[2011] UKFTT 119 (TC)

        

TC00995

 

Appeal number: TC/2010/07772

 

Self-assessment - penalty - interest - surcharge for late payment of tax - whether insufficiency of funds a reasonable excuse - no - whether taxpayer’s use of funds a reasonable excuse - no - whether HMRC had discretion to mitigate interest - no - whether HMRC had discretion to mitigate surcharge - yes - HMRC’s failure to exercise discretion - whether Tribunal had power to review failure to exercise discretion - no - appeal dismissed.

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

                                            CONOR TENNYSON                                        Appellant

 

 

                                                                      - and -

 

                                THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS                             Respondents

 

 

                        TRIBUNAL: ANNE REDSTON (TRIBUNAL CHAIR)

                                               

                                                                                               

The Tribunal determined the appeal on 7 February 2011 without a hearing under the provisions of Rule 26 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (default paper cases) having first read the Notice of Appeal dated 29 September 2010 and HMRC’s Statement of Case submitted on 11 November 2010

 

 

 

 

© CROWN COPYRIGHT 2011

DECISION

 

 

1.      This is an appeal by Mr Tennyson against interest and surcharges for late payment of tax.

2.      HMRC levied two surcharges of £2091.95 in relation to Mr Tennyson’s 2006-07 self-assessment liability, and two surcharges of £2,213.15 in relation to his 2007-08 self-assessment liability. Mr Tennyson accepted that his tax had not been paid on time, but submitted that he had a reasonable excuse.

The legislation

3.        The statutory provisions relating to the imposition of surcharges are at Taxes Management Act s 59C. So far as relevant to this Appeal, they are as follows:

Surcharges on unpaid income tax and capital gains tax

 (1)       This section applies in relation to any income tax or capital gains tax which has become payable by a person (the taxpayer) in accordance with section 55 or 59B of this Act.

(2)        Where any of the tax remains unpaid on the day following the expiry of 28 days from the due date, the taxpayer shall be liable to a surcharge equal to 5 per cent of the unpaid tax.

(3)        Where any of the tax remains unpaid on the day following the expiry of 6 months from the due date, the taxpayer shall be liable to a further surcharge equal to 5 per cent of the unpaid tax.

(4)        …

(5)        …

(6)        A surcharge imposed under subsection (2) or (3) above shall carry interest at the rate applicable under section 178 of the Finance Act 1989 from the end of the period of 30 days beginning with the day on which the surcharge is imposed until payment.

(7)        An appeal may be brought against the imposition of a surcharge under subsection (2) or (3) above within the period of 30 days beginning with the date on which the surcharge is imposed.

(8)        Subject to subsection (9) below, the provisions of this Act relating to appeals shall have effect in relation to an appeal under subsection (7) above as they have effect in relation to an appeal against an assessment to tax.

(9)        On an appeal under subsection (7) above that is notified to the tribunal section 50(6) to (8) of this Act shall not apply but the tribunal may—

(a)        if it appears that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax, set aside the imposition of the surcharge; or

(b)        if it does not so appear, confirm the imposition of the surcharge.

(10)      Inability to pay the tax shall not be regarded as a reasonable excuse for the purposes of subsection (9) above.

(11)      The Board may in their discretion—

(a)        mitigate any surcharge under subsection (2) or (3) above, or

(b)        stay or compound any proceedings for the recovery of any such surcharge,

and may also, after judgment, further mitigate or entirely remit the surcharge.

4.        The provisions relating to appeals which are referred to in TMA s 59C(8) and (9) above, so far as relevant to this Appeal, are as follows:

TMA s 48         Application to appeals and other proceedings

 (1)       In the following provisions of this Part of this Act, unless the context otherwise requires—

(a)        "appeal" means any appeal under the Taxes Acts;

(b)        a reference to notice of appeal given, or to be given, to HMRC is a reference to notice of appeal given, or to be given, under any provision of the Taxes Acts.

