.

20. The amount specified in paragraph 29(2) is £30 if determined by an officer of HMRC as in the present appeal.

21. Paragraph 29(4) makes it clear that “no penalty shall be imposed under this paragraph in respect of a failure at any time after the failure has been remedied.”

22. Section 100 of the Taxes Management Act 1970 (“TMA”) provides that an officer of HMRC may make a determination imposing a penalty under paragraph 27 schedule 18 Finance Act 1998. An appeal against such a penalty may be brought in accordance with s 100B TMA.

23. Where a person “had a reasonable excuse for not doing anything required to be done” s 118(2) TMA provides that “he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased.”

24. Therefore in the present appeals, if the Appellant had a reasonable excuse for failing to comply with the Notices to provide documents and information under paragraph 27 schedule 18 Finance Act 1998 it would be deemed not to have failed to comply with the Notices and consequently not be liable to penalties under paragraph 27. In such circumstances the penalty determinations would be set aside in accordance with s 100B(2)(a)(i) & (b)(i) TMA.

Contentions of the Parties

25. For the Appellant Mr Dyer contended that his overwhelming tax enquiry workload and the complex nature of a claim for R&D tax relief amounted to a reasonable excuse for the failure by the Appellant to provide the documents and information required by the paragraph 27 Notices.

26. Ms Thompson for HMRC, while accepting the difficulties faced by Mr Dyer, submitted that the Appellant did not have a reasonable excuse and asked for the penalties to be confirmed.

Direction

27. As the appeal concerned the reliance by the Appellant on its accountant, which had failed to provide the documents and information required by the paragraph 27 Notices, we directed the parties to provide written submissions addressing the issue of whether reliance on a third party can be a reasonable excuse in the light of the decision of the Special Commissioner (Adrian Shipwright) in Rowland v HMRC [2006] STC (SCD) 536.

Written Submissions

28. Both parties accepted that the Special Commissioner in Rowland decided that reliance on a third party was capable of being a reasonable excuse in a direct tax context. However, they differed on whether the reliance by the Appellant on Marriotts amounted to a reasonable excuse in the present appeal.

29. In her written submissions on behalf of HMRC, Ms Thompson distinguished Rowland on the facts contending that the taxpayers affairs in that case were “extremely technically complex and her agents gave her comprehensive directions as to what and when to pay. The instructions and advice was wrong. Consequently, she underpaid tax and incurred a surcharge” which was found, in that case, to constitute a reasonable excuse.

30. She further submits that “in deciding whether a person has a reasonable excuse for failing to perform a task it is proper to have regard to the nature of the task. Whilst it might be reasonable to rely on a third party with specialist knowledge to perform a complex task, HMRC submits that the same defence is not available where the task is straightforward or easily understood. Here a reasonable Appellant can assess for himself whether compliance has taken place.”

31. In contrast to Rowland Ms Thompson submits that in the present appeal information the Appellant was asked to provide was “a straightforward matter that required no knowledge or considerations of legislative technicalities. The Appellant had simply to provide the information requested or say why it could not be provided. … The Appellant was informed that the Notice had not been complied with and warned at the consequences of not complying. HMRC submits at that point, at the very latest, a reasonable person would have taken steps to ensure that information was provided even if they had relied on a third party until that point.”

32. As the only excuse proffered in the present appeal is the pressure of work upon the agent, in the absence of evidence from the Appellant as to why it could not provide the information, it was contended by HMRC that there is not a reasonable excuse in the present appeal and that the penalties should be confirmed.

33. For the Appellant it was submitted that responding to the enquiry and providing information to HMRC is not a “simple and straightforward task” as the Appellant was associated with other companies and individuals also involved in HMRC investigations and the “issues affecting [the Appellant], contentious or otherwise, are generically linked to those affecting [the] … associated parties” and “the concern was with a claim for the R&D Tax credit” which had already been denied by HMRC for White Page Limited.

34. It was explained that the claim for the R&D tax credit “relies heavily on the interpretation of Statement of Standard Accounting Practice No 13 and guidelines issued by the Secretary of State for Trade & Industry” and not “simply a case of supplying a few receipts or invoices.”

35. It was contended that the Appellant’s directors were acting responsibly when they relied on Marriotts, whom the Appellant had engaged over a long period to deal “in areas of tax legislation that they themselves cannot reasonably be expected to be conversant … [as] the provision of information for the conduct of an enquiry is itself governed by tax law.” Accordingly the Appellant had a reasonable excuse for the failure to provide the information and the appeal should be allowed.

Discussion and Conclusion

36. The issue for our determination is whether the Appellant, not its accountant, has a reasonable excuse by relying on Marriotts to provide the documents and information to HMRC as required by the paragraph 27 Notices.

37. In reaching our decision we first have to determine whether reliance on a third party, which is specifically precluded from being a reasonable excuse for VAT purposes by s 71 Value Added Tax Act 1994 can, in the absence of any corresponding direct tax provision, amount to a reasonable excuse in a direct tax context.

38. In Rowland the Special Commissioner said, at paragraphs 22 to 25:

“The issue arises as to whether reliance on a third-party is prevented from being a reasonable excuse. For VAT purposes there is specific provision that where "reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied on is a reasonable excuse." There is also specific provision that insufficiency of funds is not a reasonable excuse (see section 71 VATA). … There is no equivalent provision that reliance on a third party is not a reasonable excuse for direct tax purposes.

Whilst in the VAT context it was thought necessary to exclude reliance on a third party as presumably otherwise it could be a reasonable excuse in the direct tax context it is, at most only a indication that reliance on a third party can be a reasonable excuse. However, I consider it a very telling indication especially as it is a limited exclusion for VAT (see Enterprise Safety Coaches notwithstanding GB Capital Ltd).

The Thorne case and Enterprise Safety Coaches are clear authority that reliance on a third party can be a reasonable excuse.

I conclude that in the direct tax context reliance on a third party can be a reasonable excuse.”

39. We agree with the conclusion of the Special Commissioner and find that reliance on a third party is capable of being a reasonable excuse for direct tax purposes.

40. However, although we find that reliance on a third party can amount to a reasonable excuse, we accept the contention of HMRC that in determining whether a person has a reasonable excuse for failing to perform a particular task it is proper to have regard to the nature of the task.

41. The task in question in this appeal was the provision of documents and information which HMRC say is “straightforward and easily understood” and it is therefore not reasonable to rely on a third party with specialist knowledge to perform it.

42. While this may be the case with much of the information sought by HMRC in the Notice issued on 16 September 2008 in respect of the period to 30 April 2005, the Appellant was required to produce a detailed explanation of its R&D tax relief claim with reference to the R&D legislation. Similarly the Notice issued on 10 November 2008 in respect of the period to 30 April 2007 required a detailed explanation of the R&D tax relief claim again with reference to the relevant legislation.

43. As the provisions of the R&D legislation cannot be described as “straightforward and easily understood” to those not generally acquainted with tax law we find that it was reasonable for the Appellant to rely on Marriotts to provide this information to HMRC.

44. We also find that it was reasonable for the Appellant to expect Marriotts to provide the other documents and information required by the Notice together with and at the same time as it was to provide the explanation of the R&D claims to HMRC.

45. Accordingly we find that the Appellant has a reasonable excuse for its failure to comply with the Notices issued in respect of the periods to 30 April 2005 and 30 April 2007.

46. We therefore allow the appeals and set aside the penalties.

47. The Respondents have a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules. 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.