DECISION
Introduction
1. This case
concerns an appeal against a penalty for late payment of PAYE payments and
national insurance contributions (NICs). The penalty under appeal amounts to
£10,247.61. In this decision, where we refer to late payments of PAYE, those
references apply equally to the late payments of NICs.
2. The
appellant company was represented by Mr Bobby Kaye, of Cecil Kaye & Co;
HMRC’s case was presented by Miss E Gardiner, assisted by Mrs G Orimoloye.
3. The
Tribunal had in advance Dina Foods Ltd’s Notice of Appeal, including a schedule
from HMRC showing that they considered Dina Foods Ltd were late with all their
PAYE payments for 2010-11, but no further papers. On the day of the hearing, HMRC
produced a helpful bundle of papers, including extracts from their call logs,
copy correspondence, relevant legislation and copies of HMRC notices. However,
this bundle was only made available to the Tribunal and to Mr Kaye on the day
of the hearing. Thus, Mr Kaye had only limited time to study the material and
was unable to check certain points with his client in advance of the actual
hearing. The Tribunal asked Mr Kaye whether he had had enough time to consider
the material; he confirmed to the Tribunal that although he would have liked
the material in advance, he was content to proceed with the appeal on schedule.
The Tribunal therefore confirmed that it was in the interests of justice that
the appeal should proceed as scheduled.
The legislation
4. The
legislation in question is relatively new and this may well be the first case
on it to come before the Tribunal. The provisions came out of a comprehensive
review of HMRC’s powers and the penalties available to them. Introducing a
penalty for late payment of PAYE was a new step: historically there has been no
penalty for late paid PAYE as such.
5. The
legislation is contained in Finance Act 2009, Schedule 56. The relevant
paragraphs which lay down the structure of the penalty for PAYE are as follows:
Penalty for failure to pay tax
1 (1) A penalty is payable by
a person (“P”) where P fails to pay an amount of tax specified in column 3 of
the Table below on or before the date specified in column 4.
(2) Paragraphs 3 to 8 set
out—
(a) the circumstances
in which a penalty is payable, and
(b) subject to
paragraph 9, the amount of the penalty.
(3) If P's failure falls
within more than one provision of this Schedule, P is liable to a penalty under
each of those provisions.
(4) In the following
provisions of this Schedule, the “penalty date”, in relation to an amount of
tax, means the date on which a penalty is first payable for failing to pay the
amount (that is to say, the day after the date specified in or for the purposes
of column 4 of the Table).
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Tax to which payment
relates
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Amount of tax payable
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Date after which penalty
is incurred
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PRINCIPAL AMOUNTS
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1
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Income tax or capital gains
tax
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Amount payable under
section 59B(3) or (4) of TMA 1970
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The date falling 30 days
after the date specified in section 59B(3) or (4) of TMA 1970 as the date by which the amount must be paid
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2
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Income tax
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Amount payable under PAYE
regulations
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The date determined by or
under PAYE regulations as the date by which the amount must be paid
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(The table continues, listing many other taxes.)
Amount of penalty: PAYE and CIS amounts
5 (1) Paragraphs 6 to
8 apply in the case of a payment of tax falling within item 2 or 4 in the
Table.
(2) But those paragraphs do
not apply in the case of a payment mentioned in paragraph 3(1)(b) or (c).
6—
(1) P is liable to a
penalty, in relation to each tax, of an amount determined by reference to—
(a) the
number of defaults that P has made during the tax year (see sub-paragraphs (2)
and (3)), and
(b) the
amount of that tax comprised in the total of those defaults (see sub-paragraphs
(4) to (7)).
(2) For the purposes of this
paragraph, P makes a default when P fails to make one of the following payments
(or to pay an amount comprising two or more of those payments) in full on or
before the date on which it becomes due and payable—
(a) a
payment under PAYE regulations;
(b) a
payment of earnings-related contributions within the meaning of the Social
Security (Contributions) Regulations 2001 (SI
2001/1004);
(c) a
payment due under the Income Tax (Construction Industry Scheme) Regulations
2005 (SI
2005/2045);
(d) a
repayment in respect of a student loan due under the Education (Student Loans)
(Repayments) Regulations 2009 (SI 2009/470)
or the Education (Student Loans) (Repayments) Regulations (Northern Ireland) 2000 (S.R. 2000 No 121).