(2)        In the case of—

(a)        an appeal other than an appeal against an assessment, the following provisions of this Part of this Act shall, in their application to the appeal, have effect subject to any necessary modifications, including the omission of sections 54A to 54C and 56 below

(b)        …

(3)        In subsection (2), a reference to the relevant provisions of this Part of this Act is a reference to the following provisions of this Part, except sections 49A to 49I and 54A to 54C

TMA s 50: Procedure

(1)–(5)  …

(6)        If, on an appeal notified to the tribunal, the tribunal decides—

(a)        that the appellant is overcharged by a self-assessment…

(b)        ...

(c)        that the appellant is overcharged by an assessment other than a self-assessment,

the assessment or amounts shall be reduced accordingly, but otherwise the assessment or statement shall stand good.

(7)        If, on an appeal notified to the tribunal, the tribunal decides

(a)        that the appellant is undercharged to tax by a self-assessment …

(b)        …

(c)        that the appellant is undercharged by an assessment other than a self-assessment,

the assessment or amounts shall be increased accordingly.

(7A)     …

(8)        Where, on an appeal notified to the tribunal against an assessment (other than a self-assessment) which—

(a)        assesses an amount which is chargeable to tax, and

(b)        charges tax on the amount assessed,

the tribunal decides as mentioned in subsection (6) or (7) above, the tribunal may, unless the circumstances of the case otherwise require, reduce or, as the case may be, increase only the amount assessed; and where any appeal notified to the tribunal is so determined the tax charged by the assessment shall be taken to have been reduced or increased accordingly…

5.        The statutory provisions relating to interest are at TMA s 86:

Interest on overdue income tax and capital gains tax

 (1)       The following, namely—

(a)        any amount on account of income tax which becomes due and payable in accordance with section 59A(2) of this Act, and

(b)        any income tax or capital gains tax which becomes due and payable in accordance with section 55 or 59B of this Act,

shall carry interest at the rate applicable under section 178 of the Finance Act 1989 from the relevant date until payment.

Chronology

6.      The chronology of events in relation to the 2006-07 surcharges is as follows:

(1)          Mr Tennyson’s self-assessment return was issued on 6 April 2007. The due date for filing, and for payment of any outstanding tax, was 31 January 2008.

(2)          On 23 December 2008 HMRC raised a Revenue Determination under TMA s 28C in the amount of £69,924.82, because no return had been filed. This was almost eleven months after the due date for filing the return.

(3)          Under TMA s 59C(2) and (3) the trigger date for the first surcharge is 28 days after the due date; the trigger date for the second surcharge is six months after the due date. Each surcharge is 5% of the tax unpaid. In Mr Tennyson’s case the trigger dates were 28 February 2008 and 31 July 2008.

(4)          On 1 April 2009 HMRC issued both the first and second surcharge notices, totalling 10% of £69,924.82.

(5)          Mr Tennyson’s 2006-07 return was filed on 6 May 2009. It showed that tax of £41,839 was outstanding. His liability and surcharges were revised downwards in consequence, to £2,091.95 each.

(6)          Mr Tennyson finally paid the tax on 4 March 2010, over two years late.

7.      The chronology for the 2007-08 surcharges is as follows:

(1)          Mr Tennyson’s self-assessment return was issued on 6 April 2008. The due date for online filing, and for payment of any outstanding tax, was 31 January 2009.

(2)          The return was filed online on 13 March 2009. It showed that tax of £44,263 was outstanding. Because this tax should have been paid on 31 January 2009, it was already overdue for payment. No tax was paid at the time the return was filed.

(3)          HMRC raised the first surcharge on 1 April 2009, a month after the trigger date of 28 February 2009. The amount of the surcharge was 5% of the liability, being £2,213.15.

(4)          The tax had still not been paid by the trigger date for the second surcharge, namely 31 July 2009. and HMRC therefore raised the second surcharge of the same amount on 11 August 2009.

(5)          Most of the tax was finally paid between 4 March and 14 October 2010. However, as at 11 November 2010, the date of the HMRC’s Statement of Case for this Appeal, a balance of £7,322 remained unpaid.

8.      A surcharge was also raised in relation to Mr Tennyson’s increased liability following a HMRC enquiry into his 2007-08 return, but he has not appealed that surcharge.

