Robert Morgan & Keith Donaldson v Revenue & Customs [2013] UKFTT 317 (TC) (22 May 2013)
DECISION
1.
The appeals in these two cases were originally separately listed on 7
January 2013. On the day, after we had part heard Mr Morgan’s case, HMRC made
an application for the hearing to be adjourned. We allowed this on condition
that HMRC paid Mr Morgan’s costs of attending on 7 January. We did not hear Mr
Donaldson’s case at all on 7 January as HMRC applied at the outset for it to be
adjourned and, as the appellant had not appeared, we allowed this adjournment
too. The re-hearings of both appeals were joined and took place on 19 & 20
March 2013.
2.
At issue in both cases was the new daily penalty regime. In each case
the same question arose: were the penalties properly imposed in accordance with
the legislation? It was for this reason the continuation of the hearings of
the two appeals was joined in March. We deal with our decision on this aspect
of the appeals below. As each case also raised questions specific to the facts
of the individual cases, and in the case of Mr Donaldson, other penalties, we
deal with these matters separately, after dealing with the issue of whether the
daily penalties were properly imposed, which applies in both cases.
Background to daily penalties issue
3.
Mr Morgan was assessed to two penalties under Schedule 55 Finance Act
2009 for late filing: a £100 penalty for late filing (Sch 55 paragraph 3) and
£870 in daily penalties for late filing (Sch 55 paragraph 4). He was also
assessed to a £277 late payment penalty but HMRC have accepted the £277 penalty
should not have been levied and have discharged it. Mr Morgan has paid the
£100 late filing penalty and makes no appeal in respect of it. The appeal
before this tribunal is only in respect of the £870 daily penalties for late
filing.
4.
Mr Donaldson was assessed to three penalties under Schedule 55: £100
penalty for late filing (Sch 55 paragraph 3); £900 daily penalties for late
filing (Sch 55 paragraph 4) and £300 for filing more than 6 months late (Sch
55 paragraph 5). The total of the penalties under appeal for Mr Donaldson was
therefore £1200.
Evidence
5.
Evidence was given by Mr Delnon, an officer of HMRC, and Mr Morgan. Mr
Donaldson did not appear at the re-hearing, although he did give evidence in
his Notice of Appeal form, and we deal with that in the section on his
particular circumstances at the end of this decision notice.
6.
Mr Delnon gave evidence, in summary, about three matters:
(1)
HMRC’s policy on the implementation of the daily penalty regime;
(2)
How the penalties were actually imposed on taxpayers;
(3)
The various letters and notices sent to, and facts in relation to, the
particular taxpayers in this appeal.
7.
HMRC’s policy was that the imposition of all late filing penalties (bar
those for returns more than a year late) should be computer generated and
automatic due to the very high number of taxpayers filing late. HMRC also told
Parliament in January 2012 that HMRC would repeatedly contact taxpayers with
outstanding tax returns urging them to avoid incurring daily penalties.
8.
HMRC’s policy, while background which explained Mr Delnon’s evidence of
what HMRC actually did when imposing penalties under paragraph 4, was not, of
course, relevant to the question of the interpretation of the legislation.
9.
We find from his evidence that warnings about the risk of incurring
daily penalties were on the blank paper tax return issued to taxpayers,
including the two taxpayers in this appeal, in the April of 2011 and a single
reminder to each taxpayer (including the two taxpayers in this appeal) was
issued in batches between 18 December 2011 and 6 January 2012.
10.
We discuss Mr Delnon’s evidence below (paragraphs 51-55) on the two
documents which HMRC issued which it considered to be statutory notice of the
imposition of the daily penalties.
11.
It was also his evidence that a section of HMRC, ‘Debt Management and
Banking’ had sent three further warning letters to all taxpayers who had been
sent the £100 penalty notice. The first of these three letters specifically
warned taxpayers not to file a paper return as this would give them liability
to daily penalties but advised them instead to file online to avoid daily
penalties. This evidence was only relevant to Mr Morgan’s appeal and we make
our findings on it in paragraphs 98-104 below.
Applicable law
12.
It was accepted in Mr Morgan’s case and we find in Mr Donaldson’s case
that on the first page of the paper return that HMRC sent to both taxpayers was
a notice within s 8 Taxes Management Act 1970 (“TMA”) requiring a
self-assessment return to be made for the tax year 2010/11 and that the due
date for filing that return would have been 31 October 2011 if filed on paper
and 31 January 2012 if filed online.
13.
The £100 penalties: As we have said, penalties were imposed on
both taxpayers under Schedule 55 of the Finance Act 2009 for failing to make
these returns by the due dates. This Schedule provides:
“Penalty for failure to make returns etc
1. (1) A penalty is payable by a person
(“P”) where P fails to make or deliver a return…on or before the filing date.
(2) Paragraphs 2 to 13 set out –
(a) the circumstances in which a penalty is payable,
and
(b) subject to paragraphs 14 to 17, the amount of
the penalty.
(3) If P’s failure falls within more than one
paragraph of this Schedule, P is liable to a penalty under each of those
paragraphs (but this is subject to paragraph 17(3)).
(4) In this Schedule –
“filing date”, in relation to a return or other
document, means the date by which it is required to be made or delivered to
HMRC;
“penalty date”, in relation to a return or other
document, means the date on which a penalty is first payable for failing to
make or deliver it (that is to say, the day after the filing date)
…..”
14.
It is not disputed and we find that the self-assessment return which
both appellants were required to make was one of the returns to which Schedule
55 applied.
15.
It was also not disputed and we find that neither appellant delivered a
return by the later of the two possible filing dates. Paragraph 3 of Schedule
55 simply provided:
3. P
is liable to a penalty under this paragraph of £100.
Combined with paragraph 1(1) & (4) set out above,
this meant the appellants were each prima facie liable to a £100 penalty
because they did not deliver a return by the filing date. In both cases the
filing date was 31 October 2011 because both taxpayers eventually delivered a
paper return.
16.
As we have said Mr Morgan accepted his liability to this £100 penalty.
Mr Donaldson maintains that he has a reasonable excuse in respect of it. We
deal with this issue at the end of the decision where we look at the question
of reasonable excuse/special circumstances in respect of each taxpayer.
17.
The daily penalties: The reason for the adjournment of the
hearings was the issue of the appellants’ liability to daily penalties. These
penalties were imposed by paragraph 4 of Schedule 55 which provided as follows:
“4. (1) P is liable to a penalty under this
paragraph if (and only if) –
(a) P’s failure continues after the end of the
period of 3 months beginning with the penalty date,
(b) HMRC decide that such a penalty should be
payable, and
(c) HMRC give notice to P specifying the date from
which the penalty is payable.
(2) The penalty under this paragraph is £10 for each
day that the failure continues during the period of 90 days beginning with the
date specified in the notice given under sub-paragraph 1(c).
(3) The date specified in the notice under
sub-paragraph 1(c) –
(a) may be earlier than the date on which the notice
is given, but
(b) may not be earlier than the end of the period
mentioned in sub-paragraph 1(a).”
18.
At the original hearing on 7 January HMRC did not produce any evidence
that a notice had been given to the appellants under paragraph 4(1)(c) and,
when the Tribunal raised this at the hearing, HMRC requested the adjournment in
order to produce it.
19.
The Tribunal also indicated that it required to be satisfied that the
requirement of paragraph 4(1)(b) for a decision by HMRC had also been met. We
consider these two matters in turn below starting at paragraph 23.
20.
The six month penalty: this penalty was imposed on Mr Donaldson
(who filed after 30 April 2012) but not Mr Morgan (who filed before 1 May
2012). We set out the legislation below in paragraph 25. Mr Donaldson does
not dispute that his return was more than six months’ late but claims, as with
the £100 penalty and daily penalties, that he has a reasonable excuse for his
late filing. We deal with this below in the section starting at paragraph 147
which looks at the facts of Mr Donaldson’s particular case.
21.
We now consider whether the statutory requirements for daily penalties
to be imposed by HMRC were met in the case of both taxpayers.
Requirement in paragraph 4(1)(a) – more than three months late
22.
Neither Mr Morgan nor Mr Donaldson disputed that their failure to submit
their returns continued for more than 3 months after the due date of filing of
the returns. As they both submitted paper returns, the due date of filing was
31 October 2011 and Mr Morgan did not file his return until 27 April 2012 and
Mr Donaldson until 1 May 2012.
Requirement paragraph 4(1)(b) – a decision by HMRC
23.
“HMRC” must “decide” that a penalty is payable for paragraph 4(1)(b) to
be satisfied. Mr Delnon’s evidence, which we accept, was that the only
decisions which HMRC made were:
(a)
A high level policy decision that all taxpayers more than 3 months late
filing their SA returns should automatically be charged daily penalties;
(b)
An individual “decision” by a computer, programmed in accordance with
the above high level policy decision, to identify taxpayers meeting the
parameters and to issue a penalty assessment to the two appellants (and a great
many other taxpayers).
24.