(3) But the first failure
during a tax year to make one of those payments (or to pay an amount comprising
two or more of those payments) does not count as a default for that tax year.
(4) If P makes 1, 2 or 3
defaults during the tax year, the amount of the penalty is 1% of the amount of
the tax comprised in the total of those defaults.
(5) If P makes 4, 5 or 6
defaults during the tax year, the amount of the penalty is 2% of the amount of
the tax comprised in the total of those defaults.
(6) If P makes 7, 8 or 9 defaults
during the tax year, the amount of the penalty is 3% of the amount of the tax
comprised in the total of those defaults.
(7) If P makes 10 or more
defaults during the tax year, the amount of the penalty is 4% of the amount of
the tax comprised in the total of those defaults.
(8) For the purposes of this
paragraph—
(a) the
amount of a tax comprised in a default is the amount of that tax comprised in
the payment which P fails to make;
(b) a
default counts for the purposes of sub-paragraphs (4) to (7) even if it is
remedied before the end of the tax year.
(9) The Treasury may by
order made by statutory instrument make such amendments to sub-paragraph (2) as
they think fit in consequence of any amendment, revocation or re-enactment of the
regulations mentioned in that sub-paragraph.
6. It is
worth noting that under paragraph 11, HMRC is given no discretion over levying
a penalty, given the use of the word ‘must’:
11(1) Where P is liable for a penalty under any
paragraph of this Schedule HMRC must—E+W+S+N.I.
(a) assess the penalty,
(b) notify P, and
(c) state in the notice the period in
respect of which the penalty is assessed.
7. The
legislation does allow a measure of discretion to HMRC, but only in ‘special
circumstances’. Paragraph 9 provides:
Special reduction
9(1)If HMRC think it right because of special circumstances,
they may reduce a penalty under any paragraph of this Schedule.E+W+S+N.I.
(2)In sub-paragraph (1) “special
circumstances” does not include—
(a)ability to pay, or
(b)the fact that a potential loss of
revenue from one taxpayer is balanced by a potential over-payment by another.
(3)In sub-paragraph (1) the reference
to reducing a penalty includes a reference to—
(a)staying a penalty, and
(b)agreeing a compromise in relation
to proceedings for a penalty.
8. There is
also provision for an appeal process in paragraphs 13 to 15, the Tribunal’s
powers being laid down in paragraph 15:
15(1) On an appeal under paragraph
13(1) that is notified to the tribunal, the tribunal may affirm or cancel
HMRC's decision.E+W+S+N.I.
(2) On an appeal under paragraph 13(2)
that is notified to the tribunal, the tribunal may—
(a) affirm HMRC's decision, or
(b) substitute for HMRC's decision
another decision that HMRC had power to make.
(3) If the tribunal substitutes its
decision for HMRC's, the tribunal may rely on paragraph 9—
(a) to the same extent as HMRC (which
may mean applying the same percentage reduction as HMRC to a different starting
point), or
(b) to a different extent, but only if
the tribunal thinks that HMRC's decision in respect of the application of
paragraph 9 was flawed.
(4) In sub-paragraph (3)(b) “flawed”
means flawed when considered in the light of the principles applicable in
proceedings for judicial review.
(5) In this paragraph “tribunal” means
the First-tier Tribunal or Upper Tribunal (as appropriate by virtue of
paragraph 14(1)).
9. It will be
observed that the Tribunal is given power to confirm or cancel the penalty, or
substitute for HMRC’s decision another decision, but only one that HMRC had the
power to make. The Tribunal can only rely upon the “special circumstances”
provision in para 9 to a different extent than that applied by HMRC if it
thinks that HMRC’s decision in that respect was flawed. Applying judicial
review principles, the Tribunal must consider whether HMRC acted in a way that
no reasonable body of commissioners could have acted, or whether they took into
account some irrelevant matter or disregarded something to which they should
have given weight. The Tribunal should also consider whether HMRC have erred
on a point of law.