Mr Tennyson’s submissions

9.      Mr Tennyson submits that he had a reasonable excuse for the late payment of his tax, and the surcharges should therefore be set aside. His reasons, as set out by his accountant, Mr Oliver of Thomas Oliver and Co, are as follows:

(1)          The tax liability for 2006-07 was largely made up of capital gains tax from the sale of shares and assets. In February 2007 Mr Tennyson became the majority shareholder in a company called Geotech Construction Limited (“Geotech”). The Notice of Appeal states that he paid £220,000 for these shares. The unaudited accounts for the accounting period ending 28 February 2009 give the value as £165,000; the same figure is also used in the letter sent to HMRC by Mr Oliver on 13 August 2009.

(2)          At or around the same time, Geotech was on the verge of buying a quarry. It was relying on a £660,000 loan facility from Ulster Bank to make this purchase, but the funding was suddenly withdrawn. Had the company not completed on the purchase, it would have been in breach of contract. Mr Tennyson thus had a choice of closing the company and making fifteen employees redundant, or investing money in the business.

(3)          He invested not only the entire proceeds from his earlier share and asset sales, but also “substantially more” - in order to keep the company going and for equipment. According to the Notice of Appeal, Mr Tennyson invested £1,142,530 in total; according to the letter of 13 August 2009, it was £1,268,267. These investments were the reason he could not pay the tax.

(4)          A number of pages from the company’s unaudited final accounts for the year ended 28 February 2009 were submitted to the Tribunal. These show that the company owed Mr Tennyson £1,103,637 as at 28 February 2009, and £1,131,314 as at 28 February 2008, in addition to the share capital.

(5)          The Notice of Appeal says that Geotech is now “beating the current economic trend and very busy”, and that as Mr Tennyson’s investment in the company promoted enterprise, he should not be penalised by additional charges.

10.  Mr Oliver also submitted that the quantum of the interest and the surcharge, taken together, was “excessive by any commercial standards” and should be reduced to conform with current rates of interest. Furthermore, in view of his submissions on the reasons for the Mr Tennyson’s payment, the quantum should be “greatly reduced if not waived.”

HMRC submissions

11.  HMRC made the following submissions in relation to reasonable excuse:

(1)          Mr Tennyson has been making self-assessment (“SA”) returns since 1998-99 and has been surcharged in relation to three previous tax years. He is fully aware of the SA system, including the surcharge provisions.

(2)          Reasonable excuse “is not defined in the legislation and there are no supporting case law authorities”. The term must therefore “be given its normal everyday meaning. HMRC take this to mean that it is “something exceptional or outside the taxpayer’s control”.

(3)          Mr Tennyson’s decision to invest in his own company was a commercial choice.

(4)          Inability to pay the tax is not a reasonable excuse.

12.  As regards the interest, HMRC say that they are bound to follow the requirements set out in TMA s 86. They further say that “there is no mechanism in the Taxes Acts which would allow the appellant to appeal.”

13.  As to the quantum of the surcharge, HMRC say that that this is set by statute and they have no discretion.

Decision

14.  I deal first with reasonable excuse and then with the issue of quantum. Mr Tennyson’s case for reasonable excuse rests in part on insufficiency of funds caused by his investment in Geotech, and in part on the economic and social benefits of investing in his company rather than paying his tax on time.

Insufficiency of funds

15.  Although HMRC are right to say that statute precludes insufficiency of funds being a reasonable excuse, Steptoe v R&C Commrs [1992] STC 527 (“Steptoe”) is authority for finding that the cause of that insufficiency may constitute such an excuse. Although that decision was in a VAT context, this Tribunal has accepted that the same approach should be taken to direct taxes - see for example the recent decision of Sir Stephen Oliver QC in Stephen Mutch v Revenue & Customs Commissioners [2009] UKFTT 288(TC).

16.  The Steptoe approach requires the Tribunal to take for comparison a person in a similar situation to that of the actual taxpayer who is relying on the reasonable excuse defence. The Tribunal must then ask itself, with that comparable person in mind, whether, notwithstanding that person’s exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become payable on the particular dates, those factors would not have avoided the insufficiency of funds which led to the failures.

17.  The Tribunal thus needs to be persuaded that that reasonable competent person would have defaulted when faced by the same or similar predicament, despite exercising reasonable foresight.