It is HMRC’s case that either or both of these is sufficient for
paragraph 4(1)(b).
25.
There is a contrast with paragraph 3 and the other penalties chargeable
under Sch 55. The taxpayer becomes liable to the first £100 penalty simply by
not filing on the due date. As set out above, paragraph 3 simply states “P is
liable to a penalty”. Paragraph 5 imposes a penalty where the taxpayer has
failed to file for 6 months from the due date and provides:
“5. (1) P is liable to a penalty under this
paragraph if (and only if) P’s failure continues after the end of the period of
6 months beginning with the penalty date.”
As with paragraph 3, P is liable to a penalty
irrespective of any action taken or not taken by HMRC. We note in passing that
Mr Donaldson was prima facie correctly assessed with liability under this
section as his paper return was not filed until 1 May 2012, so the only
question with respect to this £300 penalty is whether he had a reasonable
excuse or special circumstances and we deal with this issue at the end of this
decision notice.
26.
Similarly with the £100 and six month penalties, liability to the
penalty imposed after 12 months of failure to file is automatic. Paragraph 6
provides:
“6. (1) P is liable to a penalty under this
paragraph if (and only if) P’s failure continues after the end of the period of
12 months beginning with the penalty date.”
27.
The daily penalty regime is quite different because it requires action
by HMRC without which the taxpayer cannot be liable to daily penalties. It is
HMRC’s case, of course, that it undertook this necessary action.
Meaning of “HMRC decide”
28.
In particular, it is HMRC’s case that the requirement for “HMRC” to
“decide” was met. It says this for a number of reasons.
29.
Decision by authorised officer not required: Firstly, it
contrasts it with the requirement for any particular officer to make a
decision. For instance, certain penalties can only be imposed by an officer of
the Board authorised by the Board for the purpose. The most obvious example is
in s 100(1) TMA which provides:
“….an officer of the Board authorised by the Board
for the purposes of this section may make a determination imposing a penalty under
any provision of the Taxes Acts and setting it at such amount as, in his
opinion, is correct or appropriate.”
Subsection (2) contains exceptions to this rule. As s
100C(1) makes clear, any penalty within the exception could only be imposed by
an officer of the Board with the permission of this Tribunal. So penalties
under the Taxes Acts require a decision of an authorised officer.
30.
We mention that this provision does not apply to Schedule 55 penalties
but only because s 103ZA TMA specifically states this. (If it were not for s
103ZA, s 100(1) or 100C(1) would apply because Schedule 55 is part of a ‘Taxes
Act’. This is because ‘Taxes Acts’ are defined in the TMA s118(1) as “…this
Act and – (a) the Tax Acts…..” The Tax Acts are defined in the Interpretation
Act 1978 Schedule 1 as “…the Income Tax Acts and the Corporation Tax Acts.”
The “Income Tax Acts” are defined in the same schedule as:
“…all enactments relating to income tax, including
any provisions of the Corporation Tax Acts which relate to income tax.”
Finance Act 2009 (which includes Schedule 55) clearly
relates to income tax. Not only that, but Schedule 55 itself clearly relates
to income tax in that it relates to a failure to make returns of income for the
purposes of income tax.)
31.
HMRC’s point is therefore that the legislation specifically provided
that none of the penalties under Schedule 55 required an authorised
officer to impose them. But nevertheless, we note that Schedule 55 drew a
distinction between penalties which arise automatically on a default and the
daily penalties which require “HMRC” to “decide” that such a penalty is
payable.
32.
Decision not required to be decision of individual officer in
individual case: Mr Vallat’s second point was that if the conclusion
reached by this Tribunal was that a “decision” did not include an action taken
by HMRC’s computer authorised by a general decision of HMRC to charge penalties
in all cases where certain parameters were met, then none of the penalties
charged under Schedule 55 (and no doubt many other charging provisions) would
be valid. This is because Paragraph 20 only gives a right of appeal against a
“decision of HMRC”:
“20 (1) P may appeal against a decision of
HMRC that a penalty is payable by P.
(2) P may appeal against a decision of HMRC as to
the amount of a penalty payable by P.”
33.
We agree with HMRC (and no one contended otherwise) that paragraph 20
was intended to give a taxpayer the right to appeal against any of the Schedule
55 penalties. Yet on their face the day 1, month 6 and month 12 penalties do
not require a decision to be made by HMRC, let alone any particular officer of
HMRC.
34.
Yet a closer reading of Schedule 55 shows that all penalties within the
schedule require an assessment to establish a debt and the date for payment of
it. It is only where a penalty is assessed that there can be an
appeal. Paragraph 18 provides:
“18. (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.”
While it is perhaps odd that paragraph 20 refers to a decision
rather than an assessment, paragraph 20 is clearly meant to refer back
to paragraph 18. A taxpayer has no right to appeal to the Tribunal merely
because he is liable to a penalty. He can only have the right to appeal
once a penalty has been assessed under paragraph 18.
35.
However, putting aside the oddity that paragraph 20 refers to a decision
rather than an assessment, in reality there is no distinction between them. Assessing
the penalty under paragraph 18 must be the same as deciding that a penalty is
payable under paragraph 20.
36.
And HMRC’s point is that in many cases the assessment under paragraph 18
will be an assessment by HMRC’s computer. For instance, the assessment to £100
in both Mr Morgan’s and Mr Donaldson’s case was issued by a computer. No
individual HMRC officer was involved in deciding that Mr Morgan or Mr Donaldson
was liable to the £100 penalty.
37.
HMRC’s case is that not only would it be impractical to require an HMRC
officer to make each individual assessment (it seems there were over 1,000,000
late returns in 2012), the legislation does not require this.
38.
Therefore, follows HMRC’s argument, if an individual HMRC officer does
not need to make each individual assessment for paragraph 18, it follows that
an individual officer does not need to make the decision required in paragraph
4 to impose daily penalties.
39.
Conclusion of Tribunal: This conclusion records the decision of
the Tribunal by casting vote of the Judge: Mr Thomas considers, for the
reasons set out in an appendix to this decision, that HMRC have failed to show
that paragraph 4(1)(b) was met. Otherwise the decision of the Tribunal was
unanimous.
40.
I find it difficult to resist the logic in paragraphs 31-38. While I am
not satisfied that an action by HMRC’s computer is a decision by HMRC, I do
find that a high-level decision taken by an officer or officers of HMRC, that
all taxpayers meeting certain parameters should be assessed under paragraph 18
or have daily penalties imposed under paragraph 4, is a decision by HMRC
sufficient for both those paragraphs if it was put into effect whether by
programming a computer to issue the notices or assessments or otherwise.
41.
In reaching this conclusion I considered the ‘principle against doubtful
penalisation’. My view was that there was no doubtful penalisation here:
Parliament clearly intended to levy penalties on persons filing late and,
because Parliament did not specifically require the decision to be taken by an
individual HMRC officer and (in this day and age) must be taken to be aware
that HMRC would rely on a computer for making large volumes of assessments, I
considered that the meaning of “HMRC decide” would encompass a high level
decision taken by HMRC officers and implemented by computer programme.
42.
While it was clear that Parliament intended a distinction between daily
penalties and the other penalties within Sch 55 in that only the former
requires an HMRC decision to be taken giving notice the penalty will be levied,
that distinction was met if a high level decision was taken to impose daily
penalties on taxpayers meeting certain parameters. Such a prior decision was
not required for the other penalties: for them all HMRC would have to show
would be a high level decision implemented by computer that certain taxpayers
would be assessed.
43.
I also took into account s 93(3) TMA. This was the section under which
daily penalties could formerly be charged and which paragraph 4 was intended to
replace with some very different provisions which would make it much easier for
HMRC to charge daily penalties. Under s 93(3) an application had to be made to
this Tribunal before a person become liable to daily penalties: that requirement
does not appear in paragraph 4. The application under s 93(3) had to be made
by “an officer of the Board”. But again, that requirement has disappeared and
been replaced with a reference to “if…HMRC decide….”. Parliament could have
retained the reference to an officer of HMRC but chose not to do so. This
reinforces my view that Parliament did not expect an individual decision to be
taken by an individual officer in respect of each individual taxpayer in
default; and therefore a high-level decision by HMRC officers to charge all
taxpayers in default meeting certain parameters daily penalties is within
paragraph 4.
44.
Decision on facts: I was satisfied on the basis of Mr Delnon’s
evidence that such a high-level decision had been taken by HMRC in respect of
paragraph 4 some time around June 2010. That decision was to impose daily
penalties with effect from the first possible date they could be imposed (ie
three months after the penalty date). On the basis of his evidence, no later
decision was taken by HMRC, although obviously the computer programme did not
run and issue the notices until 2012.
45.
It was not noted at the hearing but pointed
out by Mr Thomas afterwards that this high-level decision pre-dated the date
the legislation came into force on 6 April 2011 (article 2 of the Finance Act
2009, Schedules 55 and 56 (Income Tax Self-Assessment and Pension Schemes)
(Appointed Days and Consequential and Savings Provisions) Order 2011 SI No
702).
