Tribunal decisions reflecting business life

The First-Tier Tribunal has made a number of decisions lately which have shown an appreciation of the reality of business life. In the face of increased penalties from HMRC, the tribunals have brought a welcome balance of reason.

They have also shown a balanced view where the taxpayer had ‘legitimate expectation’ of an outcome, following comments in the Oxfam case (Oxfam [2010] STC 586), although this view can only be asserted in the context of a case that could otherwise be brought to appeal.

It is generally the taxpayer who brings the case to a tribunal; they have always been able to do this, but formerly it was usually HMRC who did so and many taxpayers were unaware that they also had the power to request a hearing. The appellant is also able to request postponement of the tax charged. If they choose to do so, they must appeal within 30 days of the decision.

Appeals can be made against assessments, refusals to postpone tax that is subject to an appeal, penalty determinations and refusal to suspend a penalty. It is not necessary to have been through HMRC’s review procedure first, although it may be a good idea.

One such case was Thomas Hardy v Commissioners for HMRC [2011] UKFTT 592 (TC).

Thomas Hardy appealed against a penalty assessment for £31,971 and a decision not to suspend the penalty imposed. He had submitted his tax return for the year ended 5 April 2009 in October 2009 - well within the time limit of 31 January 2010.

He had an impeccable record for filing returns and paying tax due. He always followed the same procedure; he gave his accountant the paperwork Forms P60 and P11D in respect of his employment and dividend vouchers and interest statements for his investment income.

He adopted a similar procedure for 2008-09, but sent a P45 instead of a P60, as his employment had ceased during the year. Mr Hardy’s redundancy had come as a shock to him, as he had been part of a successful team at Royal Bank of Scotland, earning about £1m each year for the past two years.

The redundancy procedure had been complex and the taxpayer had been personally involved in the negotiations, as well as receiving legal advice. Part of the complexity involved potential litigation in which the bank was involved and an indemnity sought by Mr Hardy, which was granted by the bank on condition that he gave evidence if called, which indeed he was.

He also felt under financial pressure to find alternative employment following his redundancy and did so. Unfortunately, he became concerned about the new employer’s governance and left after a short period. The combination of these events left the taxpayer in a very anxious state.

In October and November 2008, in accordance with the negotiations, Mr Hardy received cash payments of £1m, from which the bank deducted tax at 20%. He had not received any paperwork from Royal Bank of Scotland. Neither of the payments was disclosed on his 2008-09 tax return, the return was submitted electronically, having been approved by the taxpayer.

Royal Bank of Scotland’s end of year return showed the payments and HMRC launched an inquiry into the taxpayer’s return. The taxpayer did not receive a statement of income and tax deducted until 12 May 2010. He had found it extremely difficult to obtain information from his former employer and eventually received an apology. On eventual receipt, he forwarded the statement to HMRC.

HMRC imposed a penalty of 15% of the tax due, which is the standard penalty for a careless error where the adjustment is prompted by an investigation. The taxpayer’s accountant appealed and the appeal was rejected. The appellant asked for a review of the decision and the review upheld the decision.

A further appeal was made to the Tribunal. It was not disputed that Mr Hardy had made a ‘prompted disclosure’ but Schedule 24 Finance Act 2007 provides (at paragraph 11) for a special reduction where there are special circumstances. This includes staying a penalty and agreeing a compromise.

Paragraphs 15, 16 and 17 provide that a taxpayer may appeal against a decision that a penalty is payable, against the amount of the penalty, against the decision not to suspend and against the conditions of suspension. On an appeal against a decision that a penalty is payable the Tribunal may affirm or cancel HMRC’s decision and on an appeal against the amount of the penalty the Tribunal may affirm HMRC’s decision or substitute another decision that HMRC had power to make. They may only do this if they think that HMRC’s decision was flawed. Similarly, it may only order HMRC to suspend a penalty, if it thinks that the decision not to do so was flawed.

The Tribunal agreed that the taxpayer had been careless and dismissed the appeal against the penalty. It did not consider that the decision not to suspend the penalty was flawed. However, it accepted that there were special circumstances and that the taxpayer had been confused and that the decision not to reduce the penalty was flawed. It ordered that the penalty be reduced to 2.5%. 

To bring a case to Tribunal, the taxpayer should make an appeal in writing to the officer who made the decision; they must do this within 30 days of the decision. They may also apply to postpone the tax in dispute but there will be interest to pay if the tax becomes payable. The taxpayer has the right to notify the Tribunal at any time after the appeal has been made, unless it is subject to an internal review.