First-tier Tribunal (Tax)

[2014] UKFTT 208 (TC)

                             TC03348                                                     

 

 

 

Appeal number: TC/2012/10030

 

Income tax - Penalty under Schedule 56 Finance Act 2009 for late payment of income tax - Appellant had reason to believe a time to pay arrangement had been agreed - whether reasonable excuse - yes - appeal allowed.

 

 

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

                                              GORDON BROWN                             Appellant

 

                                                                      - and -

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                     REVENUE & CUSTOMS                  Respondents

 

 

 

 

                        TRIBUNAL:  JUDGE  MICHAEL S CONNELL

                                                 ROLAND PRESHO FCMA                                                                                                                                                                       

                                                           

Sitting in public at Kings Court Royal Quays, Earl Gray Way, North Shields on 03 June 2013 and 18 November 2013

 

 

Mr Michael Fleming for the Appellant

 

Mr Aidan Boal and Mrs Rosalind Oliver officers of HM Revenue and Customs for the Respondents

 

 

© CROWN COPYRIGHT 2014

DECISION

 

 

1.     This is an appeal by Gordon Brown (‘the Appellant’) against a late payment penalty imposed under Paragraph 3(2) of Schedule 56 Finance Act (FA) 2009 for failure to pay tax on time in respect of his personal self-assessment liability for the year ending 5 April 2011.

2.      Under section 59B Taxes Management Act (TMA), 1970 the Appellant was required to pay his income tax liability for the year ended 5 April 2011 by 31 January 2012. The tax paid late was £40,029 and was not paid in full until 17 May 2012              

3.     On 10 April 2012 HMRC imposed a penalty of 5% of the tax paid late in the sum of £2,001.

4.     The point at issue is whether Mr Brown had a reasonable excuse for the late payment of tax of the £40,029.43 and if so, whether that excuse continued up to the date of payment.

5.     The appeal was part heard on 03 June 2013 and adjourned to allow HMRC to verify the exact nature of conversations which had taken place with the Appellant and whether or not a time to pay arrangement had been agreed.

Background facts

6.     During 2010/11 the Appellant was a partner in Gordon Brown Associates (GBA) a firm of solicitors operating as a five person partnership. The partnership accounts for the year to 30 April 2010 formed the basis of the partnership profits for that year.

7.     The Appellant’s share of the GBA partnership profits for year to 30 April 2010 was £125,848 and this was correctly included in his 2010/11 Self-Assessment Return

8.     A Limited Liability Partnership of Gordon Brown Law Firm LLP (GBLF) was formed on 23 February 2011.

9.     The Partnership return for the LLP GBLF for the period from 23 February 2011 to 5 April 2011 shows that there were nil profits as there was no income or expenditure by GBLF.

10.  The Appellant did not include any reference to the LLP on his 2010/11 Self-Assessment Tax Return.

11.  Irrespective of any change to an LLP, each partner remains responsible for paying the tax due on his or her own share of the partnership profits and gains. The tax is computed in a self-assessment in the normal way.

12.  There is no joint liability for tax due on partnership profits. If a particular partner fails to pay the tax due on a share of partnership profits HMRC are only able to take sanctions (and ultimately recovery proceedings) against that partner, and that partner alone.

13.  On 31 January 2012 there was tax due of £40,029.43 for the year 2010/11 based on the 2010/11 SA Return submitted by the Appellant.

14.  On 28 February 2012 the Appellant telephoned HMRC to discuss payment of his outstanding tax. HMRC does not have a recording of the telephone call but notes taken by the officer who took the call read

"Tele call from tp pay by 26-03-12" and "TP called to adv they will be making PIF by 26-03"

15.  HMRC say that the conversation did not amount to a time to pay arrangement. They say this was a promise to pay on 26 March 2012 which the Appellant did not adhere to. The Appellant, in his appeal dated 19 May 2012 states  "That is why, when I called your office in February to explain that I would be late in paying, the deadline was for payment was extended by you until 26 March."

16.   The Appellant disagrees, saying this was a provisional arrangement. He says that he expected to be able to pay the outstanding tax by 26 March 2012, but no more than that. He thought he was being given time to pay generally and that it was agreed or he was led to believe that HMRC would review position at that time before taking further action. He says that if HMRC refute this they did not give due consideration as to whether to offer a time to pay arrangement.