46.
We have chosen not to ask for the parties’
submissions in respect of this timing issue as our decision on it either way
would not affect the outcome of the appeal, as we decide for other reasons,
explained below, that the daily penalties were not imposed in accordance with
the legislation.
47.
My views, which are therefore inevitably
without the benefit of submissions, is that, while “HMRC decide” is present
tense and on its face would not apply to a decision that had already been made
before the legislation became law, nevertheless the Interpretation Act 1978 is
in point:
“13 Anticipatory
exercise of powers
Where an Act (or any
provision of which) does not come into force immediately on its passing confers
power to make subordinate legislation, or to make appointments, give notices,
prescribe forms or do any other thing for the purposes of the Act, then, unless
the contrary intention appears, the power may be exercised, and any instrument
made thereunder may be made so as to come into force, at any time after the
passing of the Act so far as may be necessary or expedient for the purpose –
(a) of bringing the Act or
any provision of the Act into force; or
(b) of giving full effect
to the Act or any such provision at or after the time when it comes into
force.”
48.
I do not think that there is anything in
Schedule 55 which would suggest a contrary intention, so it seems to me that
this does enable HMRC to exercise their power to make a decision under
paragraph 4(1)(b) at any time after the Act was passed and before it came into
force as long as it was either necessary or expedient to so do.
49.
It is for HMRC to show that the penalty was
validly imposed and therefore for HMRC to show that the “decision” under
paragraph 4(1)(b) was valid. The point was not at issue in the hearing but
nevertheless Mr Delnon’s evidence tended to suggest that it was expedient for
HMRC to take the decision as to who would be charged daily penalties at an
early stage as it was part of a long term overhaul of the daily penalty system
requiring a new computer process and automated letters to large numbers of
taxpayers. The appellant did not suggest that decision was not valid (the
point was not raised). In my view, prima facie the decision was valid under s
13 and therefore in the absence of a challenge, the Tribunal’s finding is that
it was not made too early to be effective.
50.
In conclusion, the decision of the Tribunal
(from which Mr Thomas dissents) is that the June 2010 decision was sufficient
for paragraph 4(1)(b).
Requirement in paragraph 4(1)(c) – notice of daily penalties
51.
The last matter for which the original hearing was adjourned was the
lack of evidence that HMRC gave Mr Morgan or Mr Donaldson notice specifying the
date from which the penalty is payable. The requirement in the legislation is
that:
“HMRC give notice to P specifying the date from which
the penalty is payable.”
52.
At the re-convened hearing, it was HMRC’s case that this notice was
contained within two notifications to Mr Morgan and Mr Donaldson. The earliest
was the “Self Assessment – Tax return and payment reminder” (“the SA Reminder”)
and the second was notice of their respective liability to the £100 fixed
penalty under paragraph 3 (the form SA326D).
53.
The middle paragraph of the front page of the SA Reminder read as
follows:
“If we still haven’t received your online tax return
by 30 April (31 January if you’re filing a paper one) a £10 daily penalty will
be charged every day it remains outstanding. Daily penalties can be charged
for a maximum of 90 days, starting from 1 February for paper tax returns or 1
May for online tax returns.”
None of the rest of the text on either side of the notice
related to daily penalties.
54.
The later notice of assessment of the £100 penalty, the SA326D, read as
follows:
Your tax return for the year ended 5 April 2011
was not sent in on time.
Because of this a penalty of £100 is payable.
This is in accordance with
paragraph 3 of Schedule 55 to the Finance Act 2009.
What to do next
·
If you still haven’t sent us your tax return please do so now to
avoid further penalties.
-
If your tax return is more than three months late we will charge you a
penalty of £10 for each day it remains outstanding.
-
Daily penalties can be charged for a maximum of 90 days starting from 1
February for paper returns or 1 May for online returns.
·
Please pay this penalty within 30 days of the date shown on this
notice.
55.
There was also text on the reverse side of it. None of this related to
daily penalties. The left hand side was about filing online but said nothing
about the due date for filing online returns and nothing about daily penalties.
The right hand side dealt with the £100 penalty: what to do if the recipient
thought the penalty had been improperly imposed and/or wished to appeal against
it. It was stamped in red that appeals could be made up to 31 March 2012. We
were told this was because so many SA326Ds were issued, they were sent out in
batches and HMRC would not record the date on which any individual’s SA326D was
actually sent to them. As the last batches might not go out until the end of
February, so all recipients were given 30 days from the end of February to
appeal.
56.
Are either of these forms notice under paragraph 4(1)(c)? There are a
number of reasons why they might not be:
(a)
They might not amount to notice at all within the meaning of the
legislation.
(b)
Or if they do, the date from which the penalty is payable might not be
specified as required by the legislation.
Interpretation of the legislation
57.
We think this legislation should be interpreted purposively. It seems
obvious that the purpose of small, daily penalties was to encourage
compliance by making it more expensive each day the taxpayer delays in filing
his return. This is particularly the case when the legislation provides for
the taxpayer to be given notice of the date from which the daily penalties
would start. We also take into account that the penalty is significantly
greater (£900 if charged for the full 90 days) than the first one-off penalty
and larger than the minimum six month penalty (of £300), which again suggests
that Parliament intended taxpayers to be given notice before the daily
penalties started accruing so that they would be encouraged to file in order to
avoid this very substantial liability.
58.
We take into account that paragraph 4(3)(a) permits HMRC to specify a
commencement date earlier than the date of the notice. Does this mean that
Parliament intended HMRC could in all or a significant percentage of cases
exercise their discretion such that the commencement date specified would
precede the giving of the notice so that the taxpayer would have incurred
liability before he was warned about it? And if so, does this mean that our
conclusions in the immediately preceding paragraph are wrong?
59.
We think not. If paragraph 4 had been intended as a revenue generating
measure or even as a one-off penalty like the £100 in paragraph 3, the
provisions would have been quite different. HMRC would not have been required
to give a warning and the penalty would have been one-off and not accruing on a
daily basis. On the contrary, paragraph 4 is clearly intended primarily as a
measure to incentivise compliance rather than merely to punish non-compliance.
And as we explain below, paragraph 4(3)(a) was
intended to have only limited application.
60.
Further, the explanatory notes to the legislation itself read as
follows:
“Amount of penalty: occasional returns and annual
returns
…..
10. Paragraph 4(3) provides for the date specified
in the notice from which the penalty is payable to be earlier than the date on
which the notice is given. This is because HMRC will be unaware of certain
returns for taxes such as SDLT and IHT until they are received. The date
specified in the notice may not be earlier than the end of the period of three
months after the filing date.”
This clearly indicates that Parliament intended the power
to back-date a notice to be limited to cases where HMRC would not know the date
the tax return was due.
61.
It therefore follows that paragraph 4(3)(a) must have been intended as
an exception to a general expectation that notices would be given on or before
the commencement date. HMRC have a discretion to impose daily penalties, and a
discretion when doing so to backdate the commencement date: but it seems to us
that HMRC could only have been intended by Parliament to do so in an
exceptional case as to do otherwise would defeat the object of paragraph 4.
62.
Applying this purposive construction, we consider that when Parliament
said HMRC must “give notice specifying the date from which the penalty is
payable” they intended that the taxpayer (1) should be given clear warning of
the (in general) future imposition of a penalty charged each day he failed to
file and (2) clear notice of the date from which such daily penalties would
run.
Is the date specified?
63.
Both documents said by HMRC to be notices under paragraph 4(1)(c)
specified two dates from which daily penalties would be payable,
depending on whether the returns were filed by post or over the internet.
Could specifying two dates possibly comply with paragraph 4(1)(c)?
64.
It was impossible for HMRC to specify a single date earlier than 1 May
from which penalties would run. This was because the first day from which
daily penalties could run would be three months from the penalty date (see
paragraph 4(3)(b) combined with paragraph 4(1)(a)). The penalty date was the
day after the filing date (paragraph 1(4)). The filing dates were different
for postal and online returns. The earliest date from which daily penalties
could run on a paper return would be 1 February; the earliest date from which
daily penalties could run on an online return would be 1 May. As at 1 February
it could not be known how the taxpayer who had not yet made a return would
choose to file that return. So HMRC could not specify a single date between 1
February and 1 May because if they did, and the taxpayer later filed online,
the notice would be invalid under paragraph 4(3)(b) and doing so would open
them to criticism for issuing invalid notices.
65.
Therefore, although the legislation requires a date to be specified from
which the penalty “is” payable, HMRC are asking us to interpret this to mean
they need only specify a date from which the penalty would be payable depending
on the type of return ultimately filed.
66.
