[2011] UKFTT 480 (TC)
TC01327
Appeal number: TC/2011/01868
Penalty;
late filing; fairness; s98A(2)(a) TMA 1970. Common law fairness. Conscionable
conduct. Jusilla v Finland. “Reasonable excuse” does not necessarily involve
any exceptional circumstance. Honest and genuine belief amounts to “reasonable
excuse”. Burden of proof.
FIRST-TIER TRIBUNAL
TAX
RUSHWORTHS
FURNITURE LIMITED Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
GERAINT JONES Q.C. (TRIBUNAL JUDGE)
ANTHONY HUGHES ESQ (TRIBUNAL MEMBER)
The Tribunal determined the
appeal on 07 July 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 04 March 2011 and HMRC’s
Statement of Case submitted on 04 April 2011.
© CROWN COPYRIGHT
2011
DECISION
Introduction.
1. The
appellant, Rushworths Furniture Limited, has employees. Accordingly, it is
required to make an online filing of an end of year return, a P35, by 19 May in
each year.
2. On
the 27 September 2010 HMRC sent the appellant a Notice of Penalty Determination
demanding a penalty of £400 in respect of an alleged failure to file the
appellant's P35 by 19 May 2010. That was followed by a further penalty notice dated
21 October 2010 demanding £100 because HMRC contended that the necessary filing
did not take place until 12 October 2010. It is the appellant's case that it
did not receive the Notice of Penalty Determination dated the 27 September 2010
until 11 October 2010.
3. The
appellant sought a Review of the penalty decisions. By its letter of 15
February 2011, incorrectly addressed to Mr Rushworth instead of to the company
taxpayer, HMRC upheld the penalty, totalling £500, notwithstanding that the
appellant had sent it a copy of a computer-generated document headed
"Submit Employer Annual Return" for Rushworths Furniture Limited
recording that the necessary P35 online submission was "Complete" at
17:36 hours on the 28 April 2010. That information appeared under the heading
"Previous Successful Submissions” It is the appellant's case that its
online filing took place and that it is not in default, regardless of whether
HMRC’s computer system admits or denies that the online filing was received by
it.
The Law.
4. Before
we turn to the facts of this appeal and to our conclusions in respect of it, it
is appropriate that we set out the law as we now perceive it to be. In G.
Deacon & Sons v Commissioners of Inland Revenue 33TC 66 Mr Justice
Donovan dismissed a request for a case to be stated in respect of conclusions
drawn by General Commissioners, holding that from the primary facts adduced in
evidence, they were entitled to draw the inferences that they drew against the
then appellant, Mr Deacon.
5. In
Johnson v Scott (1987) STC 476 Mr Justice Walton expressly considered
where the onus of proof lay in a case where an appellant was challenging
amended assessments that had been upheld by the Commissioners. He observed that
counsel for the Crown had correctly accepted that where, as in that case,
neglect on the part of the taxpayer had to be established, the onus of
establishing such neglect lay with the Crown. He went on to hold that if a
finding of neglect is made, and justified on the evidence, that enabled the
Crown to make assessments for the purpose of making good any tax lost as a
result of such neglect. He went on to observe that if that stage was reached,
then the onus would pass to the taxpayer to adduce evidence to show that
the assessment is too large.
6. His
Lordship desisted from indicating whether the onus that then shifted to the
taxpayer was a legal burden or an evidential burden, but usually a reference to
a party then having a burden to adduce evidence, refers to an evidential rather
than a legal burden. It is also relevant to observe that in that case the
learned judge was considering section 50(6) of the Taxes Management Act 1970 in
its original, unamended, form. The learned judge also emphasised that where the
Crown's case was based upon inferences drawn from primary facts, such
inferences had to be "fair" inferences. One would not have expected
otherwise. The Court of Appeal upheld that judgment. It was a case in which the
taxpayer failed, by adducing acceptable or probative evidence, to discharge the
evidential burden upon him of showing that the inferences drawn by the Crown
were not fair or appropriate.
7. I
set out the foregoing because it is often stated, incorrectly, that once an
assessment is raised or a surcharge demanded, the burden of proving that it is
incorrect rests upon the taxpayer. That may be an approximation of the de facto
position in respect of an assessment (but not a surcharge or penalty) but it
fails to analyse the true legal position.
