The Upper and First-Tier Tribunals – What is a Reasonable excuse?

The First-Tier Tribunal has made a number of decisions lately which have shown an appreciation of the reality of business life. In Enersys Holdings UK Ltd it was concluded that a Tribunal does have power to strike down a penalty if it is “not merely harsh but plainly unfair” 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; he has 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 he chooses to do so, he must appeal within 30 days of the decision.

Appeals

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.

To bring a case to Tribunal, the taxpayer should make an appeal in writing to the officer who made the decision; he must do this within 30 days of the decision. He 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.

Reasonable excuse

‘Reasonable excuse’ is a term which regularly appears in indirect tax legislation, but has only recently received much attention in relation to direct tax matters.

Where reasonable excuse is established, penalties are withdrawn or not charged, but there is no definition of ‘reasonable excuse’ in the legislation.

Penalties

Penalties usually involve late filing of a tax return – PAYE or self-assessment – inaccurate returns (“negligence”) or late payment of tax. Some cases recently heard by the Tribunals have concerned HMRC’s insistence that “reasonable excuse must involve an exceptional event beyond the control of the taxpayer”, which appears to have no basis in law.

Section 71 (1) VAT Act 1994 states:

“For the purpose of sections 59 to 70 which refers to a reasonable excuse for any conduct -

(a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and

(b) 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 upon is a reasonable excuse.”

In addition, HMRC have always refused to accept:

• ignorance of the law
• oversight or misunderstanding
• error
• preoccupation with work
• inexperience of business affairs
• no intention to escape payment of tax as ‘reasonable excuse’.

A number of cases have been heard at the First-tier Tribunal and some are outlined below.

Cases where the taxpayer was successful:

HMRC alleged that the company, Hicharms (UK) Ltd, failed to file its employer’s end of year returns by 19 May, 2010. It unnecessarily waited four months before sending the company a penalty notice demanding £400 by way of a late filing penalty, assessed at £100 per month. Subsequently, on 20 October 2010, an amended penalty determination was issued, reducing the penalty to £266.

On 30 October the company appealed on the basis that the necessary filing had taken place at 22.17 hours on 3 May 2010. The letter in which the appeal was notified even quoted the “correlation ID number”. As the company had used commercial software, it had been able to attach to the letter a copy of the computer screen showing the status of the employer annual return submission as “complete”. The correlation ID also appeared on that document.

HMRC replied on 19 January 2011 saying that it did not agree that the company had a reasonable excuse for failing to send its return on time. It did not understand, or deal with, the grounds of the company’s appeal.

The Tribunal decided as follows:

It is often, incorrectly, assumed that once an assessment is raised or a surcharge demanded, the burden of proving that it is incorrect rests upon the taxpayer. A penalty or surcharge can only be levied if there has been a relevant default. If it is for HMRC to prove that a penalty or surcharge is justified, it follows that it must prove the relevant default, which is the trigger for any penalty or surcharge to be levied. It is for HMRC to prove that a penalty is due. That involves HMRC proving, on the balance of probabilities, that the required end of year filing did not take place by 19 May 2010: it has produced no evidence to that effect.

Even if the company had not successfully filed its end of year returns, it is a fact that they genuinely and honestly believed it had done so. In those circumstances it would have a reasonable excuse for not doing so until such time as it was notified that its genuine and honest belief was incorrect. The appeal was allowed and the £266 penalty cancelled.

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The company appealed against the imposition of penalties in the sum of £500 for failure to submit its employer’s end of year return (P35) for the year to 5 April 2010 online by 19 May 2010. Under section 98A (2) and (3) Taxes Management Act 1970, the company was liable to a fine of £100 for each month or part of a month which elapsed before the return was filed. The return was filed on 12 October 2010 and a penalty of £400 was imposed and another of £100 for the period from September to October was first imposed and then revoked in error.

The company’s case was that it had only traded for eight months and it was the first time that it had been required to file an end of year return online. It had logged onto its account on 17 May and believed that it had submitted the return online and did not discover that it had not been received by HMRC until it received the penalty notice on 27 September 2010. It was unaware of the system that HMRC acknowledged receipt of the return by sending an automatic message to the company’s email address. The company was advised by HMRC that its online return failed because of a systems internet error; the taxpayer pointed out that it had paid over the tax one week prior to the filing deadline and was being punished unfairly for a systems error that was not its fault.

HMRC claimed that it offered advice through the employers’ bulletin and website and that the company should have known the return had not been received because it had not received a receipt.