As we have said above, legislation should normally have a purposive
interpretation and we have construed paragraph 4(1)(c) accordingly so that we
think Parliament intended taxpayers to be given an unequivocal prior warning of
the risk they ran of daily penalties if they continued to fail to file their
return. But looking at the provisions in the TMA relating to income returns,
Parliament also clearly intended to make a distinction between online and paper
returns, and in particular to discriminate in favour of taxpayers filing online
by giving them later filing dates and later penalty dates than taxpayers filing
on paper. It would run contrary to that intention to interpret paragraph
4(1)(c) as requiring a single date to be specified because it would prevent
HMRC specifying a date before 1 May for taxpayers filing by post. This would
put such taxpayers in the same position as electronic filers, yet Parliament
clearly did not intend postal filers to have the same penalty dates as
electronic filers. So we will not interpret paragraph 4(1)(c) as requiring
this.
67.
Therefore, we consider that paragraph 4(1)(c) must be interpreted as
allowing HMRC to specify in a single notice two dates from which the daily
penalties would run, depending on whether paper or electronic returns were
filed. It inevitably follows that this would need to be clearly expressed in
the notice or it would fail to be notice at all.
68.
We move on to consider whether either of the two documents claimed by
HMRC to amount to notice under 4(1)(c) were in fact notice as intended by
Parliament.
Was the SA326D notice under paragraph 4(1)(c)?
69.
HMRC’s primary case was that the SA326D was notice. But so far as the
SA326D is concerned, by itself the sentence “If your tax return is more than
three months late we will charge you a penalty of £10 for each day it remains
outstanding” is not notice within paragraph 4(1)(c) as no date is specified.
The next sentence “Daily penalties can be charged for a maximum of 90 days
starting from 1 February for paper returns or 1 May for online returns” by
itself is not notice either because it uses the word “can” rather than “will”.
It could simply be read as a warning: daily penalties could be so charged: it
does not mean that they will be so charged.
70.
But do the two sentences combined amount to notice of a specified date
from which daily penalties will run? The first sentence uses the verb “will”
but only refers to “outstanding” returns and the second sentence, although more
specific on date, merely says “can”. There is a clear difference in meaning
between the “will” in one sentence and “can” in the other, so we find the
notice is ambiguous.
71.
Further we take account of the context of these two sentences. The
reader’s attention was not drawn to them. There was no heading or bold text
that related specifically to daily penalties. Relegated to small print, we consider
their natural interpretation is as a warning that HMRC had power to
charge daily penalties rather than notice that HMRC would be charging
daily penalties.
72.
We find that that the two sentences alone or combined in the context of
the SA326D did not amount to “notice” within paragraph 4(1)(c) as intended by
Parliament. Parliament intended taxpayers to be given clear warning that they
would be liable to daily penalties from a specified date. The SA326D failed to
do this as in the context of the whole document as the warning was in the small
print and the actual wording was ambiguous over whether HMRC were telling the
taxpayer that daily penalties would be charged or merely could be charged.
Was the ‘ Self Assessment – tax return and payment reminder’ notice under
paragraph 4(1)(c)?
73.
For much the same reasons we consider that no notice sufficient for
paragraph 4(1)(c) was contained in this document either. The ‘notice’ was in
the small print without any heading or bold text to draw attention to it. Most
of the text related to other matters such as other penalties and how to file
online. We consider it was not made clear whether HMRC were saying daily
penalties could be charged from one of the two specified dates or would be so
charged. It fell short of being the clear and unambiguous statement we
consider Parliament had in mind when it required “notice” to be given to
taxpayers before daily penalties could be charged.
74.
The conclusion that neither of these two documents comprised notice is
bolstered by the reflection that “notice” within the meaning of paragraph
4(1)(c) need only be given once, yet even HMRC appeared not to have decided
which of the two documents amounted to notice, and the documents were (in so
far as they related to daily penalties) very similarly worded. We consider
that they were intended by HMRC as warnings, and this would explain why they
were given twice. Neither was a notice within paragraph 4(1)(c).
75.
That decision is sufficient to dispose of both appeals against daily
penalties (but not Mr Donaldson’s appeals against the £100 and £300 penalty
which we address at the end of this decision notice). But we go on to consider
all matters in case this goes on appeal.
Should the actions be consecutive?
76.
We briefly considered whether the order of the pre-conditions in
paragraph 4(1) were meant to be consecutive so that the 3 months (condition
4(1)(a)) had to have expired before HMRC decided to impose the penalty
(condition 4(1)(b)) and notice was given (condition 4(1)(c)).
77.
In these cases the order of events was (b), (a) and (c). This was
because the high-level HMRC decision to impose the penalty was taken long
before the appellants were in default; the next event was the expiry of the
three months on 31 January 2012 and lastly the issue of the purported notice in
February 2012. If either appellant had ultimately filed an online return, the
order of events would have been (b), (c) and then (a).
78.
We saw no reason why the pre-conditions should have been intended to
occur consecutively in the order (a), (b), (c). It was clearly intended that
notice could be backdated in some limited cases (paragraph 4(3)(a)) and
therefore it seems there was nothing to prevent notice being given before the
expiry of the 3 months as long as (in such a case) the notice was prospective
(paragraph 4(3)(b)). We saw nothing to prevent HMRC giving notice in February
to take effect on 1 May.
Did HMRC exercise their discretion unlawfully?
79.
This was a point which was not raised at the hearing and one on which we
would have directed submissions were it not for the fact that it is unnecessary
to our decision. We have determined that neither the SA Reminder nor the
SA326D amounted to “notice” within the meaning of paragraph 4(1)(c).
80.
If we had determined that the SA326D was notice but the SA Reminder was
not then this issue of lawfulness would arise. As the point is irrelevant to
our decision we cover it briefly: the SA326D was issued with a retrospective
commencement date for anyone who ultimately filed a paper return in that the
date of issue in late February post-dated the date daily penalties commenced on
1 February. This issue does not arise on the SA Reminder which at the latest
was issued on 6 January.
81.
Backdated notification is prima facie effective because of paragraph
4(3)(a). Were it not for this provision, we consider backdated notifications
would be ineffective because paragraph 4(1)(c) uses the present tense “is” and
the obvious purpose of daily penalties is, as we have said, to encourage
compliance prospectively rather than punish non-compliance retrospectively.
82.
As we have discussed, we consider that this power to backdate was
intended as an exception to the general rule that notice would not be later
than the start date of the daily penalties and Parliament did not intend it to
be used for returns where the due date was known to HMRC. Was this a lawful
exercise of HMRC’s discretion? And even if it is lawful for HMRC to use the
exception to backdate a large percentage of the notices, would it be lawful for
them to exercise their discretion in a way which might have indirectly
discriminated against a section of the population, say, on grounds of age, if
it was shown that older persons tend to file by post rather than online, and
that therefore it was older persons who had the retrospective notifications?
83.
Assuming the conclusion on this was that in such circumstances
retrospective notice was unlawful, it seems arguable to us that HMRC would be
unable to rely on it in order to claim that they had validly imposed a
penalty: Wandsworth London BC v Winder [1994] 3 All ER 976, [1985] AC 461.
84.
However, other than recognising that there might be an issue here, we
make no preliminary conclusions as it is irrelevant to our decision as we have
determined that the SA326D and SA Reminder were not notices within the
meaning of paragraph 4(1)(c).
Conclusions
85.
Our conclusion in paragraph s 73-75 is sufficient to dispose of both
appeals in respect of the daily penalties in favour of the taxpayers. They
were not given notice within the meaning of paragraph 4(1)(c) and therefore
daily penalties could not be imposed.
86.
However, that is not the end of the matter for Mr Donaldson as we need
to consider his liability to the £100 and £300 penalties. So far as Mr Morgan
is concerned, it disposes of the appeal in his favour. But in case this matter
goes on appeal, we deal with all aspects raised in Mr Morgan’s defence. So the
rest of this decision in respect of Mr Morgan is on the basis that our above
decision on paragraphs 4(1)(c) is wrong. On this assumption, were HMRC right
to levy the daily penalties?
Mr Morgan – findings of fact
87.
HMRC did not challenge the veracity of Mr Morgan’s evidence and we find
he was an honest witness. In particular, he readily accepted that he was at
fault for not filing on time and accepted his previous relaxed attitude to his
filing duties rendered him liable to penalties. His reason (although not put
forward as an excuse) for this relaxed attitude was that he was in a demanding
job which he prioritised over filing his returns. He points out that at no
time was tax outstanding: he was only required to render a return because he
was a director of a non-profit making company but this appointment carried no
income. All his income from employment was taxed under PAYE.
88.
We consider that Mr Morgan’s memory was not entirely reliable. His
initial grounds of appeal included that HMRC had previously accepted letters
from him in lieu of tax returns, but he later accepted that although it had
been his practice to lodge letters with HMRC with a statement of his income,
HMRC had always insisted on tax returns being filed.
89.
He accepted that he did receive his tax return at the proper time and
that he received various reminders and the SA329D. He had no record of receiving
the SA Reminder.
90.
We accept his evidence that, had he understood he was liable to daily
penalties of £10 a day, he would have filed his tax return immediately to avoid
further penalties and that had he understood he could have avoided them
altogether by filing online, then he would have done so. He had no objection
to filing online and later did so in respect of a different tax year.
91.