17.  HMRC say that it is clear that the Appellant understood from the telephone conversation that payment had been deferred to 26 March 2012. Deferred payment until 26 March 2012, by way of a payment promise, was accepted and as this was a payment promise no written acknowledgement or agreement was issued by HMRC.

18.  Payment was not made by 26 March 2012. HMRC say that the Appellant broke his agreement and the Appellant did not contact HMRC on or after the agreed date of payment date to explain why payment had not been made.

19.  A penalty notice was issued charging 5% on the unpaid tax of £40,029 i.e. £2,001 on 17 May 2012.

20.  On 9 May 2012 a letter warning of legal action to recover outstanding amounts was sent to the Appellant.

21.  On 17 May 2012 the Appellant telephoned to advise that he had arranged a bank transfer by CHAPS to his account and from that would make payment in full to HMRC.       

22.  The Appellant made a payment of £56,165.35 on 17 May 2012 and £40,029.43 of this was used to satisfy the tax outstanding from the 2010/11 liability due at 31 January 2012.

Relevant legislation

23.  For 2009/10 and earlier years, late payment of income tax gave rise to Surcharges imposed by Section 59C TMA 1970. Under the legislation current at that time a Surcharge of 5% was imposed on tax paid 28 days late.

24.  Schedule 56 FA 2009 introduced new financial penalties for failure to pay income tax and capital gains tax on time.

25.  Section 59B (4) TMA 1970 establishes the date of payment of Income Tax as being on or before 31 January next following the year of assessment.

26.  Schedule 56 (1) FA2009 provides for a penalty to be paid by a 'person' who fails to pay an amount of tax specified in column 3 of the Table (at subparagraph (4)), on or before the date specified in column 4.

27.  Subparagraph (4) shows a Table which includes at item 1, "income tax and capital gains tax" payable "under Section 59B(4) TMA 1970" and defines the day after which a penalty is incurred as being "the date falling 30 days after the date specified in s 59B(4) TMA 1970."

28.  In this case, the combination of s 59B(4) and Schedule 56(1) deems the Due Date for payment of tax in respect of the year 2010/11 as being 31 January 2012 and the Penalty Date as being 1 March 2012 .

29.   Schedule 56 (3) subparagraph (2) specifies the amount of penalty as being 5% of the tax unpaid after 30 days. There are further penalties should tax remain unpaid 5 or 11 months after the Penalty date.

30.  Under Schedule 56 (10) where a taxpayer makes a request to HMRC before the due date to defer payment of an amount of tax and HMRC agrees that payment may be deferred for a period, the taxpayer will not be liable to a late payment penalty on that amount between the date of the request and the end of the deferral period.

31.  Schedule 56 (11) requires HMRC to assess any late payment penalty which arises under Schedule 56 and the assessment is to be treated in the same way as an assessment to tax.

32.  Schedule 56 (13) provides for a Person to;

      (1)       appeal against a decision that a penalty is payable and/or

      (2)       appeal against a decision as to the amount of a penalty

33.  Schedule 56(15)provides for a Tribunal to;

      (1)       on an appeal under para 13(1), to affirm or cancel HMRC's Decision

      (2)       on an appeal under paragraph 13 (2) to

                              (a)       affirm HMRC's Decision, or

                                   (b)       substitute for HMRC's decision another decision that HMRC had power to make

      (3)       rely on paragraph (9) if the Tribunal applies Para 15 (2)(b)

34.  Schedule 56 (9) sub-paragraph (1) provides for HMRC to reduce any late payment penalty, because of "special circumstances". Sub-Paragraph (2)(a) specifies that "special circumstances" does not include inability to pay.

35.  Schedule 56(16) sub-paragraph (1) provides that liability to a late payment penalty does not arise where the taxpayer satisfies HMRC or (on appeal) the First-tier Tribunal or Upper Tribunal, that there is a reasonable excuse for the failure. For the purpose of Sub-Paragraph (1), conditions at sub-paragraph (2) state

(a)   an insufficiency of funds is not a reasonable excuse unless attributable to events outside the persons control.