The Tribunal agreed that the company did make a return on 17 May but for some reason unknown to the company, it was not received by HMRC. It was the first time that the company had been obliged to submit the return and the first year of mandatory online filing and the company was unaware of the arrangement whereby HMRC sent an electronic message on receipt of the return.

The company had submitted a replacement return in good time after discovering that the earlier return had not been received. It had also paid the tax before the due date. These were the actions of a prudent employer exercising reasonable foresight and due diligence and established that it had a reasonable excuse for its failure to submit the P35 on time. The appeal was dismissed and the penalty discharged.

This demonstrates the Tribunal’s awareness of the fact that companies have their business to run as well as having to deal with unfamiliar tax compliance requirements.

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Buxton Rugby Union Football Club appealed against penalties of £565, £500 and £500 imposed for late filing of the 2005-6, 2006-7 and 2007-8 end of year returns (P35) respectively.

The PAYE Regulations require details of:

• The tax year to which the return relates;
• The total amounts of the relevant payments made by the employer during the tax year to all employees in respect of whom the employer was required at any time during the year to prepare or maintain deductions working sheets, and
• The total net tax deducted in relation to those payments.

The return must be submitted before 20 May in the tax year following the end of the year to which the return relates. If the return is submitted late, an entity with fewer than 50 employees is liable to a penalty of £100 for each month or part of a month by which it is late.

The taxpayer has a right of appeal against the determination of a penalty. HMRC may mitigate the penalty but a Tribunal can only uphold or set aside the determination.

Section 118 Taxes Management Act provides: “… where a person has a reasonable excuse for not doing anything required to be done he shall not be deemed 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 had ceased.”

The Club is a small local rugby club with one part-time employee, the barman. Most of the work, including the filing of tax returns, is carried out by volunteers. The facts of the three years are set out:

2005-6

The club treasurer had filed the 2004-5 return online but found it difficult. In 2005-6, he decided to revert to paper filing, but because the Club had filed the previous year’s return online, HMRC did not issue a paper return. The Club missed the filing deadline and total tax and NIC was £565.18. Almost two years later HMRC advised the Club that it had missed the filing deadline and charged it a penalty of £900. The Club appealed and submitted a paper return. Another three years later, HMRC told the Club that a penalty of £1,900 was owed, but did not identify the years for which it had been charged.

2006-7

The PAYE and NIC were paid by three cheques on 22 May, 2007; the cheques were cleared on 30 May 2007. The Treasurer claims to have sent the P35 with the cheques, but HMRC said they have not received it. They issued a penalty notice of £400 and a later penalty of £100, making £500 in total.

2007-8

The position for 2007-8 is confused. The Treasurer says that he paid the tax and submitted the return on time. He wrote in 2010 asking for a review of the penalties and summarising the position for the four years to 2008-9. HMRC’s letter did not identify the tax years covered by their demand for £1,900, which, it transpires included an amount of £500 for 2007-8.

The facts of 2005-6 are similar to the position in BN Dudley (see above), where the judge said: “one cannot deliver what one has not received”. The Club did not know that HMRC would not issue a paper return and HMRC had not told them. They therefore had a reasonable excuse for late filing.

2006-7, the Tribunal accepted the Treasurer’s evidence that he completed the P35 when he was working out the tax and NICs due, as the cheques were safely received and banked. The penalties issued were clearly wrong.

HMRC have put forward no evidence as regards 2007-8. The Treasurer says clearly that he submitted the return on time; the penalty is set aside as incorrect.

The Club’s appeal for all three years succeeds.

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HMRC sent a penalty notice to Hok Ltd on the basis that the company had failed to file its end of year returns (P35) by 20 May, 2010. The notice was sent in September 2010. A further notice was sent on 21 October, as the company filed the return on 15 October, having been alerted to its default.

The company did not assert that it did file on time, but thought that it did not need to file the appropriate returns because its only employee had ceased employment part way through the year. It acknowledges that it was wrong in that belief and that HMRC was entitled to levy a penalty. The complaint is that HMRC waited until September to levy the penalty; had they done so earlier, the company would have complied much sooner and the penalty would have been less.

The Tribunal considered that HMRC had been acting unfairly in that they had, as a matter of course, waited four months before sending out penalty notices. As a State agency, they had a duty to act fairly not just in its decision-making process, but also in administering its statutory powers. This compares with the decision in John Scofield (TC1068) where the Tribunal failed to ‘use its discretion’. They focused upon the fact that, although the company was ‘liable’ to a fine of £100 per week, there was no duty on HMRC to impose the full amount. It suggested that they had deliberately waited four months to impose the penalty in order to increase the amount.