18.  In this case, no evidence was provided as to Mr Tennyson’s assets and income. Furthermore, although several pages of Geotech’s unaudited accounts were supplied to the Tribunal, neither the balance sheet nor the company’s profits for the years ended 28 February 2008 and 2009 were made available. It was thus not possible to establish the Geotech’s turnover, its overall profitability, whether any dividends were paid, or the value of any retained profits.

19.  The evidence which was supplied to the Tribunal by Mr Oliver shows that Mr Tennyson was able to find either £165,000 or £220,000 to purchase the Geotech shares in February 2007; a further £660,000 to plug the gap in the company’s finances when Ulster Bank pulled out of the loan, and (given a total investment of either £1,268,637 or £1,142,530) a sum of between £443,637 and £262,530 “to keep the company going and for equipment”.

20.  Considering Mr Tennyson’s tax liability in the context of his investments in Geotech, I note that he owed £41,839 in 2006-06 and £44,263 in 2007-08. This is a total of £86,102, around 7% of the sum he invested in his company.

21.  I have been provided with no evidence that insufficiency of funds prevented Mr Tennyson paying his tax liability. Instead, the evidence shows that he invested a significant sum in Geotech, that £660,000 of this amount was to plug a gap left by the withdrawal of Ulster Bank, and that he invested more than he had intended at the time he purchased the shares. But this is not the same as insufficiency of funds.

22.  I thus find that insufficiency of funds does not provide Mr Tennyson with a reasonable excuse for non-payment of his taxes.

The wider economic benefits

23.  Mr Oliver submits that Mr Tennyson should not be penalised because his investment has been beneficial to the economy.

24.  The payment of taxes is a statutory obligation, which cannot be excused because taxpayers consider that the country would receive a greater benefit if they instead invested their money in other ways. I agree with HMRC that this does not constitute a reasonable excuse.

Quantum

25.  Mr Tennyson’s complaint is against the quantum of the interest and surcharge taken together.

26.  Once tax is late, TMA s 86 provides that interest shall be charged thereon at the prescribed rate. HMRC has no discretion, and Mr Tennyson no rights of appeal, against either the imposition of the interest or the rate at which it is charged.

27.  As to the surcharge, HMRC are correct that its quantum is set by TMA s 59C(2), but incorrect to say they have no discretionary power to mitigate or remit the penalty. These powers are provided by TMA s 59C(11).

28.  The Tribunal’s normal jurisdiction on appeals is set out at TMA s 50, by virtue of TMA s 48. It includes a power to reduce or increase amounts assessed. However, in the case of appeals against surcharges, the Tribunal’s power is limited to cancelling the surcharge, should it find that appellant has a reasonable excuse, or to confirming the surcharge, if it finds no reasonable excuse.

29.  In Mr Tennyson’s case, HMRC did not consider whether or not to exercise their discretion under TMA s 59C(11) because they wrongly thought they did not have any such discretion. Oversight of the exercise of discretion is a judicial review power. The question whether this Tribunal has a general power of judicial review has recently been considered in Oxfam v HMRC [2009] EWHC 3078, and it is fair to say that the law in this area is currently uncertain.

30.  In the case of an appeal against a surcharge, the statute specifically gives HMRC discretion to reduce or waive the amount assessed. Just as clearly, it removes the normal power of the Tribunal to abrogate or increase the surcharge.

31.  I thus find that, whether or not this Tribunal has a general judicial review power, the statute here has restricted its jurisdiction to the matters set out in TMA s 59C(9). In coming to my decision I am therefore unable to take into account HMRC’s failure to exercise their discretion.

32.  In concluding on the issue of quantum I note that the purpose of the surcharge is not to charge a commercial rate of interest, but to act as a deterrent to taxpayers who seek to delay compliance with their statutory obligation, namely to pay their taxes on the due dates.

Conclusion

33.  I find that a reasonable competent person in the same position as Mr Tennyson would not have defaulted on his tax liability, and that he does not have a reasonable excuse. The Tribunal has no power to review the quantum of either the interest or the surcharge. The appeal is therefore dismissed and the surcharges confirmed.

34.  This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. 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.

 

 

 

 

ANNE REDSTON

 

TRIBUNAL CHAIR

RELEASE DATE: 16 FEBRUARY 2011