This appeal

The issues in the case

8.           The issues in the case were:

(1)        whether the company’s cashflow difficulties provided a reasonable excuse for the late payments;

(2)        whether the company had a time to pay (“TTP”) agreement with HMRC for one or more of the months for which a penalty has been charged, and if not, whether the company’s communications with HMRC relating to delays in payment provided it with a reasonable excuse;

(3)        whether there were any special circumstances;

(4)        whether the penalty was disproportionate to the default.

The legislation

9.           The relevant legislation is at Finance Act 2009, Schedule 56. The penalty amounts are set out at para 6, as follows:

(1)        if payments are late for one month in a tax year, there is no penalty;

(2)        if two to four months’ payments are late, the penalty is 1% of the total PAYE for the tax year;

(3)        if five to seven months’ payments are late, the penalty rises to 2%;

(4)        if eight to ten months’ payments are late, the penalty rises further to 3%;

(5)        if eleven or twelve months’ payments are late, the penalty is 4%.

(1) This paragraph applies if—

(a) P fails to pay an amount of tax when it becomes due and payable,

(b) P makes a request to HMRC that payment of the amount of tax be deferred, and

(c) HMRC agrees that payment of that amount may be deferred for a period (“the deferral period”).

(2) If P would (apart from this sub-paragraph) become liable, between the date on which P makes the request and the end of the deferral period, to a penalty under any paragraph of this Schedule for failing to pay that amount, P is not liable to that penalty.

(3) But if—

(a) P breaks the agreement (see sub-paragraph (4)), and

(b) HMRC serves on P a notice specifying any penalty to which P would become liable apart from sub-paragraph (2),

P becomes liable, at the date of the notice, to that penalty.

(4) P breaks an agreement if—

(a) P fails to pay the amount of tax in question when the deferral period ends, or

(b) the deferral is subject to P complying with a condition (including a condition that part of the amount be paid during the deferral period) and P fails to comply with it.

(5) If the agreement mentioned in sub-paragraph (1)(c) is varied at any time by a further agreement between P and HMRC, this paragraph applies from that time to the agreement as varied.

(1) Liability to a penalty under any paragraph of this Schedule does not arise in relation to a failure to make a payment if P satisfies HMRC or (on appeal) the First-tier Tribunal or Upper Tribunal that there is a reasonable excuse for the failure.

(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.

(1) Where P is liable for a penalty under any paragraph of this Schedule, HMRC must—

(a) assess the penalty,

(b) notify P, and

(c) state in the notice the period in respect of which the penalty is assessed.

(1) On an appeal under paragraph 13(1) that is notified to the tribunal, the tribunal may affirm or cancel HMRC's decision.

 (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.

The evidence

16.        The Tribunal was provided with:

(1)        the correspondence between the parties;

(2)        a summary of the company’s monthly PAYE payment history for the years 2009-10, 2010-11 and 2011-12;

(3)        HMRC’s computer records showing the dates on which the company paid its PAYE in 2011-12, the issue of the penalty warning letter and details of agent and company addresses;

(4)        screenprints from HMRC’s “Action History” for the company;

(5)        extracts from the company’s bank account and a letter dated 10 October 2012 from the company’s bankers;

(6)        extracts from the company’s management accounts and from its aged debtors analysis;

(7)        a copy of the company’s statutory accounts for the year to 31 December 2010.

The facts

The PAYE payments

The company’s business

(1)  As at 31 May 2010, Company C owed the company £16,515 and Company P owed the company £68,322. Total debtors in that month were £497,072.

(2)  By August 2010, debts owed by Company C had reduced to £12,463 and those owed by Company P were £57,417, out of a total of £535,684.

(3)  By December 2010, the amount due from Company C had increased again to £58,154, that due from Company P had dropped to £49,241, out of total debtors of £597,649.

The cashflow issue

Submissions

35.        Mr Primarolo said that:

(1)         the payment delays by two major customers had had a serious effect on the company’s cashflow, which was “unforeseen and outside of our control”

(2)        The position was so severe that Mr Severn, the owner of the business “ended up having to sell part of the company”;

(3)        The company was forced to use the expensive invoice discounting facility because it couldn’t get cheaper bank loans;

(4)        The company had taken steps to cut back on staff costs.