The appeal was allowed.

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Mr Noor appealed against a decision by HMRC to reduce the amount of input tax claimed on his first tax return, as this related to a supply of services. VAT legislation permits a taxpayer to reclaim certain costs incurred prior to registration ‘as if it were input tax’. Input tax incurred in the six months prior to registration in respect of services is treated as incurred at the start of the first period of registration. In the case of input tax incurred on the purchase of goods the time limit was three years, increased to four years from 1 April 2009.

The taxpayer had problems with a builder during the construction of a small commercial property. It resulted in legal action and adjudication prior to the completion of the property. Mr Noor received three invoices from the solicitors on 24 August 2007, 16 October 2007 and 29 February 2008 and an invoice from the adjudicator on 3 December 2007. He visited the tax office to seek advice as to whether he should register for VAT in order to reclaim the input tax in respect of the costs incurred on the construction. He was directed to a phone on the wall of the office from which he could contact HMRC’s National Advice Service.

The National Advice Service told him he should keep all the invoices ‘as he could claim VAT under the option to tax within three years’.

On 25 September 2009 HMRC received Mr Noor’s application to register for VAT from 1 July 2009 as a voluntary registration.  On 1 November 2009 the taxpayer submitted his first VAT return for the period to 31 October 2009, claiming input tax of £28,971.91 and no output tax.  An officer visited on 6 November to examine the claim and found that four invoices on which the VAT amounted to £3,628.39 related to services provided more than six months prior to registration and disallowed the claim to that extent. On 18 November 2009, Mr Noor appealed to the Tribunal.

The fact that the tax on services must be claimed within six months would normally have disposed of the matter, but the case of Oxfam v HMRC [2010] raised the question of legitimate expectation. In order to have a legitimate expectation of the deductibility of input tax, Mr Noor must have stated exactly what the expectation was and received clear unequivocal advice. The Tribunal found that, when he visited the tax office, Mr Noor went there with the express intention of finding out when he needed to register in order to reclaim the input tax. Had he been told that he could only reclaim inputs on services within six months, he would have registered earlier. He was entitled to rely on the advice received from HMRC, regardless of the fact that it was incorrect and had not been given in writing. The appeal was allowed.

This is consistent with the approach taken in the case of Thames Valley Renovations (TC 0947).

A case where the taxpayer succeeded was Ithell and another (TC1029).  HMRC carried out a compliance review and, as a result, decided to revoke the company’s gross payment status. The company had made a profit in 2007 and, on the advice of their accountant, had issued a cheque to HMRC which paid the 2007/8 liability and also part of the 2008/9 liability. Unfortunately, the cheque was both unsigned and inadequate to meet the liability.

HMRC considered that, as two years’ liability was involved, they had two failures to make payments. They contended that the taxpayers had failed the construction scheme compliance test on four occasions and cancelled their gross payment status from August.

The contractors claimed that they had never received the notice and it was only when one of their sub-contractors notified them that they were aware of the cancellation.

They appealed; they accepted their errors but claimed that they were given wrong advice and had made innocent mistakes.

The Tribunal found that they had probably not received the notice, HMRC had not met their obligations to notify and the Tribunal allowed the appeal.

Another construction business which was successful in their appeal was Alan Kinkaid, trading as AK Construction Company (TC1090).  He appealed against HMRC’s decision to cancel his registration for gross payment under the construction industry scheme. Under the scheme, sub-contractors can receive gross payments from contractors without deduction of the 20% levy, provided they have met their compliance obligations.

HMRC claimed that AK had not met these obligations as one payment was 332 days late and another 189 days late.

AK argued that he had done his best to avoid late payment but insufficiency of funds had prevented meeting the due date.  Insufficiency of funds is not normally a reasonable excuse, but AK’s problems were caused by an earlier decision to remove the gross payment status, which had subsequently been overturned. It was therefore unreasonable for HMRC to assume that he would be non-compliant in future.

The Tribunal agreed and allowed the appeal.

This is in contrast with section 71 VATA1994 which states that insufficiency of funds is not a reasonable excuse, although the Tribunal did look at the circumstances surrounding the insufficiency of funds.