8. In
our judgment the true legal position now has to be considered bearing in mind
the amendments to section 50 of the Taxes Management Act 1970, the most recent
having come into effect from the 1st April 2009, but more importantly having in
mind the decision of the European Court in the Jussila v Finland (2009)
STC 29 where, in the context of default penalties and surcharges being
levied against a taxpayer, the Court determined that Article 6 of the European
Convention on Human Rights was applicable, as such penalties and surcharges,
despite being regarded by the Finnish authorities as civil penalties,
nonetheless amounted to criminal penalties despite them being levied without
the involvement of a criminal court. At paragraph 31 of its judgment the court
said that if the default or offence renders a person liable to a penalty which
by its nature and degree of severity belongs in the general criminal sphere,
article 6 ECHR is engaged. It went on to say that the relative lack of
seriousness of the penalty would not divest an offence of it inherently
criminal character. It specifically pointed out, at paragraph 36 in the
judgment, that a tax surcharge or penalty does not fall outside article 6 ECHR.
9. This
is a case involving penalties. The European Court has recognised that in
certain circumstances a reversal of the burden of proof may be compatible with
Article 6 ECHR, but did not go on to deal with the issue of whether a reversal
of the burden of proof is compatible in a case involving penalties or
surcharges. This is important because a penalty or surcharge can only be levied
if there has been a relevant default. If it is for HMRC to prove that a penalty
or surcharge is justified, then it follows that it must first prove the
relevant default, which is the trigger for any such penalty or surcharge to be
levied.
10. In our judgement
there can be no good reason for there to be a reverse burden of proof in a
surcharge or penalty case. A surcharge or penalty is normally levied where a
specified default has taken place. The default might be the failure to file a
document or category of documents or it may be a failure to pay a sum of money.
In such circumstances there is no good reason why the normal position should
not prevail, that is, that the person alleging the default should bear the onus
of proving the allegation made. In such a case HMRC would have to prove facts
within its own knowledge; not facts peculiarly within the knowledge of the
taxpayer.
11. It is for HMRC
to prove that a penalty is due. That involves HMRC proving, on the balance of
probabilities, that the required end of year filing did not take place by 19
May 2010. In our judgment it has produced no, or no sufficient, evidence to
that effect and, for that reason alone, this appeal must succeed.
12. Section
98A(2)(a) Taxes Management Act 1970 provides that any person who fails to make
a return in accordance with the relevant provisions “shall be liable to a
penalty or penalties of the relevant monthly amount for each month (or part of
a month) during which the failure continues ...........”.
13. So far as the
State and its several Manifestations are concerned (HMRC being one such
manifestation), there is a common law duty of fairness. In R v S. S. Home
Department [2003] EWCA Civ 364 at paragraph 69 the Court of Appeal
expounded the principle as related to the decision making process under
scrutiny in that appeal. In S. S. Home Department v Thakur [2011] UKUT 151
the Upper Tribunal, in paragraph 12 of its Decision, also recognised that
principle, again in the context of a decision making process.
14. Thus, the issue
arises whether that common law principle has any application where a statutory
provision renders a person “liable” to a specified penalty. It must be noted
that the statute does not provide that the penalty or any part of it must
be levied. It does no more than to indicate that a person is “liable” to the
penalty which means not that the specified penalty must apply, but may apply
and may be demanded. If we take a criminal analogy it is that, for a specified
offence, a statute might provide that a convicted person is liable to a fine
not exceeding £500. In our judgement the words "not exceeding" make
little, if any, difference. They are not words which import discretion but
simply make it clear that the fine must not exceed £500. The discretion of a
court to impose a fine below the specified maximum does not arise by reason of
the words "not exceeding" but by the use of the expression that a
person is "liable" to a fine, capped at £500. Similarly where a
person is “liable” upon conviction to a specified penalty, it does not mean
that prosecution will ensue if such an offence is detected; it means no more
than that the appropriate prosecuting authority, exercising its discretion in
the public interest, may prosecute.
15. Accordingly, in
our judgement, the appellant is entitled to rely upon the common law duty of a
public body to act fairly not just in its decision-making process but also in
administering its statutory powers. We are in no doubt that such a body does
not act fairly when it deliberately desists from sending a penalty notice, for
four months or more, knowing that the likely effect will be to impose a minimum
penalty of £500 upon somebody whose sin may be nothing more than oversight or
forgetfulness.