10. Paragraph 16 contains a
defence of reasonable excuse, with some particular express exclusions:
16—
(1) If P satisfies HMRC or
(on appeal) the First-tier Tribunal or Upper Tribunal that there is a
reasonable excuse for a failure to make a payment-
(a) liability to a penalty under any paragraph of
this Schedule does not arise in relation to that failure, and
(b) the failure does not count as a default for the
purposes of paragraph 6 …
(2) For the purposes of
sub-paragraph (1)—
(a)
an insufficiency of funds is not a reasonable excuse unless attributable to
events outside P's control,
(b)
where P relies on any other person to do anything, that is not a reasonable
excuse unless P took reasonable care to avoid the failure, and
(c)
where P had a reasonable excuse for the failure but the excuse has ceased, P is
to be treated as having continued to have the excuse if the failure is remedied
without unreasonable delay after the excuse ceased.
11. The legislation became
operative under SI 2010/466, the Finance Act 2009, Schedule 56 (Appointed Day
and Consequential Provisions) Order, with a commencement date of 6 April 2010. Thus,
the first time penalties could be raised under these rules was after the end of
the 2010/11 tax year, given the way that the penalties talk in terms of the
number of defaults during the year in question.
12. The parallel statutory
authority for the levying of the corresponding penalties for late payment of
NICs is set out in regs 67A and 67B (inserted with effect from 2010/11) of the
Social Security Contributions Regulations 2001 (SI 2001/1004). This lays down
that Schedule 56 is applied to Class 1, Class 1A and Class 1B contributions.
There was nothing in HMRC’s paperwork to indicate how the liability to a
penalty on the NICs amount arose; we suggest that this should be made clear to
an appellant on any appeal.
The penalty notice
13. Dina Foods Ltd is a company
that supplies Mediterranean foods. It received a penalty notice from HMRC dated
13 June 2011, marked as received by the company on 20 June 2011, stating that
as it had not paid one or more of its PAYE payments for 2010/11 on time, HMRC
were charging the company a penalty. The letter included a schedule of the
company’s monthly PAYE payments, including both tax and NICs, for the year 2010/11
and the penalty amounts, though this did not state the dates of payment. The
penalty was calculated at 4% of the company’s late paid PAYE and NICs due for
the year (ignoring the first default) of £276,316, leading to a penalty of
£10,247.61, though there is no explanation of the calculation, or even the
rationale for the 4% rate, in the letter.
14. Dina Foods Ltd wrote to HMRC
on 21 June 2011 appealing against the penalty, citing grounds including their
not being formally informed about the new penalty system and the lack of any
notification of the individual late payments and the consequences.
Submissions for Dina Foods Ltd
15. Mr Kaye’s arguments centred
on the lack of warning from HMRC to his client of the build up of the penalty.
He contended that this lack of warning gave the company a reasonable excuse for
its failure. In doing so, he drew an unfavourable comparison with the VAT
Default Surcharge system that has a system of a warning letter and escalating
penalties.
16. Mr Kaye drew the Tribunal’s
attention to an extract from the HMRC Employers’ Bulletin, issued in April
2010. He pointed in particular to the penultimate paragraph, which said:
“[HMRC] will not routinely
send reminders but on the first occasion that it appears a payment is late many
employers will get a letter saying that if they pay late again they may get a
penalty.”
17. Mr Kaye stressed that his
client had never received any warning letter along the lines alluded to in the
paragraph. He also questioned whether HMRC had properly publicised the new
penalties, commenting that his firm had not been invited to briefing seminars
by HMRC as they had been for various other developments.
18. Mr Kaye considered that the
amount of the penalty, being 4% of the PAYE due for the year, was excessive and
argued that for a first offence HMRC should have levied a lower penalty. He
pointed to the Employers’ Bulletin that said “...the amount of the penalty
varies from 1-4% of the late amount...”. In support of this contention he also
referred to the company’s cash flow problems: they had negotiated a time to pay
arrangement with HMRC in the past but were now aware of the need to pay on time
and were doing so.