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John Scofield (TC1068) objected to HMRC’s cancellation of his construction industry scheme gross payment status due to compliance failure. The matter concerning the appeal was HMRC’s discretion in relation to cancellation of registration contained in section 66 Finance Act 2004. Section 66(1) states; “The Board of Inland Revenue may at any time make a determination cancelling a person’s registration…”

Originally, ten failures were put forward as grounds for cancellation but HMRC accepted responsibility for eight of these and one was waived under reasonable excuse. The final one was a payment over 30 days late and there followed a lengthy argument as to whether the word ’may’ was permissive and gave HMRC discretion.

The Tribunal decided that HMRC’s determination cancelling the registration was invalid, as they had not exercised discretion as required by the Act.

The Tribunal also took the view that the taxpayer was an honest man, who may well lose his business should his gross payment status be removed.

The taxpayer’s appeal succeeded.

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Still with the construction industry, Anthony Wood t/a Propave (TC1010) appealed against withdrawal of gross payment status as HMRC claimed that he had not met the compliance test.  Mr Wood’s business had suffered badly in the recession.  The taxpayer had heard from the media that the Government had announced in the November 2008 pre-budget report that firms suffering difficulties in paying would be able to spread their payment on a timetable they could afford.  Not being computer-literate and therefore unable to visit HMRC’s website, he did not realise that this arrangement must be agreed in advance; he sent three £1,000 cheques on the understanding that he would be given time to pay.

It transpired, on completion of is tax return, that he had overpaid for the year, but his second payment on account had been late.  Had he made an arrangement with HMRC, this may not have been the case.

The Tribunal accepted that this was a misunderstanding and concluded that Mr Wood did have a reasonable excuse and that the consequences of withdrawal of gross payment status would be wholly disproportionate to the late payment.

The Tribunal were here exhibiting knowledge of the reality of the taxpayer’s limitations and the commercial environment and the taxpayer’s appeal was allowed.

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Incorrect advice was the cause of the appeal by Thames Valley Renovations (TC947). They were refused gross payment status because the directors had filed their self-assessment returns late.

The directors had taken advice from their accountant who had told them that, as they had no income, they did not need to file a return and they could also ignore the late filing penalties. Because the returns were outstanding, gross payment status was refused. The directors tried dealing with HMRC, who sent the replacement returns to the wrong address. They were unable to file all the returns online.

The Tribunal concluded that the taxpayers had a reasonable excuse and had acted reasonably in relying on their accountant and trying to sort out the matter themselves, once they realised the accountant’s advice was incorrect.

This is interesting, since HMRC will not accept reliance on a third party as a reasonable excuse, but it does reflect the fact that taxpayers can be vulnerable to incorrect advice.

The company’s appeal was allowed.

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Christian Sanders v HMRC (TC 1005) deals with an appeal against a surcharge for late payment of tax.  The taxpayer’s tax return for 2008/9 showed a tax liability of £75,536.44 of which £60,353.50 was outstanding at the surcharge date of 28 February.  He was therefore liable to pay surcharge at 5% of £60,353.50, i.e. £3,017.67.

The majority of the tax related to the sale of a partnership and an LLP and the consequent capital gain.  The taxpayer’s estate agency income had reduced as a result of the economic downturn.  He decided to pay his income tax immediately and pay the capital gains tax by instalments.

On 1 February 2011, he agreed a payment plan of ten monthly instalments of £6,228.52 to clear the outstanding tax.  This was confirmed by HMRC on 3 February.  In April 2011, Mr Sanders’ accountant informed him that payments under the payment plan were not being taken from his bank account.  The taxpayer contacted HMRC and explained that the payments were not being collected.  The HMRC officer told him that he had not supplied details of his bank account, the payment plan had lapsed and he was liable to a surcharge of £3,017.67.  Another plan was agreed at £7,973.41 per month which discharged the debt including the surcharge by the original date.

Mr Sanders could not recall why the bank details had not been supplied.  When he made the first agreement his father, who was also a partner of the firm, was suffering from acute pancreatitus, so the taxpayer had to take his elderly mother to the hospital on a regular basis.  He also believed that everything was in order when he received confirmation of the plan on 3 February, which made no mention of the requirement for bank details.

The Tribunal has no power to mitigate a penalty; they can confirm it or quash it.  The Tribunal decided that the appellant’s actions were those of a prudent taxpayer having proper regard to his responsibilities.

They upheld the appeal and quashed the surcharge of £3,017.67.

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It is extremely difficult to appeal against a penalty as some of the following cases will illustrate. Section 118(2) Taxes Management Act 1970 states that if a person has ‘a reasonable excuse for not doing any thing 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 without unreasonable delay after the excuse ceased’.

