First-tier Tribunal (Tax)

[2013] UKFTT 601 (TC)

TC02988

Appeal number: TC/2012/05263

TYPE OF TAX – PAYE – late submission of Employer’s Annual Return –Whether reasonable excuse for late submission of return - Yes.

FIRST-TIER TRIBUNAL

TAX CHAMBER

The Tribunal determined the appeal on 28 August 2013 without a hearing under the provisions of Rule 26 of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (default paper cases) having first read the Notice of Appeal dated 24 April 2012 with enclosures, and HMRC’s Statement of Case submitted on 21 June 2013 with enclosures. Copies of other relevant documents provided were also considered. The Tribunal wrote to the Appellant on 2 July 2013 indicating that if they wished to reply to HMRC’s Statement of Case they should do so within 30 days. No reply was received.

© CROWN COPYRIGHT 2013

DECISION

1.           Introduction

2.           Legislation

3.           Case law

HMRC v Hok Ltd. [2012] UKUT 363 (TCC)

Stephen Rich v HMRC [2011] UKFTT 533 (TC) TC03180

Rowland v HMRC [2006] UKSPC 00548

4.           Facts

5.           In the Notice of Appeal and correspondence provided the appellant acknowledges that the return was late but claims it has reasonable excuse for the failure.

6.           The level of the penalties has been laid down by parliament. The respondents have applied the legislation correctly and calculated the amount of the penalties accurately for the periods 20 May 2011 to 19 September 2011(£400) and 20 September 2011 to 30 September 2011 (£100). 

7.           The only other consideration that falls within the jurisdiction of the First-tier Tribunal is whether or not the appellant has reasonable excuse for the late submission of the Employer’s Annual Return (Forms P35 and P14) as contemplated by the Taxes Management Act 1970 Section 118(2).

8.           On 13 October 2011 the appellant’s agent, Ingham & Co wrote to HMRC appealing against the penalty issued on 26 September 2011. Their letter included the following. “The company was incorporated on 18 January 2010 and Dr. Jumogolima Idoniboye was appointed the company’s first director. She had remained the company’s sole director from incorporation to the date of the letter. She in turn appointed Mr. Abolaji Gbesan, who advised his qualifications as FCCA ACA, as agent and instructed him to deal with all taxation affairs of the company including filing all company tax returns and establishing the PAYE scheme (“the Scheme”).

9.           The appellant’s agent drew attention to the decision of the First-tier Tribunal decision in the case of Stephen Rich. It submits that the case is relevant to the appellant’s case. HMRC merely say that this was a decision made at First-tier Tribunal and any decision made at First-tier Tribunal does not set a precedent. Each case is taken on its merits. This Tribunal considers that, whilst this may be true,  when a taxpayer points to a decision of the First-tier Tribunal HMRC should take that seriously and not merely dismiss it as not setting a precedent. Decisions of the First-tier Tribunal may not set a precedent but they give informed guidance from experienced tax practitioners which may help to determine what the outcome of a set of facts should be. They should not be dismissed lightly as appears to have happened in HMRC’s review in this case. In fact the case of Stephen Rich is relevant to this case. The following is an extract from that decision:

“26.    I now have to consider whether this amounts to a reasonable excuse. This is not defined in the legislation but “is a matter to be considered in the light of all the circumstances of the particular case” (see Rowland v HMRC [2006] STC (SCD) 536 at [18]).

27.    Although reliance on a third party is specifically precluded from being a reasonable excuse for VAT purposes by s 71 Value Added Tax Act 1994, there is no similar provision in relation to income tax.  As this legislation came into effect many years after the VAT provisions had been in force it would have been open to the draftsman to adopt a similar restriction to the definition of “reasonable excuse” for income tax purposes. However as he did not do so I conclude that, in the absence of a specific provision to the contrary, reliance on a third party can amount to a reasonable excuse in cases such as this.

28.    I find support for my view from the decision of the Special Commissioner (Adrian Shipwright) in Rowland where he said at [22 – 26]:

“The issue arises as to whether reliance on a third-party is prevented from being a reasonable excuse. For VAT purposes there is specific provision that where "reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied on is a reasonable excuse." There is also specific provision that insufficiency of funds is not a reasonable excuse (see section 71 VATA). The legislation that I am concerned with in this case was passed after the VAT legislation but only contains a provision that insufficiency of funds is not a reasonable excuse. There is no equivalent provision that reliance on a third party is not a reasonable excuse for direct tax purposes.