16. We should also
add that when HMRC sent the result of its Review to the appellant on the 15
February 2011 it made it clear that it had undertaken the Review process on the
basis that, for the appellant to show that it had a "reasonable
excuse" for failing to file its P35, it needed to demonstrate that there
had been some exceptional event beyond its control that had prevented it from
filing its return on time. As a matter of law, that is not the correct test and
is misleading. Thus HMRC misdirected itself in law. Parliament has said that
an appellant must demonstrate that it has a "reasonable excuse”. Those are
ordinary English words in everyday use. They must be given their ordinary and
natural meaning. If Parliament had intended to say that an appellant must prove
some exceptional circumstance, it could and should have said so. It did not
choose to say so. Instead, it used the expression "reasonable excuse"
which HMRC has wrongly sought to elevate to something more onerous than the
test specified by Parliament. The fact that section 118 Taxes Management Act
1970 (the definition section) does not contain a statutory definition of
"reasonable excuse" is sufficient to indicate that those words or
that expression must be given their plain and ordinary meaning. That meaning
cannot be said to extend to demanding that an appellant demonstrates that there
were exceptional circumstances, or some exceptional event beyond its control
before a "reasonable excuse" can be established.
The Facts and our Conclusions.
17. HMRC has not
adduced a witness statement from any officer dealing with any alleged non
receipt of the necessary filing by the appellant or explaining how the online
filing system works (or should work). For that reason alone it fails to
discharge the onus of proof upon it and this appeal must succeed.
18. In the Review
Decision letter of 15 February 2011 HMRC asserted that the fact that the
appellant was able to make an online filing on the 12 October 2010 indicates
that there could not have been an earlier successful online filing. That is
not relevant. It is not the appellant's case that there was a successful online
filing. It is the appellant's case that its computer system informed it that
its end of year filing had been sent and was complete. We are not prepared to
proceed on the assumption that any error lay within the appellant's computer
system rather than within the computer system of HMRC which did not accept
and/or log the online filing.
19. However, we make
it clear that even if HMRC had adduced sufficient evidence to require the
appellant to answer the allegation that it had not made the necessary online
filing, we would have no hesitation in accepting the material adduced by the appellant,
which demonstrates that, according to its computer system, it made a successful
end of year filing at 17:36 hours on 28 April 2010. There is no good reason why
we should infer, as is implicit in the case put forward by HMRC, that what its
computer has disclosed should be any more reliable than what the appellant's
computer has disclosed.
20. We should add
that Mr Rushworth says that consequent upon making the online filing on 28
April 2010 he was able to print off the necessary P60’s for the employees. We
accept his "evidence" being, in effect, what he says in the Grounds
of Appeal signed by him on 4 March 2011. We treat that as his evidence. It is uncontroverted
and we accept it.
21. Even if this was
a case where HMRC had proved that the necessary online filing had not taken
place, we would have found as a fact that the appellant, by its Director Mr
Rushworth, genuinely and honestly believed that the necessary online filing had
taken place on or before 19 May 2010. We are in no doubt that where a person honestly
and genuinely believes that successful online filing has taken place, that
amounts to a reasonable excuse, at least until such time as that person is
given to believe that that honest and genuine belief is incorrect. The
jurisprudence of this Tribunal plainly establishes that principle.
22. Even if this was
a case where the appeal did not succeed totally, the penalty would have been
reduced to £100 because in our judgement there was no good reason why HMRC,
acting fairly and in good conscience, could not de facto have placed the
appellant on notice of its alleged default by sending a penalty notice to the
appellant soon after 19 May 2010. We can discern no good reason why HMRC should
instruct its computer system to wait until September in each year before
sending out a penalty notice, which would have the desirable effect of placing
a person unwittingly in default, on notice of that default so that it could be
rectified. We recognise that HMRC argues that it has no obligation to issue
reminders. That is not the point. The point is that if HMRC, being empowered to
raise a penalty, issued the penalty notice within a fair and reasonable time
after the default, it would have the desirable effect of acting as a reminder
(even if not intended so to do).