On 21 February 2012 Mr Morgan wrote to HMRC setting out his income for
the tax year 2010/11. We find that he wrote this letter hoping that HMRC would
consider it sufficient notification of his income and not require him to file a
full tax return. It was probably written in response to a PAYE coding notice
or in response to the penalty assessment for the £100 (the SA329D). Mr Morgan
paid the £100 penalty electronically at about this time.
92.
On 14 March 2012 Mr Morgan telephoned HMRC in response to the SA326D.
His recollection was that he specifically asked the HMRC officer to whom he
spoke whether he had paid all the penalties to which he was liable and that he
was told that he had.
93.
HMRC’s note of the conversation records that Mr Morgan was told his
“statement [was] up to date”. HMRC’s case is that, strictly, this was an
accurate answer. At that point only the £100 penalty had been assessed (and
paid). Daily penalties had not been assessed. But if the SA326D had been
notice within paragraph 4(1)(c), then because Mr Morgan subsequently filed by
post daily penalties were at this point accruing and had been accruing
since 31 January 2012. He was not told this.
94.
Mr Morgan also complains that he was not told in this phone call that he
could, by filing online before 1 May 2012, avoid the daily penalties which were
already accruing if he filed by post.
95.
On 15 March 2012 HMRC wrote to Mr Morgan in response to his letter of 21
February. This letter notified him that he was required to complete a tax
return and enclosed two paper returns for the two outstanding years 09/10 and
10/11. The final paragraph was:
“Enclosed are 2009/10 and 2010/11 tax returns for
your completion.”
96.
On 27 April and, we find, in response to this letter Mr Morgan filed his
2010/11 tax return by post.
The debt management letters
97.
There was a dispute over whether he received the three letters from
HMRC’s ‘Debt Management & Banking’ section mentioned in paragraph 11
above. This question is relevant because the first of these three letters
dated to March 2013 contained a specific warning to file online to avoid daily
penalties.
98.
Mr Morgan’s evidence given to the Tribunal on 19 March was that he had
no recollection of receiving the letters but that he would double check his
files overnight. On 20 March it was his evidence that he had checked and he
had no record of receiving them.
99.
Mr Delnon’s evidence on this was hearsay. He spoke to someone in the
‘Debt Management & Banking’ section of HMRC and was told that the circular
letters were issued to all taxpayers in default and in particular to Mr Morgan
respectively on 4 March, 24 March and 31 March 2012. Mr Delnon was not given
or shown a computer log recording the sending of these letters to Mr Morgan and
all he could say is that they were sent from a separate computer system to the
one he used. While we entirely accept that Mr Delnon’s account of what he was
told was accurate, he was only repeating what he had been told by an unnamed
HMRC officer who was not called to give evidence.
100. We found Mr
Morgan to be an honest witness who has kept letters sent to him by HMRC (even
if he did not always action them). Although his recollection of events was
shown not always to be accurate, in the case of these three letters he made a
contemporaneous check of his files and did not find any of them.
101. We are faced
with a conflict of evidence. While we are sure that Debt Management &
Banking did send out the three letters to some taxpayers, without the log we
have no means of testing whether they were actually sent to Mr Morgan, or
whether a mistake was made. We found Mr Morgan to be honest and we are
reluctant to reject Mr Morgan’s own rejection of counsel’s suggestion that he
received and lost these three letters. And further, as we have said, we accept
Mr Morgan’s evidence that had he understood that paper filing would lay him
open to daily penalties, he would have filed online. This suggests he never
read the letter of 4 March which indicates he may not have received it.
102. All in all this
is one of those rare cases where we consider the evidence to be finely
balanced. It is HMRC’s case that these particular three letters were sent and
therefore it is for HMRC to prove that the letters were sent and received
rather than for the appellant to prove that he did not receive them. As we
consider it is equally likely that they were received as not received, our
finding of fact is that HMRC have failed to prove on the balance of probability
that they were received by Mr Morgan.
103. We will
therefore not refer to them again as our finding is that, whatever information
they contained, their contents was not known to Mr Morgan as he did not receive
them.
Reasonable excuse?
104. Paragraph 23 of
Schedule 55 provides:
“Reasonable excuse
(1) Liability to a penalty under any paragraph of
this Schedule does not arise in relation to a failure to make a return 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.”
105. It was Mr
Morgan’s primary case that he had a reasonable excuse for the failure to submit
his return on time. However, we consider that to be a reasonable excuse, by definition
the excuse must be both reasonable and causative. It cannot be an excuse for a
default at all if it was not the cause of the default. Mr Morgan’s default
occurred on 31 October 2011 when he failed to make the paper return which he
ultimately made on 27 April 2012.
106. He proffered
nothing as a good reason for failing to make the return by 31 October 2011 (or
even 31 January 2012, the deadline for online returns). At best it seems that
he had a relaxed attitude to filing in view of his demanding job, the knowledge
that he would have no tax to pay, and having only had to pay penalties of £100
in previous years. He did not suggest, and we do not find, that this amounts
to a reasonable excuse. He has paid the £100 late filing penalty and withdrawn
his appeal in respect of it.
107. He objects to
what he sees as HMRC’s failure to warn him in February and March 2012 that he
could only avoid further penalties by filing online. In particular, he
complains he was not given this warning in the phone conversation of 14 March
or letter of 15 March. Whether or not we think HMRC are at fault for failing
to give the warning, it is clear that their failure to do so in February/March
2012 could not have caused Mr Morgan’s failure to file back in October
2011. Therefore, it is impossible for this failure by HMRC to be a reasonable
excuse.
108. A reason which
might explain and excuse late filing but which only arises after the
due date of filing fails to explain why the filing was late in the first place,
however much it might explain why it continued to be late, and on the terms of
the legislation such a reason cannot be a reasonable excuse even in so far as
the later non-filing penalties are concerned. If it was a ‘reasonable excuse’
it would apply as much to the first £100 penalty as to the later daily
penalties. But Mr Morgan had no reasonable excuse as at 1 November 2011 (or
even 1 February 2012) and so he has no reasonable excuse for the daily
penalties.
Special circumstances?
109. Paragraph 16
provides as follows:
“Special reduction
16
(1) If HMRC think it right because of special
circumstances, they may reduce a penalty under any paragraph of this Schedule.
…..”
Paragraph 22 provides in respect of appeals to this
tribunal:
“22
…
(2) On an appeal …the tribunal may –
…
(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 16 –
(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 16 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.”
In other words, a penalty may be reduced by HMRC on the
grounds of ‘special circumstances’. HMRC did not reduce Mr Morgan’s penalty.
But on appeal this tribunal may also reduce Mr Morgan’s penalty on the grounds
of ‘special circumstances’ but only if HMRC’s decision not to do so was
flawed in the public law sense.
Flawed?
110. ‘Flawed’ in the
light of the principles applicable in proceedings for judicial review is well
understood. It means that HMRC’s decision is flawed if it failed to consider
the exercise of its discretion at all; and if it did exercise its discretion,
its exercise of it would be flawed if HMRC considered something relevant which
was irrelevant, if it failed to consider something relevant, or came to a
decision it could not reasonably have reached.
111. When should
HMRC consider special circumstances? There is an issue over whether HMRC
considered the exercise of its discretion at all. It is accepted that the
daily penalties were assessed without any consideration of special
circumstances. As counsel for HMRC explained, this is inevitable in respect of
the imposition of all late filing penalties bar the one for returns more than a
year late. HMRC simply assess late filing penalties when returns are late:
they do not first seek the taxpayers’ representations on whether they have a
reasonable excuse or whether special circumstances apply. As we have already
reported, the assessments are issued by computer. Does this therefore mean that
in all cases HMRC’s decision to impose penalties is flawed because HMRC have
failed to consider whether special circumstances apply before the assessment is
raised?
112. This has been
considered in a number of cases. In White [2012] UKFTT 364 (TC) and Algarve
Granite Ltd (2012) UKFTT 463 (TC) the Tribunal considered that the
scheme of the legislation was that special circumstances should be considered
before the penalty was assessed and a failure to do so resulted in a flawed
decision. However, in those cases it seems that special circumstances were not
considered at any stage by HMRC so the issue whether special circumstances had
to be considered before or after the assessment was not critical.
113. In Agar [2011] UKFTT 773 (TC) the Tribunal came to the opposite conclusion.
114. There is a
tension here: as the Tribunal in Algarve pointed out in
paragraph [53], the legislation is drafted on the assumption that special
circumstances (and reasonable excuse) would be considered before the penalty is
assessed. But HMRC automate the imposition of penalties. No doubt in view of
the numbers concerned, individual assessment of each case is impractical.
Special circumstances, like reasonable excuse, are only considered on a review
once a taxpayer lodges an appeal.
115. As a question of
purposive interpretation, we are inclined to support the view expressed in Agar.
By limiting the Tribunal’s ability to consider special circumstances only
to those decisions of HMRC which are flawed, it was clearly not Parliament’s intent
that all decisions should be seen as flawed. And therefore the
legislation should not be interpreted as meaning all penalty decisions are
flawed simply because the assessments are issued automatically, when, as we
have said, automation must have been intended as there is no requirement for an
individual officer to issue the assessment to a penalty, in contrast to other
assessments.
