[2011] UKFTT 737 (TC)
TC01574
Appeal number: TC/2011/5291
Penalty
– inaccuracies in self assessment return – whether careless – argument that
penalties were too harsh and unjustified – human rights
FIRST-TIER TRIBUNAL
TAX
SANJEEV
VERMA Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
JUDGE ROGER BERNER
JOHN
WHITING (Member)
Sitting in public at 45 Bedford Square, London WC1 on 13 October 2011
The Appellant did not appear
and was not represented
Mrs Eleanor Gardiner, HM
Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2011
DECISION
Hearing in a party’s absence
The Appellant failed to attend the hearing and was not
represented. The Tribunal was satisfied that reasonable steps had been taken
to notify the Appellant of the hearing and that it was in the interests of
justice to proceed with the hearing.
Mr Verma’s appeal
1. Mr
Verma has appealed against a penalty assessment made under Schedule 24 of the
Finance Act 2007 issued on 16 June 2007 in respect of the year 5 April 2009.
The basis for the penalty assessment is that Mr Verma’s self assessment return
contained inaccuracies, and that those inaccuracies were careless on the part
of Mr Verma.
2. Mr
Verma’s appeal sets out the following grounds:
(1)
The penalty was too harsh and unjustified.
(2)
The inaccuracy was the result of an innocent omission, the appellant had
no intention to defraud and has been fully transparent.
(3)
The appellant responded promptly and provided access to records that
support all enquiries e.g. payslips and P60s.
(4)
The appellant provided a reconciliation between the original tax return
and what HMRC have stated.
(5)
The appellant agreed immediately to the discrepancy once made aware of
it and then paid promptly the outstanding tax.
(6)
The appellant had fully complied with instructions and such is noted by
the Assessment Officer.
The facts
3. Mr
Verma was employed by Goldman Sachs for a period up to June 2007, when he left
that employment. He was thereafter employed by Deutsche Bank until his
employment with that company ceased on 31 October 2011.
4. It
is accepted by Mr Verma that he failed to return certain amounts of taxable
income on his self assessment return for the tax year ended 5 April 2009. In
relation to Goldman Sachs, the amount not declared was £2,567. This amount was
received by Mr Verma well after his employment with Goldman Sachs had come to
an end. From what he has said in correspondence, Mr Verma is himself not
entirely clear to what this amount relates, but it might have been in relation
to stock options.
5. In
relation to Deutsche Bank, a number of items were omitted. These were (i)
notice period pay of £28,269, (ii) a payment in respect of a confidentiality
agreement of £200, and (iii) an amount of £6 in relation to “taxable shares”.
6. The
total under-declaration was therefore £31,042. As tax had been deducted at
source at the rate of 20%, the balance of the tax unpaid (at the higher rate of
40%) amounted to £6,208.40. The “potential lost revenue”, which by Sch 24,
para 5 is the additional amount due or payable in respect of tax as a result of
correcting the inaccuracy, is therefore £6,208. The penalty has been applied
to this figure.
7. On
6 August 2010 HMRC wrote to Mr Verma giving him notice of their intention to
check his self assessment return for the year ended 5 April 2009. HMRC said
that information they held indicated that Mr Verma’s declaration of pay and tax
from Deutsche Bank might be understated, and that Mr Verma also had an
employment with Goldman Sachs. The letter requested certain information.
Following that letter, on 29 September 2010, Mrs Quirk of HMRC telephoned Mr
Verma. Mr Verma at that time said that he had not opened the 6 August letter.
He expressed surprise at Goldman Sachs having reported pay for 2008/09, and
speculated that this might relate to stock options. He undertook to check the
position regarding the Deutsche Bank shortfall.
8. Mr
Verma wrote to Mrs Quirk on 12 October 2010 to say that he had managed to
reconcile the Deutsche Bank numbers, but that he needed to investigate the
Goldman Sachs payment further by running through his bank statements. He again
surmised that this might relate to some form of taxable shares.