23. We should also
add that HMRC sets out that it runs a "structured programme to enable
penalties to be issued regularly throughout the year, rather than waiting for
the late return to be submitted and then issue a final penalty. These
penalties, although aimed at encouraging compliance and having the effect of
reminding are not designed to be reminders for the outstanding return.”
24. It seems that as
part of that “structured programme”, HMRC deliberately waits until four months
have gone by and does not issue the first interim penalty notice until, as in
this case, September of the year of default. By that time a penalty of £400,
being four times £100 per month, is said to be due. In fact, if the penalty
notice operates as a reminder and the taxpayer undertakes the necessary filing
forthwith, a further one month penalty arises because the de facto reminder
is received only after it is too late to avoid a further £100 penalty. Thus,
the effect of HMRC desisting from sending out a penalty liability notice very
soon after 19 May of the relevant year, and choosing deliberately to delay that
penalty notice until four months has gone by, is likely to result in the
taxpayer facing a minimum penalty of £500. We appreciate that HMRC takes the
stance that it is the responsibility of the taxpayer to make the necessary
filing and that it is its stance that it has no obligation to issue any
reminder. However, we have no doubt that any right thinking fair minded member
of society would consider that to be plainly unfair and falling very far below
the standard of fair dealing and conscionable conduct to be expected of a
manifestation of the State that is empowered to issue penalties, as a means of
ensuring compliance.
25. There can be no
logical reason whatsoever for HMRC to delay sending out a penalty notice for
four months so that, in effect, a minimum penalty of £500 will be levied unless
the taxpayer has unilaterally realised that it has failed to undertake the
necessary filing. Its computers could be set to issue a penalty notice at any time
after 19 May in each year; but it chooses to wait until mid/late September in
each year.
26. HMRC is a
manifestation of the State. It is no function of the State to use the penalty
system as a cash generating scheme. The penalty system has a legitimate aim,
which is to ensure that appropriate filings take place in good time and to
discourage default. Given that that is the legitimate aim, it is inexplicable
why HMRC deliberately delays sending out a penalty notice for four months, with
the effect that a penalty for five months becomes payable, that is, £500. In
our judgement it would be a very simple matter for HMRC to set its computer
settings so that a default or penalty notice was sent out soon after 19 May in
any year, instead of some four months later. That fair approach might generate
less penalty cash for the State, but it would be fair and conscionable as
between the taxpayer and the State (acting by HMRC).
27. HMRC makes the
point that it is not under an obligation to remind a taxpayer of its obligation
to file documents. It is true that it is under no obligation to do so, but that
does not mean that good practice and conscionable conduct does not require it
either (i) to send a reminder soon after 19 May in each year when it knows that
a default has taken place or, more likely (ii) soon after 19 May each year to
issue a £100 penalty notice which would levy the penalty then due and also have
the effect of acting as a reminder before further monthly penalties are
incurred.
28. It has long been
part of the common law of this country that manifestations of the State must
act fairly and in good conscience with its citizens. In our judgement there is
nothing fair or reasonable in setting a computer system so that it does not
generate a penalty notice until four months have gone by from the date of
default, thereby ensuring that a penalty of not less than £500 will be due. We
are in no doubt that the computer system could easily be set to generate a
single £100 penalty notice soon after the 19 May in each year. That is the
course that a fair manifestation of the State, acting in good conscience
towards the citizens of the State, would adopt.
29. As, in our
judgement, HMRC has neither acted fairly nor in good conscience, in the manner
described above, we do not consider that any penalty would be recoverable over
and above the £100 penalty for the first month, unless HMRC proved (the onus
being upon it) that even if such a penalty notice, which would have acted as a
reminder, had been issued, the default would nonetheless have continued. It has
proved no such thing.
30. It follows from
the foregoing that we find as follows:
(1)
HMRC has not proved the alleged default.
(2)
Even if the alleged default had been proved, the appellant has
established a reasonable excuse for the entire period of the default given that
it honestly and genuinely believed that the filing had taken place on the 28
April 2010.
(3)
Even if there had been no reasonable excuse, the penalty would have been
reduced from £500 to £100 given that HMRC deliberately desisted from sending
out a penalty notice until September 2010, by which time it could demand a total
penalty of £500 and in fact did so.
(4)
This appeal must be allowed in full. The £500 penalty is set aside.
31. 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.
TRIBUNAL JUDGE
RELEASE DATE: 15 JULY 2011