116. Where a
review is requested: But in any event, it seems to us that the answer is
even more straightforward in any case where HMRC offer and the taxpayer accepts
a review of HMRC’s decision. The structure of the appeals procedure in s 49A to
s 49H TMA is that in any case where an appeal is lodged, HMRC may offer a
review (s 49A(2)(b)). If HMRC offer a review, they must state their “view”.
The review can lead to that view being upheld, varied or cancelled (s 49E(5))
and it is implicit that the appeal is against that reviewed decision on the
view, because a failure to appeal it results in it being treated as a s 54 TMA
agreement (s 49F(2)).
117. Therefore, where
a review is carried out, the question is whether the review decision is
flawed. It does not matter if the original decision to assess was flawed. As
long as HMRC consider special circumstances on a review, in our opinion the
decision cannot be flawed simply because special circumstances were not
considered before the assessment.
118. Where there
is no review: Mr Morgan’s is a case where a review was requested and
undertaken. We note here that for the reasons explained below, Mr Donaldson’s
case was one where the taxpayer opted to appeal to this Tribunal without first
requiring a review at least in respect of the daily penalties and six months
penalty. In Mr Donaldson’s case, the decision under appeal is the original
assessment and that assessment would have been raised without consideration of
special circumstances. Does that make it flawed?
119. Our view, for
the reasons expressed in paragraph 116, is that even where the appeal is
against an unreviewed decision, it is not flawed if consideration were given
to special circumstances on notification of the appeal to HMRC. On the other
hand if special circumstances are not considered until the hearing, then that
is too late because it is clear that Parliament intended special circumstances
to be considered by HMRC before the taxpayer lodged an appeal with the
Tribunal.
120. Application
to facts in Mr Morgan’s case: In Mr Morgan’s case he requested a review.
HMRC’s decision on that review was dated 10 September 2012. In this case the
officer specifically rejects a claim for reasonable excuse. Special
circumstances are not mentioned.
121. We therefore
conclude that HMRC’s decision on paragraph 16 was flawed in this case because
they failed to consider the matter on review. The effect is that under
paragraph 22(3)(b) the Tribunal may substitute its own decision on special
circumstances.
122. We deal with Mr
Donaldson’s case in paragraphs 147-169 below.
Special circumstances?
123. Principles to
be applied: There have been a number of cases in which ‘special
circumstances’ have been considered. HMRC relied on the Tribunal’s decision in
St John Patrick Publishers Ltd [2012] UKFTT 20 (TC) (which was itself
relying on the Tribunal’s decision in Dina Foods Ltd [2011] UKFTT 709 (TC)) that:
“[20] …..
(3) lack of awareness of
the penalty regime is not capable of constituting a special circumstance; in
any event, 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;
(4) 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 not of itself capable
of amounting either to a reasonable excuse or special circumstances.”
124. We agree that
ordinarily there is no obligation on HMRC to issue warnings to defaulting
taxpayers that they have or are about to incur penalties, or, at least, that
failure by HMRC to do so does not amount to special circumstances.
125. In St John
Patrick Publishers Ltd the taxpayer was in regular contact with HMRC
seeking time to pay. It was occasionally told that penalties “may” apply. It
was not told that it had already incurred penalties and further defaults would
incur more. The Tribunal considered that this did not amount to special
circumstances, although we note it said that where “an appellant has sought to
engage in good faith with HMRC, together with other relevant circumstances,
might in combination amount to a reasonable excuse or special circumstances…”
126. In Algarve (above) the Tribunal rejected the claim to special circumstances because the
appellant’s case was that it was unaware of the change in penalty regime and
was facing economic recession. It cited, as did HMRC in this case, the
decision of the Court of Appeal in Clarks of Hove Ltd v Bakers Union [1978]
1 WLR 1207 at page 1215 H:
“…to be special the event must be something out of
the ordinary, something uncommon; …”
127. In Warren [2012] UKFTT 57 (TC) the Tribunal said of “special circumstances”:
“[53.] We were not referred to (and could not find)
any authority on the meaning of "special circumstances". Plainly it
must mean something different from, and wider than, reasonable excuse, for (i)
if its meaning were confined within that of reasonable excuse, paragraph 9
would be otiose, and (ii) because paragraph 9 envisages a reduction in a
penalty rather than absolution, it must be capable of encompassing
circumstances in which there is some culpability for the default: where it is
right that some part of the penalty should be borne by the taxpayer.
[54.] The adjective "special” requires simply
that the circumstances be peculiar or distinctive. But that does not
necessarily mean that the circumstances which affect all or most taxpayers
could not be special: an ultra vires assertion by HMRC that for a period
penalties would be halved might well be special circumstances; but generally
special circumstances will be those confined to particular taxpayers or
possibly classes of taxpayers. They must encompass the situation in which it
would be significantly unfair to the taxpayer to bear the whole penalty.”
128. As in the later
case of Algarve, the Tribunal rejected HMRC’s failure to issue
warnings as special circumstances. We think it right that that taxpayers who
are knowingly in default of their obligations to file should take it upon
themselves to find out to what penalties they lay themselves open to by their
actions. HMRC’s failure to warn them cannot in general be special
circumstances.
129. But each case
must be considered on its own merits. The factors which we consider relevant
to special circumstances in this case are:
(a)
Mr Morgan was in default;
(b)
Mr Morgan knew he was in default;
(c)
Mr Morgan was unaware of the daily penalty regime;
(d)
Mr Morgan tried in good faith to engage with HMRC and wrote to them on
21 February to attempt to regularise his affairs and telephoned them on 14
March to sort out his position on penalties;
(e)
HMRC had issued a number of general warnings about daily penalties and
Mr Morgan accepts that he received them;
(f)
In the phone conversation of 14 March 2012, in reply to a specific
question about liability to penalties, the HMRC officer gave correct if
misleading advice in saying that Mr Morgan had no outstanding liability to
penalties; no other penalties had been assessed on Mr Morgan but at that
date daily penalties were accruing as (in HMRC’s view but not ours)
notice of daily penalties had been given with effect from 1 February;
(g)
In the letter of 15 March 2012, HMRC in effect invited Mr Morgan to
submit paper returns at a time when it was very much against his interests to
file on paper;
(h)
On the face of them, the returns enclosed with that letter contained a
warning about daily penalties.
130. HMRC’s case is
that Mr Morgan should have paid more attention to what the circulars and tax
return said and less attention to what individual officers had told him when he
had had direct contact with HMRC by telephone and in the personal letter. And
in any event he wasn’t actually given wrong information.
131. We note that our
reason for considering that SA Reminder and the SA326D were not notice under
paragraph 4(1)(c) was the ambiguity and lack of prominence given to the matter
so that they were warnings and not notice. If we are wrong on this, then for
the same reasons we would say it was a reasonable response to them to do as Mr
Morgan did and ring HMRC to find out what was his liability on penalties, and
then to rely on what he was told.
132. HMRC’s case is
that even putting aside the earlier warnings, the tax returns sent to him with
the letter of 15 March on their face contained a warning that should have put
him on notice that he was already in the daily penalty regime if he submitted
them. This is because on the first page it said in a red box:
“We must receive your tax return by these dates:
·
If you are using a paper return – by 31 October 2011 (or 3 months
after the date of this notice if that’s later), or
·
If you are filing a return online – by 31 January 2012 (or 3
months after the date of this notice if that’s later).
If your return is late you will be charged a £100
penalty. If your return is more than 3 months late you will be charged daily
penalties of £10 a day.
….”
133. We note that this
falls short of a clear statement that daily penalties would be due if the
taxpayer made a paper filing rather than an online filing, particularly as it
refers to 31 October or the “date of this notice”.
134. Mr Morgan’s case
was that he completed the paper returns because that is what the letter
accompanying them had asked him to do. He did not suggest that he had either
read this above warning or been misled by it.
135. We think that Mr
Morgan is to be criticised. If he had read the numerous warnings about daily
penalties which he accepts he received from HMRC, no doubt he would have
specifically asked about it when he telephoned the HMRC adviser. However,
although he did not mention daily penalties in that call, he did ask if there
were penalties other than the £100 penalty to which he was liable.
136. However, we
think Mr Morgan does have the right to feel aggrieved despite his failure to
read the warnings sent to him. This is not a case where he has entirely
ignored warnings, because he did ring HMRC to ask. Nor is it a case of a
taxpayer in default failing to inform himself of to what penalties he has
rendered himself liable: he phoned HMRC up and asked them about it. Further
he tried to do what HMRC appeared to require of him: he completed and returned the
forms sent to him. We find those forms did not have what would have been a
clear warning to a taxpayer; and the significant fact is that HMRC had invited
him to complete them, which he did.
137. We consider that
overall there were special circumstances in this case. It is crucial to our
finding that Mr Morgan attempted to resolve his default but that in direct
contact with HMRC he was given misleading or at least less than complete
information on the telephone and then received a letter from HMRC which in effect
invited him to submit paper returns when it was not in his interests to so do.