Whilst in the VAT context it was thought necessary to exclude reliance on a third party as presumably otherwise it could be a reasonable excuse in the direct tax context it is, at most only an indication that reliance on a third party can be a reasonable excuse. However, I consider it a very telling indication especially as it is a limited exclusion for VAT (see Enterprise Safety Coaches notwithstanding GB Capital Ltd).

The Thorne case and Enterprise Safety Coaches are clear authority that reliance on a third party can be a reasonable excuse.

I conclude that in the direct tax context reliance on a third party can be a reasonable excuse.

The issue then becomes, did Mrs Rowland have an effective reasonable excuse? Having found that it was reasonable from Mrs Rowland to rely on her then accountants and that it was this reliance that led to the underpayment, I consider that this was an excuse for making the underpayment and as the reliance was reasonable the excuse was at first blush reasonable. Having further concluded that reliance on a third party can be a reasonable excuse I conclude that Mrs Rowland has a reasonable excuse in the particular circumstances of this case for not having paid the tax on time and had this reasonable excuse throughout the period of default.”

29.    I agree with the conclusion of the Special Commissioner in Rowland that reliance on a third party, such as the accountants in this case, can be a reasonable excuse. Like him, I find that it was reasonable for Mr Rich to rely on his accountants and that it was this reliance that led to the failure to notify his chargeability to income tax on time.  This failure was the causal factor of the subsequent chain of events.  Until such time as HMRC had received that notice, no UTR could be issued. The experience of the accountants was that without a UTR, HMRC would not accept a tax return.  In very short order after the UTR was issued, the relevant tax returns were filed and the tax due was paid in full.

30.    I find that the appellant had a reasonable excuse throughout the period of default.

10.  This Tribunal agrees with the reasoning in set out above. It must therefore decide if there was reasonable excuse what period was the excuse valid for and was that the whole period of the default.

11. The return was due by 19 May 2011 at the latest and was actually submitted on 30 September 2011. HMRC have levied penalties covering that period. From the letter from Ingham & Co it is clear that it was at some time in late August 2011 that the problem was discovered. Ingham & Co were appointed agent and notified this to HMRC on 31 August 2011.  Following that appointment the Scheme was established on 19 September 2011. It should be noted that the Annual return was due on 19 May 2011 and Dr. Idoniboye was relying on Mr.Gbesan to file the return by the due date. HMRC although presumably aware of the lack of a return continued to say nothing until 26 September 2011 when a penalty for 4 months to 19 September 2011 was issued and no doubt received a day or so later by the appellant. Nothing alerted Dr. Idoniboye to the fact that the return had not been submitted until she discovered the tax return had been rejected so she appointed new accountants

12. The Tribunal finds that the appellant understandably wished to appoint a qualified accountant to deal with her taxation matters. She had appointed Mr. Gbesan who had represented himself to be an ICAEW member which in fact he was not. The appellant had no reason to suspect that Mr.Gbesan was not being truthful.  Dr. Idoniboye had given instructions as to what she expected Mr Gbesan to do. She thought him to be a qualified accountant and relied on him to file her returns on time. As she had heard nothing from HMRC she assumed there was no problem. As soon as she learned there was a problem she appointed fresh accountants. The tribunal finds this to be the actions of a person who is concerned to ensure their tax affairs are being dealt with properly. In the Tribunals view these unusual events establish a reasonable excuse for the appellant submitting its Employer Annual return for 2010-2011 late and that this excuse ceased on or around the end of August 2011 when the appellant realised that its tax return had been rejected.

13. However the Tribunal notes that Section 118 (2) of the Taxes Management Act 1970 includes the following:

“……….and where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse ceased.”

The Tribunal finds that Ingham & Co notified HMRC of their agency on 31 August 2011 and by 19 September  2011 they had discovered the omission so established the Scheme and on 30 September 2011 had submitted the return for the appellant.

It is clear to the Tribunal that there was no unreasonable delay after the excuse ceased. Therefore the appeal is allowed.

14.  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.