19. In discussion of the
schedule provided by HMRC in the bundle of papers of the company’s PAYE payment
dates, Mr Kaye was unable to accept the dates of payment that were listed as he
had not been able to check the details with his client. This schedule shows
payments made between 4 and 84 days late.
Submissions for HMRC
20. Miss Gardiner took the
Tribunal through the relevant legislation. She then addressed the issue of
publicity for the new penalty regime. She argued that HMRC had given the new
PAYE penalties wide publicity. HMRC believed that no responsible employer,
aware of their general PAYE responsibilities, could miss all of the various
communications. In support of this, she referred to various extracts from the
HMRC website that deal with PAYE, including specific headings about late
payment penalties, together with Employers’ Bulletins of April and August 2010.
Copies of all these were included in the bundle of papers provided to the
Tribunal and to Mr Kaye.
21. Miss Gardiner then referred
us to extracts from HMRC’s records of dealings with Dina Foods Ltd, copies of
which were also contained in the bundle of papers. These included:
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A record stating that on 29 June 2010 a ‘penalty default letter’ was
issued, following a telephone conversation with the company on 28 June 2010
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On 26 August 2010 a form P101 (Notice requiring payment of PAYE/NIC) was
issued, following a telephone call
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Further P101s were issued on 25 June 2010, 25 January and 28 April 2011
with various telephone calls, including one on 11 January 2011 which records
“Spoke to Mr Haddad (MD). I advised that m8 payment not yet received; he
advised that payment of £26,893.24 sent in 6 January 2011. I advised that
payments should be made on time.” (Miss Gardiner pointed out that ‘m8’ means
month 8 of the tax year, i.e. November 2010.)
22. Miss Gardiner’s contention
was that considerable contact had been made with Dina Foods Ltd, though she
accepted that most of this was in terms of chasing payment. Referring to Mr
Kaye’s reference to the Employers’ Bulletin of April 2010, she argued that no
reminders were promised, but that HMRC had in fact sent three in the year.
23. Miss Gardiner submitted that
the PAYE penalty is automatic in nature and follows from the number of
defaults. The only discretion was in terms of paragraph 9 and ‘Special
circumstances’; there had been an internal HMRC review which found no reason
for using this provision.
Findings of fact
24. From the documentary and
oral evidence we find the following facts.
25. PAYE and NIC amount have
been paid late by the company during 2010/11. This is not disputed, although
the exact extent of lateness for each payment is not something that could be
agreed due to Mr Kaye’s inability to verify the dates on HMRC’s schedule. This
schedule shows payments made between 4 and 84 days late during 2010/11. As Mr
Kaye was unable to accept the dates on this schedule, for reasons explained
above, we make no finding of fact over the exact dates of the monthly payments.
However, we have no reason to doubt the HMRC schedule and we are satisfied that
this demonstrates, together with the evidence of the extracts from the HMRC
call log, that the company habitually paid its PAYE late during 2010/11. The
nature of the PAYE penalty does not mean that the number of days late of a
particular payment is relevant; once a payment is a day late, it is ‘on the
register’ for the penalty for the year.
26. We do, however, note that
the penalty notice letter of 13 June 2011 included a schedule of the company’s
PAYE payments during 2010/11, showing that all 11 had been paid late (there was
no PAYE due for month 2) albeit without the payment dates recorded by HMRC on
their system or included in the schedule provided in HMRC’s bundle. Thus the
company were notified of HMRC’s belief that they had made all 11 payments late
and had time to prepare arguments and evidence that one or more of the payments
was not late. None of the correspondence between the parties or the grounds of
appeal suggests that Dina Foods Ltd had at any time disputed that the payments
were late. We note that the company’s letter of 21 June 2011, following the
receipt of HMRC’s penalty notice, accepts that “...all PAYE for the year
2010/11 has been paid albeit with little delay...”. We are therefore
satisfied, and we find as a fact, that the PAYE and NICs payments set out in
HMRC’s schedule were made late.
27. We considered the evidence
and contentions around the introduction of the new PAYE penalties. We find that
HMRC publicised the late payment penalties for PAYE and NICs extensively both
before and after they came into effect. An employer pack including a CD-ROM
was mailed to all employers in February 2010, flyers were mailed to employers
and factsheets were distributed at face to face events (such as “Employer Talk”
and published on the HMRC website. Late payment penalties also featured in
issues of Employer Bulletin, on the PAYE pages of the website (and on a
podcast), on Businesslink and in published guidance and employer help books.