(b)  reliance on any other person to do anything is not a reasonable  excuse unless the person took reasonable care to avoid the failure

(c)   where the person had a reasonable excuse for a failure but that excuse has ceased, they are treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased.

36.  Schedule 56 (10) deals with the suspension of a penalty during currency of an agreement for deferred payment.

10 (1) This paragraph applies if:

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

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

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

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

                 (3) But if:

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

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

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

(4) P breaks an agreement if

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

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

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

The Appellant’s case

37.   The Appellant says that the tax related to income from the year to 30 April 2011 and cash that had been put away to pay tax in January 2012 was mostly dissipated in the final quarter of 2011, when the economy continued to decline into recession. For over 12 months the LLP had set aside money to pay the members tax in January and it was unexpected that it would have insufficient funds to release to him. When the economy went into negative growth the funds were used by the LLP to meet its own liabilities. The cash reserves of the business were rapidly and severely depleted in preserving the business and protecting jobs.  It only became clear in January 2012 that the LLP would not be in a position to release funds to pay his tax. When he needed money from the LLP to pay his personal tax liability in January 2012 the LLP's bank would not allow the LLP to pay his money to him. This was unforeseeable and beyond his control.

 

38.  The Appellant says that the LLP went on to make a loss in the year to 30 April 2012.

39.  It was only in January 2012 that he realised he needed to obtain a bank loan to pay his tax. When the tax liabilities were finalised in January 2012 the bank manager agreed to lend the money but the monies were not made available as expected by the end of February 2012. As soon as funds were available the outstanding tax was paid.

40.  The Appellant says that a penalty of £2000 is "inordinate" particularly given that he has ‘been a conscientious taxpayer for over thirty years’ and this was his first default. His ‘contributions to the Exchequer over his working life make a penalty of £2,000 for a first lapse, unreasonable and unconscionable’.

 

41.  The Appellant asks for compassion because of his efforts and enterprise to provide employment for eighty five people. His business has to bank £85,000 per week just to survive. He delayed his retirement because of the debt incurred to the bank to pay HMRC. 

42.  The Appellant says that he contacted HMRC as soon as he knew there would be a delay in making payment.  The Appellant stated in his evidence to the Tribunal that he had a detailed recollection of his telephone call of 28 February 2012 to HMRC.  He said that the officer to whom he spoke indicated that the position would be reviewed in 4 weeks.  He further stated that he did not promise payment on a specific date as he had no idea how long it would take his bank to have funds in place.

43.  HMRC assert, that the agreed deferral of payment at least to 26 March 2012 was by way of a "payment promise" rather than a "time to pay" arrangement. HMRC further contends that it was because this was a payment promise that no written acknowledgement or agreement was issued by HMRC following the telephone conversation of 28 February 2012.

44.  The Appellant disputes this and says that HMRC are relying on a re-classification of the payment arrangement from a 'time to pay arrangement' to 'payment by way of a payment promise'. To rebut this argument the Appellant refers to an extract from HMRC's Debt Management and Banking Manual Reference 800025 entitled 'DM8M800025 Time to Pay, introduction, payment promises'.

45.  In the manual reference to payment promises are limited to where payment is promised within 14 days. HMRC's internal manuals make a clear distinction between 'payment promises' and 'time to pay arrangements' and HMRC's internal instructions clearly place a number of obligations on HMRC where a payment promise arrangement is reached and payment is agreed to be made within that 14 day period. None of the actions, which are mandatory and are set down in the manual, have been taken by HMRC and it is clear from the instructions contained in the Debt Management and Banking Manual that the arrangement agreed with the Appellant cannot and has not been treated by HMRC as a payment promise as:-

1)     the delay agreed was for a period of more than 14 days; and

2)     none of the actions referring to issuing advice to the tax payer regarding penalty nor the issue of an Enforcement Warning Letter was effected.

46.  The Appellant says the period agreed as a result of the Appellant's telephone call to HMRC on 28 February 2012 was extended to 26 March 2012, well beyond the maximum 14 days' period stipulated in HMRC's Debt Management Banking Manual. Also it was not until 70 days after the telephone conversation, on 9 May 2012, that notification of a late payment penalty was given to the Appellant.