9. A
notice of penalty assessment was issued to Mr Verma on 16 June 2011 in the sum
of £931.20. This was calculated at the rate of 15% of the potential lost
revenue of £6,208. The 15% rate reflected the minimum percentage permitted
under Sch 24, para 10 in the case of a careless inaccuracy where the relevant
person has made a prompted disclosure. (The standard amount of the penalty for
careless action is 30% of the potential lost revenue (para 4); para 10 provides
that the standard percentage in such a case cannot be reduced for a prompted
disclosure to a percentage below 15%.) In Mr Verma’s case, HMRC made the
maximum reduction allowed in the case of prompted disclosure.
Discussion
10. We have to
decide whether in the circumstances of this case the inaccuracies which it is
accepted were contained in Mr Verma’s self assessment return were careless.
As, in accordance with Sch 24, para 1(4) a penalty is payable for each
inaccuracy, we must consider this in turn in respect of each of the Deutsche
Bank and Goldman Sachs understatements.
Were the inaccuracies “careless”?
11. The starting
point is to consider what is meant by “careless”. Para 3(1) contains a
definition: an inaccuracy in a document given by a person (P) to HMRC is
careless if the inaccuracy is due to a failure by P to take reasonable care.
Mrs Gardiner referred us to a case on negligence dating back to 1858, namely Blyth
v The Company of Proprietors of the Birmingham Waterworks [1856] EWHC Exch J65. In that case the issue was whether damage sustained was by reason of the
negligence of the waterworks company in not keeping their water pipes and the
apparatus connected therewith in proper order.
12. We have to say
that reliance on a 19th century authority on negligence in a civil
claim can hardly be regarded as authoritative in the context of the
interpretation of a statutory provision for tax penalties enacted by the
Finance Act 2007. The Birmingham Waterworks case is not binding on us
as it concerns a different legal issue and wholly different factual
circumstances. The approach to penalty appeals under Sch 24 can be derived
from more relevant case law, most recently from David Collis v Revenue and
Customs Commissioners [2011] UKFTT 588 (TC), where the tribunal found that
the standard by which reasonable care fell to be judged is that of a prudent
and reasonable taxpayer in the position of the taxpayer in question.
Furthermore, the tribunal in that case went on to say that it is of the essence
of the reasonable care test that in normal circumstances this should avoid
simple errors of omission, or mere oversights.
13. Mr Verma says
that his inaccuracies were the result of innocent omissions and that he had no
intention to defraud. An omission may be innocent, in the sense of not having
been deliberate, but such an innocent omission may still be the result of a
failure to take reasonable care. The penalty reflects the fact that HMRC have
accepted that the inaccuracies were not deliberate, and no question of fraud
has been alleged.
14. In this case we
did not have the benefit of hearing from Mr Verma in person. The facts in
relation to both the Deutsche Bank income and the Goldman Sachs income are that
those amounts were paid into Mr Verma’s bank account. Mr Verma says that he
received no notification of these payments. We do not consider that a
reasonable taxpayer in Mr Verma’s position, when completing his tax return for
the relevant period, would have ignored any of the sums which he had received
in the relevant period, even if he had not been notified of the nature of the
payments. If the reasonable taxpayer did not have information to enable him
properly to identify the nature of payments from former employers, the
reasonable taxpayer would have made enquiries of each of his former employers
to obtain an explanation in order to make a proper return.
15. We conclude
therefore that each of the inaccuracies in Mr Verma’s return was careless.
The amount of the penalties
16. We are satisfied
that the appropriate standard amount of the penalty is that for careless
action, namely 30% of the potential lost revenue. We also conclude that the
disclosures made by Mr Verma were not “unprompted”, as they were not made by
him at a time when he had no reason to believe that HMRC had discovered or were
about to discover the inaccuracies (para 9(2)). On the contrary, HMRC’s letter
of 6 August 2010 clearly identifies the potential inaccuracies in relation to
both Deutsche Bank and Goldman Sachs. Accordingly the disclosures were
“prompted” (para 9(2)(b)). The penalty was reduced to the minimum applicable
percentage for a prompted disclosure, namely 15%. On this basis, full credit
has been given to Mr Verma for the cooperation and disclosures that he refers
to in his grounds of appeal.