138. This entirely
distinguishes this case from the cases mentioned above where the taxpayer was
simply unaware of the penalty regime. Here we find Mr Morgan relied on
misleading advice from HMRC.
139. We mention one
last point which is that HMRC criticised Mr Morgan for taking from 15 March
(the date of the letter from HMRC enclosing the tax returns) to 27 April to
file his returns. He did not seek to excuse this: he cannot remember if he
was away over the Easter period nor the date that HMRC’s letter was actually
received by him. It certainly seems to us that he could have acted more
promptly in response to HMRC’s letter of 15 March: however, had HMRC’s letter
of 15 March explained the difference between online filing and postal filing,
we consider he would have filed online and on a date no later than the date of
his postal filing which would have been before daily penalties would have been
incurred.
140. Therefore, while
we consider that Mr Morgan is to be criticised for the dilatoriness with which
he has addressed his liability to submit a return, nevertheless we consider the
immediate cause of his liability to daily penalties was the misleading advice
from HMRC in the phone call and the letter. We consider that that amounts to
“special circumstances” although not to a reasonable excuse (on the technical
grounds it post-dated the failure).
141. Having found
that there were special circumstances, we need to consider what effect that
should have on the penalty levied. Under paragraph 16 we can reduce the
penalty or stay the penalty. Staying the penalty is not appropriate; this is
not a case where future events could have any impact on the special
circumstances. The question is whether it should be reduced and if so by how
much.
142. We find that,
had Mr Morgan been given full advice in the phone conversation which was that
daily penalties were already accruing if he did a postal return but not an
online return; and if the letter to him had invited him to submit either an
online or paper return and pointed out the different dates from which the
notice for daily penalties commenced depending on online or paper returns, then
he would have submitted an online return at about the time that he actually
submitted a paper return.
143. We take into
account that Mr Morgan has no reasonable excuse for failing to file his return
on the due date: but Parliament has established that the penalty for so
failing is in the first instance £100. Mr Morgan paid this. We are looking at
liability to the daily penalties, and we consider that had he been correctly
advised by HMRC he would have filed online and avoided liability for them.
144. In other words,
we think the ‘special circumstances’ are such that Mr Morgan would have put
himself in a position where no daily penalties would have been incurred at all,
were it not for the less than complete information provided by HMRC.
Therefore, the appropriate reduction in this case is to 0%.
145. That would
determine the appeal in Mr Morgan’s favour, but for the fact we have already
determined it in his favour on other grounds.
Mr Donaldson
Findings of fact
146. Mr Donaldson’s
notice of appeal to HMRC dated 20 March 2012 against the £100 penalty (imposed
on 15 February 2012) stated that when he received the £100 penalty letter he
called his accountant, Mr Paul Wilson, who told him that he would call Mr
Donaldson back and sort it out but, says Mr Donaldson, Mr Wilson did not do
this.
147. At no point in
any of the correspondence does Mr Donaldson explain why he took no further
action and in particular to chase his accountant who, even on his version of
events, failed to call him back as promised.
148. Mr Donaldson
then appealed to HMRC.
149. HMRC’s reply
dated 18 April 2012 to Mr Donaldson’s appeal was that HMRC could not consider
his appeal until he submitted his outstanding tax return. It asked him to
submit it within 30 days. The letter warned Mr Donaldson about potential
liability to daily penalties.
150. Presumably in
response to this letter, Mr Donaldson filed his tax return by post on 1 May
2012. No explanation was given at any time of why Mr Donaldson took no action
in between learning in approximately mid-February that his accountant had let
him down and filing his return on 1 May 2012.
151. The £900 daily
penalties and the £300 6 months late penalty were assessed and notified to Mr
Donaldson around 29 May 2012.
152. HMRC wrote again
to Mr Donaldson on 20 June 2012 to say that HMRC refused his appeal because
HMRC did not consider that the failings of his agent, Mr Wilson, amounted to a
reasonable excuse.
153. Mr Donaldson
asked for this decision to be reviewed. The review decision was dated 14
August and upheld the rejection of the appeal against the £100 penalty. Mr
Donaldson appealed to this Tribunal on 10 September 2012 against this decision
and against the imposition of the daily penalties and £300 6 month late filing
penalty.
154. No record was
produced to the Tribunal of an appeal being lodged with HMRC by Mr Donaldson
against the daily penalties or the 6 months penalty. In accordance with this
Tribunal’s normal practice, as it was clear that the Notice of Appeal to the
Tribunal covered all 3 penalties, we treated the Notice of Appeal (which the
Tribunal copied to HMRC) as notice to HMRC under s 49A TMA. Therefore the
appeal against all three penalties was properly lodged (albeit out of time in
respect of the later two penalties) and this Tribunal has jurisdiction to hear
it. As HMRC raised no issue on the timing point, we extend time.
155. The Notice of
Appeal stated:
“I employed an agent named Paul Wilson in 2011 and
submitted all my papers to him by December 2011 to file online. You will see
from my records that I have used him to submit my returns for a number of years
quite successfully.”
156. However, we find
that Mr Donaldson filed his tax returns for the two previous tax years more
than 6 months late and that two late filing penalties were imposed in respect
of each year (the immediate penalty and the six month penalty). Returns for
these years were still outstanding at the date of Mr Delnon’s witness statement
on 19 February 2013.
Reasonable excuse?
157. Paragraph 23 of
Schedule 55 provides:
“Reasonable excuse
(1) Liability to a penalty under any paragraph of
this Schedule does not arise in relation to a failure to make a return if P
satisfies HMRC or (on appeal) the First-tier Tribunal or Upper Tribunal that
there is a reasonable excuse for the failure.
(2) Fro 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.”
158. It is apparent
from paragraph 23(2)(b) that reliance on an agent could be a reasonable excuse
if the taxpayer took reasonable care to avoid the failure. However, in this
case, even if reliance on Mr Wilson could have been a reasonable excuse, we
consider that such a reasonable excuse came to an end no later than when Mr
Donaldson knew that Mr Wilson had not filed his return which was around
mid-February 2012.
159. Paragraph
23(2)(c) permits an extension of the reasonable excuse as long as the taxpayer
remedies the failure without unreasonable delay after the excuse ceased. Mr
Donaldson, however, did not file his return until 1 May 2012 so, although we
acknowledge this was within the 30 days of HMRC’s letter dated 18 April, we do
not consider it was “without unreasonable delay” since the notification he
received around mid-February of Mr Wilson’s failure to file. No explanation of
why it took him so long to remedy the failure was given and so we dismiss his
claim that Mr Wilson’s failure was a reasonable excuse.
160. We note that in
any event we would not have considered Mr Wilson’s failure to be a reasonable
excuse. For it to be a reasonable excuse, Mr Donaldson would have to show that
he took reasonable care to avoid the failure. Yet it is his case that he used
Mr Wilson for previous years and we find that he knew he had incurred late
filing penalties in previous years. In these circumstances, we find he failed
to show that he took reasonable care to avoid the default because he did not
explain why he continued to employ an agent he knew had filed late returns
before.
Special circumstances?
161. We have already
recorded our decision that in principle that where there is a review, HMRC’s
decision can only be flawed if it does not consider special circumstances at
the time of the review. Where the decision is not reviewed, we think that the
decision is not flawed as long as special circumstances were considered when
HMRC were notified of the appeal.
162. In Mr
Donaldson’s case no consideration was given to special circumstances at any
time by HMRC in respect of any of the penalties until after HMRC lodged their
statement of case.
163. As the
assessment of the £100 was reviewed and no consideration was given at this time
to special circumstances, we find that decision was flawed.
164. However with
respect to the other two penalties, as we have already commented the first HMRC
knew of the appeal was when it would have received notification from the
Tribunal. In these circumstances its failure to consider special circumstances
any earlier cannot in our view make their decision flawed.
165. Nevertheless, we
need to go on to consider whether their subsequent decision that there were no
special circumstances was flawed in the sense of irrational and to do that we
need to consider whether there are special circumstances.
166. There are
superficial similarities with Mr Morgan’s case in that Mr Donaldson was asked to
file his tax return. However, the advice from HMRC was quite different. The
letter from HMRC dated 18 April 2012 which invited him to file his return
within 30 days said:
“….Please send us your 2010-11 tax return within the
next 30 days so that I can consider your appeal….
Daily penalties
If your tax return is more than three month late, we
will charge you a penalty of £10 for each day it remains outstanding. So daily
penalties may already be building up. To reduce the amount of daily penalties
that we may charge you, you can file your tax return online….”
167. In these
circumstances, we do not consider that there is anything in the facts of Mr
Donaldson’s case which disclose special circumstances in respect of the daily
penalties or the other penalties. So even to the extent HMRC’s decision on
special circumstances was flawed because it failed to consider the matter at
all, we cannot reduce the penalty under paragraph 22 because we do not consider
that there are any special circumstances. To the extent HMRC did consider
special circumstances, their decision that there were none is not flawed: it
was an entirely reasonable decision.