47.  HMRC failed to apply the necessary actions as published in their Debt Management and Banking Manual and as a result the Appellant had an expectation that the time to pay arrangement remained in place and as such had a reasonable excuse for late payment.

 

HMRC’s case

48.  The legislation at Para 16 Schedule 56 provides for a penalty not to be charged if it can be proven there was a "reasonable excuse" for the failure.

49.  Previous payments on time are not considered to be a reasonable excuse nor is overall contribution to the Exchequer, providing jobs, never claiming benefits, or delaying retirement.

50.  The self-assessment system is based on voluntary compliance so it is important that taxpayers who pay on time feel confident the system does not reward non-compliance in any way.

51.  The tax of £40,029.43 had not been paid by the Penalty Date of 1 March 2012 as defined at Paragraph (3) of Schedule 56.

52.   Whilst further time to pay was allowed up to 26 March 2012, this agreement was broken as the Appellant failed to pay the unpaid tax by that date (Para 10(3)).

53.  Paragraph 16(2) of Schedule 56 stipulates that, for the purposes of Para 16(1) that "an insufficiency of funds is not a reasonable excuse unless attributable to events outside the persons control". In considering the provisions of Paragraph 16(2)(a) the following points should be noted.

a)     The tax liability of £40,029.43 due and payable on 31 January 2012 is the balancing amount of tax, based on the Appellant’s income (as shown in the partnership accounts for the year ended 30 April 2010) for the year 2010/11. Instalments had already been paid on 31/1/2011 and 31/7/2011.

b)     The majority of the Appellant’s  taxable income for the year 2010/11 was derived from his partnership of Gordon Brown Associates; i.e. the pre-LLP partnership

c)        The LLP was not registered until 23 February 2011 and the LLP did not formally take over the GBA partnership until September 2011.

f)        A 2010/11 self-assessment return for the LLP was submitted on 31/1/2012 and this states that "No Trade" occurred in the period 6/4/2010 to 5/4/2011

g)        A 2011/12 SA Return for the LLP was submitted on 20/12/2012 and this states "No Trade" in the period 6/4/2011 to 5/4/2012

54.   The above also calls into question why the LLP, which at best did not exist until February 2011 but may have started to trade in September 2011 had allegedly retained tax liabilities for the tax year 2010/11 which was based on an accounts period which ended 30 April 2010.

55.   Any lax liabilities' retained by the LLP could only have commenced as early as February 2011 and they would relate to the accounts period ended 30 April 2011 which would form the basis of 2011/12 tax returns. The balancing tax liabilities for 2011/12 would not be due and payable until 31 January 2013.

56.  If the LLP did not take over the partnership until September 2011, any retained tax liabilities would relate to the accounts year ended 30 April 2012, relevant to the tax year 2012/13 with the balance of tax liabilities due and payable 31 January 2014.

57.  The 2010/11 and 2011/12 returns for the LLP state that "No Trade" existed in the period 6/4/2010 to 5/4/2012. It is therefore questionable as to how "for over 12 months before January 2012, the LLP had been setting aside monies to release to members to pay their January 2012".

58.  The Appellant has also asserted that “the LLP had in place a process of amassing the funds for my expected tax liability for nearly 18 months before the recession started". Assuming the 'recession' to which Mr Brown is referring is that which started in September/October 2011, this would put the LLP starting to "amass the funds" sometime in March/April 2010 — almost a year before the LLP legally existed.

59.  The Appellant is a senior partner in Gordon Brown Associates and its LLP successor. In the position of senior partner, he will have been aware of the ongoing trading situation of the partnership and whatever impact a recession and/or recovery was having on the partnership income and profits.

60.  Draft accounts will have existed before the LLP came into existence and therefore it is difficult for HMRC to accept the Appellant’s contention that it was not until late January 2012 that he became aware of an 'insufficiency of funds'.

61.  Irrespective of the alleged problems caused by the LLP, HMRC would expect a reasonable and prudent person, being fully aware of the amount of tax due and payable at a specific date, to have ensured sufficient money was available to meet that liability.

62.  Whatever the situation, the Appellant in his capacity as senior partner would have been in a position to exercise reasonable foresight to ensure funds were available in time to make the payment of tax due on 31 January 2012.