There was also communication with accountants and other tax agents, and
publication in local and national media.
28. The HMRC log shows that a
‘Late payment warning’ was sent to Dina Foods Ltd in June 2010. The HMRC system
does not contain copies of the actual letter sent to an employer but we were
shown a copy of the standard letter that would be used. Mr Kaye stated that his
client had never received this warning letter, nor the various P101 letters
chasing payment of PAYE (copies of which similarly are not on HMRC’s system).
We find this non-receipt unlikely, particularly as the company clearly received
the penalty notice letter of 13 June 2011 and subsequent correspondence. With
due respect to Mr Kaye’s vigorous contention, we have heard no explanation of
why they seem to have not been received. On the balance of probabilities, we
find that the various notices and letter were properly issued by HMRC.
29. We also find that Dina Foods
Ltd was contacted regularly by HMRC during the year about late payment of
PAYE. Mr Kaye did question the substance of these contacts but we are
satisfied that HMRC was in contact with the company about late payment, though
we accept that there is no evidence one way or another about penalties being
mentioned in the conversations.
30. Finally, we were shown
schedules compiled by HMRC showing that Dina Foods Ltd habitually made late
payments of PAYE and NICs in 2008/09 and 2009/10. These schedules were not
disputed, and we accordingly find that they accurately reflect the payment
record of Dina Foods Ltd for those tax years.
Discussion and conclusions
31. The legislation on PAYE
penalties is clear. As we have described, except in the case of special
circumstances, the scheme laid down by the statute gives no discretion: the
rate of penalty is simply driven by the number of PAYE late payments in the tax
year by the employer. A company that makes 11 late payments in the year will
fall into the 4% penalty rate.
32. Dina Foods Ltd paid 11 of
its PAYE payments late during the year. Accordingly the 4% rate of penalty
applies. What could affect the quantum of the penalty is the possibility of
showing a reasonable excuse for one or more of the individual monthly late
payments. A reasonable excuse will eliminate liability for the default or
defaults in question. The result could also be that the number of late
payments for the year reduces and so means a 3% (or lower) rate applies. We did
ask Mr Kaye about this; he could not suggest any particular reason for any of
the late payments. Nor had the company suggested any reason to HMRC during the
year or in subsequent correspondence.
33. The scheme of the PAYE legislation
requires taxpayers to pay over PAYE on time. The legislation does not require
HMRC to issue warnings to individual employers, though it would be expected
that a responsible tax authority would issue general material about the new
system. This HMRC did; in our view, the absence of specific warnings to Dina
Foods Ltd about the consequences of failing to pay on time does not constitute
a reasonable excuse for any of the late payments.
34. With respect to Mr Kaye’s
argument on the lack of any warning from HMRC that the penalty was building up,
the comparison he drew with the VAT Default Surcharge system may be apt, but
only in the sense that both seek to encourage a taxpayer to pay on time and
penalise him if he does not. However, the comparison only goes so far.
Parliament decided on a different system for PAYE, possibly because of the
monthly schedule that usually applies to PAYE payments. But even though there
is no provision for a formal warning, Schedule 56 does exclude the first
default from the penalty regime.
35. Schedule 56 does allow HMRC
some limited discretion, under paragraph 9, to allow a ‘special reduction’. We
accept that HMRC did consider this by means of their internal review process. The
conclusion reached was that no special circumstances existed. We can therefore
only apply a reduction on account of special circumstances if we find that
HMRC’s decision in this respect was flawed on the judicial review principles we
outlined earlier.
36. Ability (or perhaps more
relevantly, inability) to pay does not constitute special circumstances. Accordingly,
the plea advanced by the company in correspondence and by Mr Kaye about the
impact on the business’s cash flow of the penalty cannot help them.