168. The result is
that Mr Donaldson’s appeal against the daily penalties of £900 is upheld
because notice was not properly given by HMRC. His appeal against the immediate
penalty of £100 and the 6 months late penalty of £300 (totalling £400) is
dismissed as there were no reasonable excuse or special circumstances.
169. 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.
BARBARA MOSEDALE
TRIBUNAL JUDGE
RELEASE DATE: 22 May 2013
APPENDIX
Reasons for dissent by Mr
Richard Thomas
170. A reference in
this Appendix to “paragraph” without more is to a paragraph of Schedule 55 FA
2009.
171. As paragraph 43
of Judge Mosedale’s decision states, I agree with everything in the decision
apart from her holding on paragraph 4(1)(b). It follows that I agree with the
disposition of the appeals in these cases. But if, as seems likely, these
cases go further, it may be of some help to the Upper Tribunal if I state my
reasons for dissent.
172. HMRC put forward
two propositions in support of the argument that the condition in paragraph
4(1)(b) had been met: that a decision by a computer is sufficient, or,
alternatively, that a policy decision that penalties be imposed where the time
limit in paragraph 4 is breached is sufficient.
173. I agree with
Judge Mosedale about the first of these propositions (paragraph 39, second
sentence of the decision). I would add that Mr Delnon’s evidence about this (paragraph
23(b) of the decision), that the computer identified cases and issued notices
of assessment does not seem to me to be relevant in relation to paragraph
4(1)(b). Issuing the notice is something required by paragraph 18 and cannot
be part of a paragraph 4(1)(b) decision. And identifying cases is a paragraph
4(1)(a) matter.
174. I do not accept
HMRC’s alternative proposition that a policy decision taken in June 2010 can
amount to HMRC’s making a decision within the meaning of paragraph 4(1)(b), for
the following reasons.
175. Firstly, I do not
accept the logic of HMRC’s proposition set out in paragraph 38 of the decision.
I agree with Judge Mosedale that the use of the term “decision” in paragraph 20
is odd, because it is clear that an appeal lies against an assessment under
paragraph 18. The oddity is reinforced to my mind by the fact that s 30A(3)
TMA (made applicable to penalty assessments by paragraph 18(3)(a)) requires a
notice of assessment to state “the time within which any appeal against the
assessment [my emphasis] may be made”. It is because of this
looseness of language that I do not think it follows that the decision required
of HMRC in paragraph 4(1)(b) need not be that of an individual officer. An
appeal against a “decision” in paragraph 20 encompasses an appeal against both an
automatically issued assessment under paragraphs 3 to 5 and an assessment under
paragraph 6 which clearly requires a decision by an individual officer of HMRC
based on the facts of the case and the behaviour of the person liable. Because
the term “decision” in paragraph 20 is a portmanteau word covering a variety of
procedures, I do not think that it is a safe guide to construing paragraph
4(1)(b).
176. Nor do I think
that in the case of paragraph 18 was there any “high level” decision by anyone
in HMRC. Paragraph 18(1) is clear that if a person is liable to a penalty
(because they meet the conditions in any of paragraphs 3 to 6) “HMRC must …
assess the penalty”. No one at a high level has to decide whether or not to
assess either generally or in a particular case.
177. Secondly, I find
it extremely difficult to see the point of paragraph 4(1)(b) if the decision
need not be that of an individual officer having conduct or oversight of a
person’s affairs, but can be a single policy decision taken before the start of
the operation of Schedule 55. If the policy of HMRC was that all those who
were three months late filing returns were to be automatically charged a
penalty (as Mr Delnon’s witness statement says), then paragraphs 3(1)(a) and
18(1) are sufficient to achieve that, just as paragraphs 3 and 5(1) taken with
paragraph 18(1) are sufficient for those automatic penalties. The undoubted
contrast that the Tribunal has noted between paragraph 4 on the one hand and
paragraphs 3, 5 and 6 on the other must have some
significance, and it cannot be said that paragraph 4(1)(c), the other
significant difference, could not work without paragraph 4(1)(b). So in my
view paragraph 4(1)(b) must have some work to do beyond a blanket application
of paragraph 4 in all cases.
178. Mr Delnon’s
evidence was that “…on 16 June 2010, the Project Board ratified the decision to
charge all taxpayers filing more than 3 months late, computer generated
automatic daily penalties.” This can be interpreted quite simply as a
statement that HMRC had decided that, as with paragraph 3, penalty assessments
would be made automatically if the paragraph 3(1)(a) deadline had passed. We
were not shown the decision, or evidence of its ratification by the Project
Board, so we were not able to see the precise terms in which the decision was
made or whether it referred to paragraph 4 Schedule 55. Nor were we told
whether similar decisions were made in relation to paragraph 3 or 5: if they
were, it might cast doubt on whether making the policy decision in relation to
paragraph 4 was a paragraph 4(1)(b) decision.
179. Thirdly, if I am
wrong about the validity of a policy decision as a paragraph 4(1)(b) decision,
I do not think that the policy decision in this case made in or before June
2010 is saved by s 13 Interpretation Act 1978. For that section to apply the
Act has to confer a power (in this case it would be a power to “do any … thing
for the purposes of the Act”) and it has to be necessary or expedient to
exercise it before commencement to give full effect to the Act. I have
difficulty in seeing making the decision mentioned in paragraph 4(1)(b) as the
exercise of a power conferred on HMRC, or, if it is, why it was necessary or
expedient to exercise it before 6 April 2011 to allow Schedule 55 to operate.
180. Fourthly, I
think the use of the present tense in each of paragraphs (a) and (b) of
paragraph 4(1) is significant. If a once and for all high level decision was
all that was required, whether before or after commencement, it would have been
more natural to have used the past tense in paragraph 4(1)(b).
181. Finally I also
consider it relevant that “HMRC decide” is a phrase found only once in Schedule
55 and that that one use in paragraph 4(1)(b) is the only one in all tax
legislation, direct or indirect, relating to penalties for infringements of tax
law. But it is however used in relation to acts of HMRC in paragraph 26
Schedule 7 Counter-Terrorism Act 2008 (‘CTA’):
“Imposition of penalty by HMRC: procedure
26(1) This paragraph applies where HMRC decide to
impose a penalty under paragraph 25 on a person.
(2) HMRC must give the person notice of—
(a) their decision to impose the penalty and its
amount,
(b) the reasons for imposing the penalty,
(c) the right to a review under paragraph 26A, and
(d) the right to appeal under this paragraph.
(3) The person may appeal to the tribunal against
the decision in accordance with paragraph 26F.
(4) On the appeal the tribunal may—
(a) set aside the decision appealed against, and
(b) impose any penalty that could have been imposed
by HMRC or remit the matter to HMRC.
Paragraph 25 of
Schedule 7 CTA (see paragraph 26(1)) provides, relevantly:
25—(1) An enforcement authority may impose a penalty
of such amount as it considers appropriate on a person who fails to comply with
a requirement imposed—
(a) by a direction under this Schedule, or
(b) by a condition of a licence under paragraph 17.
For this purpose “appropriate” means effective,
proportionate and dissuasive.
(2) No such penalty is to be imposed if the
authority is satisfied that the person took all reasonable steps and exercised
all due diligence to ensure that the requirement would be complied with.
(3) In deciding whether to impose a penalty for
failure to comply with a requirement, an enforcement authority must consider whether
the person followed any relevant guidance which was at the time—
(a) issued by a supervisory authority or any other
appropriate body,
(b) approved by the Treasury, and
(c) published in a manner approved by the Treasury
as suitable in their opinion to bring the guidance to the attention of persons
likely to be affected by it.
182. It is clear from
paragraph 25 of Schedule 7 that the decision of HMRC in paragraph 26(1) must
involve an individual officer. No high level policy decision, let alone a
computer, could possibly carry out the consideration in sub-paragraphs (1) and
(3) or be satisfied as in sub-paragraph (2). There are differences of course
as there is no separate assessment procedure, and it could be said that the
context is completely different. But the closeness of the dates of the two
pieces of legislation (the CTA was given Royal Assent on 26 November 2008, the
same month that a draft of what became Schedule 55 was published), and the
similarities in the structure suggest to me that “HMRC decide” should have the
same meaning in both.
183. I would also add
that “HMRC decide” is also used in several of the provisions about reviews of
decisions in indirect taxes (e.g. s 83G Value Added Tax Act 1994) where it
clearly relates to a decision of an individual officer. The provisions
concerned also date from late 2008 as they were inserted into the relevant
indirect tax statutes by the Transfer of Tribunal Functions and Revenue and
Customs Appeals Order, SI 2009 No. 56 made on 18 January
2009.
184. In summary, I
think that a construction that does not make paragraph 4(1)(b) redundant is to
be preferred, and I would hold that, as with the other uses of “HMRC decide”,
the paragraph requires the intervention of an individual officer of HMRC
applying their mind to the facts of the case.