63.  HMRC are unable to agree that the Appellant has any 'reasonable excuse' for the failure to make payment of £40,029 on 31 January 2012, as required by Para 16(2)(a) Schedule  56.

64.  HMRC's consideration of any special circumstances allowed by Para 9 Schedule 56 cannot be routinely considered in the circumstances of automatically issued penalties. Nonetheless HMRC will consider any reasonable points made in this respect. The 'special circumstances' allowed by Para 9 should be different to those considered for the purpose of 'reasonable excuse' and should be out of the ordinary.

65.  HMRC submit that there are no 'special circumstances' that could be construed as uncommon or exceptional, over and above those circumstances already considered for the purpose of 'reasonable excuse'.

66.  In dealing with the grounds of appeal relating to unfairness and proportionality, HMRC refer to the case of Hok Ltd in which it was accepted that the First Tier Tribunal has no jurisdiction beyond that which is stipulated in legislation.

67.   HMRC say that an agreement to accept deferred payment is entirely within the discretion of HMRC. There are two types of deferred payment which HMRC might agree.

1)     A Time to pay agreement (TTP).

a.      In order for the customer to be allowed TTP they must meet set conditions.  They must have the means to make the agreed payments. They must also have the means to pay other tax liabilities that become due during the TTP period. The TTP period must be as short as possible.

b.     A structured time to pay arrangement agreed after discussions with HMRC will be confirmed in writing and noted up on the appropriate computer records.

c.      If the customer makes payments as agreed and contacted us to request time to pay before they became liable to a penalty they can be considered to have met the conditions in Schedule 56 (10) of the Finance Act 2009 and will not be liable to a late payment penalty.

2)     A ‘payment promise’. A payment promise is distinct from a TTP as they are often a one-sided offer of payment from the customer rather than being a negotiated payment plan. A payment promise arises where the taxpayer informs HMRC that he will pay an amount outstanding by a specific date. No written acknowledgement would be issued. On some occasions HMRC can informally agree to withhold recovery action for a short period to allow the customer to make payments, but HMRC does not issue agreement letters or set up TTP arrangements on the computer systems.

Conclusion

68.  The self-assessment system places a greater degree of responsibility on taxpayers for their own tax affairs. This includes ensuring that tax is paid on time without waiting for a tax demand or prompt for payment.

69.  When a person appeals against a penalty they are required to have a reasonable excuse. There is no definition in law of reasonable excuse, which is a matter to be considered in the light of all the circumstances of a particular case. A reasonable excuse is normally an unexpected or unusual event either unforeseeable or beyond a person’s control which prevents him from complying with an obligation. The reasonable excuse must also exist throughout the entire period of default. 

70.  The Tribunal regarded the telephone conversation of 28 February 2012 to be crucial to the outcome of the case, and granted the adjournment of the 3 June 2013 hearing to give HMRC the opportunity to produce a transcript of the call, whilst indicating that the tribunal was inclined to accept the Appellants version of what was said.  HMRC were in the event, unable to produce a transcript or any further evidence in relation thereto.

71.  It is necessary to consider the actions of the Appellant from the perspective of a prudent tax-payer exercising reasonable foresight, due diligence and having proper regard for their responsibilities provided by legislation. The Appellant realised that he would not be able to pay his tax on time and contacted HMRC. He agreed that the deadline for payment was extended by HMRC to 26 March 2012. However, the reviewing officer made no mention of a time to pay arrangement, (which is entirely within the discretion of HMRC), a payment plan or that a penalty would ensue if payment was not made by that date. The position as agreed between the Appellant and HMRC was therefore far from clear, but the Appellant believed that if necessary the position would be reviewed on 26 March 2012. He regarded that date as a deadline in terms of HMRC having the option on that date of demanding payment immediately or otherwise. Following that there was no further contact between the parties. We conclude that the Appellant therefore thought, not unreasonably that he was being given time to pay without penalty.

72.  For the above reasons we therefore find that the Appellant had a reasonable excuse for the late payment of his tax.

73.  The appeal is therefore allowed and the £2,001.00 penalty is discharged

74.  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.

 

 

 

MICHAEL S CONNELL

TRIBUNAL JUDGE

                      RELEASE DATE: 20 February 2014