37. Having considered all the
evidence and material before us we can find no special circumstances that would
justify a reduced penalty. This is a company that has habitually paid its PAYE
late. We do not consider that the lack of awareness of Dina Foods Ltd of the
penalty regime is capable of constituting a special circumstance. In any
event, having considered the evidence of the information provided by HMRC
concerning the introduction of the PAYE and NICs penalties, we are of the view
that no reasonable employer, aware generally of its responsibilities to make timely
payments of PAYE and NICs amounts due, could fail to have seen and taken note
of at least some of the information published and provided by HMRC.
38. In this context we have a
number of observations to make concerning the scheme of Schedule 56 as a whole,
as it applies to PAYE and NICs payments. The penalty regime is based on the
number of defaults over a complete tax year. There is no separate penalty for
each individual default; the penalty can only be assessed once the aggregate of
the late paid tax comprised in the total of the defaults for a particular tax
year has been ascertained. A taxpayer who continues to pay late, so increasing
both the amount of tax (and NICs) on which the penalty may be levied and the
rate of the penalty, may well complain that his behaviour (and thus the amount
of his liability) would have been different had a penalty been levied in
respect of a default early in the tax year or at least a warning issued. But
on the scheme of penalties that has been laid down, the total would not then
have been capable of being ascertained, so the penalty could not at that
earlier time have been assessed.
39. We do not therefore consider
that any failure on the part of HMRC to issue warnings to defaulting taxpayers,
whether in respect of the imposition of penalties or the fact of late payment,
is of itself capable of amounting either to a reasonable excuse or special
circumstances.
40. In its initial appeal letter
and in its formal notice of appeal, the company referred to the penalty being
excessive. It is clearly not excessive on the terms of Schedule 56 itself
because the system laid down prescribes the penalties. Nonetheless, whilst no
specific argument was addressed to us on proportionality, we have considered
whether, in the circumstances of this case, the 4% penalty that was levied on
the total of the relevant defaults in the tax year can be said to be
disproportionate.
41. The issue of proportionality
in this context is one of human rights, and whether, in accordance with the
European Convention on Human Rights, Dina Foods Ltd could demonstrate that the
imposition of the penalty is an unjustified interference with a possession.
According to the settled law, in matters of taxation the State enjoys a wide
margin of appreciation, and the European Court of Human Rights will respect the
legislature’s assessment in such matters unless it is devoid of reasonable
foundation. Nevertheless, it has been recognised that not merely must the
impairment of the individual’s rights be no more than is necessary for the
attainment of the public policy objective sought, but it must also not impose
an excessive burden on the individual concerned. The test is whether the
scheme is not merely harsh but plainly unfair so that, however effectively that
unfairness may assist in achieving the social objective, it simply cannot be
permitted.
42. Applying this test, whilst
any penalty may be perceived as harsh, we do not consider that the levying of
the penalty in this case was plainly unfair. It is in our view clear that the
scheme of the legislation as a whole, which seeks to provide both an incentive
for taxpayers to comply with their payment obligations, and the consequence of
penalties should they fail to do so, cannot be described as wholly devoid of
reasonable foundation. We have described earlier the graduated level of
penalties depending on the number of defaults in a tax year, the fact that the
first late payment is not counted as a default, the availability of a
reasonable excuse defence and the ability to reduce a penalty in special
circumstances. The taxpayer also has the right of an appeal to the Tribunal. Although
the size of penalty that has rapidly accrued in the current case may seem
harsh, the scheme of the legislation is in our view within the margin of appreciation
afforded to the State in this respect. Accordingly we find that no Convention
right has been infringed and the appeal cannot succeed on that basis.
43. In summary, we find that:
(1)
The penalty has been properly levied in relation to the late payment
defaults of Dina Foods Ltd in the tax year 2010/11.
(2)
Dina Foods Ltd does not have a reasonable excuse for any of the failures
to pay PAYE and NICs amounts on time.
(3)
HMRC’s decision that there are no special circumstances was not flawed.
(4)
The penalty was not excessive or disproportionate.
Decision
44. For the reasons we have
given, we dismiss this appeal. The penalty of £10,247.61 is therefore
confirmed.
Application for permission to appeal
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.
ROGER BERNER
TRIBUNAL JUDGE
RELEASE DATE: 5 NOVEMBER 2011