Reduction of amount of penalties
17. Mr Verma also
says that the penalty is too harsh and unjustified. On an appeal against the
amount of a penalty the tribunal may either affirm HMRC’s decision or
substitute for HMRC’s decision another decision, but only another decision that
HMRC had power to make. Under Sch 24, para 13, HMRC are obliged to assess a
penalty for which a person has become liable under a relevant provision. That
does not give HMRC any discretion in the matter. HMRC must also reduce the
standard percentage to one that reflects the quality of the disclosure. But it
is only if HMRC fail to reduce it to the minimum percentage that the tribunal
will be able to substitute its own view of the quality of disclosure and make a
further reduction. In this case the penalty was reduced to the minimum
percentage, so the tribunal has no power to reduce it further on this basis.
18. Where HMRC does
have a discretion is in the ability to reduce a penalty (including one levied
at the minimum percentage based on the quality of the disclosure) if they think
it right because of special circumstances (para 11). The tribunal may also
rely on para 11, including to a different extent than HMRC, but only in that
case if the tribunal thinks that HMRC’s decision on the application of para 11
was flawed when considered in the light of principles applicable in proceedings
for judicial review (para 17).
19. In this case
nothing in the nature of special circumstances has been put forward.
Accordingly, as the penalty fully reflects a reduction to the minimum
percentage on account of Mr Verma’s prompted disclosure, the Tribunal is unable
to interfere with the amount of the penalty.
Human rights
20. As a final
matter, we consider whether Mr Verma’s complaint that the penalty was too harsh
and unjustified can be upheld on the basis of any infringement of his human
rights. In order to found such an argument Mr Verma would need to show that
there had been an unjustified interference of a possession for the purpose of
the European Convention on Human Rights. Here there is no doubt that the
penalty would interfere with a possession. The question is whether that
interference is justified. The hurdle is a high one. The test to be applied
is that in National and Provincial Society v United Kingdom [1997] STC 1466, 25 EHRR 127, where the European Court of Human Rights said (at para 80):
“According to the court's well-established case law …
an interference, including one resulting from a measure to secure the payment
of taxes, must strike a 'fair balance' between the demands of the general
interest of the community and the requirements of the protection of the
individual's fundamental rights. The concern to achieve this balance is
reflected in the structure of art 1 as a whole, including the second paragraph:
there must therefore be a reasonable relationship of proportionality between
the means employed and the aims pursued.
Furthermore, in determining whether this requirement
has been met, it is recognised that a contracting state, not least when framing
and implementing policies in the area of taxation, enjoys a wide margin of
appreciation and the court will respect the legislature's assessment in such
matters unless it is devoid of reasonable foundation …”
21. It has equally
been recognised that it is implicit in the concept of proportionality 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 also
that it must not impose an excessive burden on the individual concerned (International
Transport Roth GmbH v Home Secretary [2002] 3 WLR 344 at [52]). In Roth
Simon Brown LJ formulated the relevant question (at [26]) as: Is the scheme not
merely harsh but plainly unfair so that, however effectively that unfairness
may assist in achieving the social goal it simply cannot be permitted?
22. Applying these
principles to the penalties in Sch 24, we are unable to find that, in seeking
to provide both an incentive for taxpayers to comply, and a harsh (but in our
view not a plainly unfair) consequence of not complying, with obligations to
make accurate returns, the legislature’s assessment of the relationship between
these aims and the penalties prescribed, could in any sense be described as
devoid of reasonable foundation. The penalties are graduated according to the
seriousness of the conduct leading to the inaccuracy, they can be mitigated
according to whether prompted or unprompted disclosure is given, and according
to the quality of that disclosure, and they can be reduced to take account of
special circumstances. A penalty may, in certain circumstances, be suspended
subject to conditions. Finally, a taxpayer has a number of avenues of appeal
to the tribunal. Accordingly, we find that no Convention right has been
infringed, and the appeal cannot succeed on that basis.
Decision
23. For the reasons
we have given, we dismiss this appeal.
Application for set aside and right of appeal
The hearing having taken place in the absence of the
Appellant, the Appellant has a right to apply for this decision to be set aside
pursuant to Rule 38 of The Tribunal Procedure (First-tier Tribunal) (Tax
Chamber) Rules 2009.
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: 14 NOVEMBER 2011