Discussion

41.        From the evidence we note the following facts:

(1)   the company continued to pay its directors almost £150,000pa, including pension contributions of nearly £15,000.

(2)  the £17,260 debt due to one of the directors was repaid to him during the year;

(3)  while there was a reduction in salaries, this was only for the two months of July and August;

(4)  the company continued to spend around £800 a month on entertaining and staff refreshments;

(5)  the debt due from Company C had dropped back in August, so some cash must have come in during that period.

The second issue: whether there was a TTP agreement

The date on which a TTP agreement is made

Submissions of the parties

Analysis of the transactions

69.        On 24 December there was a further conversation. Mr Primarolo has provided the Tribunal with his notes of the call. They read as follows:

“Agreed to put mth 8 (£25,933) into arrears with debt owing from last year (approx £14k) & then I to call in New Year after mth & has cleared and [HMRC officer] will write agreement to me: ie keep current year up to date and pay £4k per month off arrears. Explained would be about a month late with current year payments.”

 “tele call from tp inst arrgt agreed. Rob Primarolo the dir rang he stated he is sending a chq today for mth 7 of £27.198.89 and £3k re the arrears, explained that if the current is not kept up2date then proceedings will comm.

Dir explained that co still struggling because of the recession, He advd that they can pay mth 9 by the 19/1 but will have a problem with mth 8 after long conversation agreed for t/p to pay mth 7 and 9 and then have time to clear mth 8 with the arrears. Co to pay £4k initially but their intention is to clear that mth asap. Agreed to this but did insist that all future debts must be made on time.”

Conclusions from the detailed review

76.        The result of the Tribunal’s review is that we find as a fact that the company did not have a TTP agreement for any of the months in question. In particular we note that:

(1)        most of the references to a TTP agreement in the Action History record refer to that agreed for the 2009-10 underpayment.

(2)        in January 2011, HMRC agreed to delay collection of the Month 8 PAYE amount. This was described as a TTP agreement, but it was for debt that had already become due. As we said earlier in this decision, it is clear from the wording of FA 2009, Sch 56, para 10(2) that a TTP agreement must come before the payment date if a penalty is to be avoided.

79.        Nevertheless, we find that the directors genuinely believed that informing HMRC that a payment would be late was sufficient to prevent a penalty accruing. For example Mr Primarolo’s letter of 26 October 2011 to HMRC says:

“the payment plan was at one point renegotiated to include month 8 of the tax year 2010-11 with [name of officer] on 24 December 2010 at which point I informed her that I would be late in paying the remaining months for 2010-11 (so how you can charge me a penalty for this month and the subsequent months is quite frankly beyond belief.”

In oral evidence before the Tribunal Mr Severn said that “As far as I was aware as long as if I rang up then that was enough”.

83.        Assuming this inference is correct, this would mean that directors’ belief rested on their failure to realise that the law had changed, and that from April 2010 penalties would be charged for late paid monthly PAYE. However, we note that:

(1)        It is well established principle of English law that ignorance of the law cannot constitute a reasonable excuse.

(2)        HMRC has no statutory duty to inform employers of the change in the law; the onus is on taxpayers to be aware of changes to the law.

(3)        Even though there was no statutory obligation on HMRC to inform the company of the change to the law, it issued a letter to the company on 28 May 2010 warning that the payment for Month 1 was late and that further late payments risked penalties.

Overall conclusions on TTP

Special circumstances

Proportionality

94.        Proportionality is an important constituent in both EU law and the Human Rights Convention. The company in this case is disputing a penalty for late submission of PAYE returns. This is a domestic legal question and does not engage EU law.

95.         The Tribunal can thus only consider whether the penalty breaches the Convention, and in particular Article 1 Protocol 1 (“A1P1”) of the Human Rights Convention, incorporated as Schedule 1 of the Human Rights Act 1988, which  reads as follows:

“Protection of Property

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties

Decision

102.    We thus find that:

(1)           the company does not have a TTP agreement for the months in question;

(2)           neither its cashflow difficulties nor its belief that simply informing HMRC that payment would be late, constitutes a reasonable excuse for its defaults;

(3)           there were no special circumstances; and

(4)           the penalties were not disproportionate.

Appeal rights