A PAYE case was Yusuf Budiadi v HMRC (TC1098) which involved both late filing and late payment. At the end of December 2007, Mr Budiadi left his employment with UBS; he was paid up to date. After that date but before the end of the fiscal year, Mr Budiadi received a further payment from UBS.  Tax was deducted under PAYE, but only at the basic rate and not at the higher rate, which would have been correct. The taxpayer said he was unaware that insufficient tax had been deducted.

In April 2010, Mr Budiadi was sent a tax return, which he completed. HMRC wrote on August 2010 thanking him for the completed tax return for the fiscal year ended 5 April 2008, which went on to explain that it is the individual’s responsibility to ensure that the correct amount of tax is paid at the appropriate date. It also stated that as the higher rate tax should have been paid by 31 January 2009, surcharges at 28 days thereafter and at a further six months were being levied. The amount of the surcharges was £210.44.

The return to 5 April 2008 showed a liability of £2,104.40, which should have been paid by 31 January 2009. The taxpayer had paid only £500 on 31 August 2010, there being £1,604.40 remaining unpaid for that tax year.

The Tribunal pointed out that this should not be taken into account; the point at issue was whether the appellant had a reasonable excuse for the entire period of the relevant delay. ‘HMRC contends that “a reasonable excuse” necessarily involves some exceptional event within or without the taxpayer’s control. That involves HMRC putting an unjustified gloss upon the ordinary English words that Parliament has chosen to use. A “reasonable excuse” is just that and does not, as a matter of statutory interpretation, require that there should have been some exceptional event within or without HMRC’s control.’

They accepted that the appellant believed that all necessary tax had been deducted under the PAYE system and that reasonable excuse applied.

However, the appellant has still not paid the tax due. Any reasonable excuse must have ceased upon him being informed of the correct tax, so if HMRC seeks interest or lawfully imposes any surcharges or penalties for the period thereafter, it is highly unlikely that the taxpayer could properly contend that there is any reasonable excuse for that period.

The appeal succeeded.

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HMRC assumptions were the subject of another PAYE case – that of N A Dudley Electrical Contractors Ltd (TC1124)

The taxpayer company filed its 2006/07 form P35 online.  It was not registered to file online, neither was it compulsory for it to do so.  HMRC decided that, since the 2006/7 return was filed online, it was not necessary for it to send the taxpayer company a paper form for 2007/8.  The company did not file a 2007/8 form on the grounds that it could not file a form that it did not have.  HMRC issued a late filing penalty for the period 20 May to 19 September and a further penalty for the period 20 September to 5 December.  The company appealed, claiming reasonable excuse.

The First-tier Tribunal judge asked HMRC to satisfy him that the company had elected, by word or deed, not to receive a paper P35 and that HMRC was justified in not sending the paper return.  HMRC had not produced any evidence that this was the case and had assumed that there was no need to send one, even though the paper return would have stated that it had to be filed by 19 May 2008.

Since online filing was not compulsory for this period, the judge decided that the company had a reasonable excuse throughout the entire period of the default, since HMRC admitted that they had not sent the return.  He added that even if the first penalty had stood, the second could not because HMRC, knowing that the P35 had not been filed on time, did not send out the penalty notice until 29 August, after the start of the period in which a second penalty could be levied.  They had therefore not given the taxpayer company the chance to remedy the default.

The taxpayer’s appeal was allowed.

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PAYE was also the subject of Mr T.J.Fisher (t/a The Crispin) v HMRC (TC1100).  Mr Fisher traded as The Crispin until 28 July 2008.  He then paid his employees up to date and issued them with forms P45.  As the business ceased in July 2008, the annual return P35 should have been submitted by 19 May 2009; it was not submitted.  In May 2010, HMRC sent a fixed penalty charge of £800 to the appellant.

Mr Fisher contended that the business was sold in July 2008 and prior to the sale he phoned HMRC and spoke to someone called Kath so that he could establish what had to be done to finalise PAYE arrangements.  He was told that a letter should be sent to HMRC explaining that the business had closed and that the PAYE should be brought up to date, which in fact, it was.  There was no suggestion that PAYE was outstanding.  He specifically asked Kath if there was anything else to be done and she said that he should simply send the letter explaining the termination of the business.

Mr Fisher also said that notwithstanding the HMRC claims that the return was sent to him on 5 September, it was not received by him and may have been sent to the wrong address.

The Tribunal found that the appellant was misled by omission rather than commission.  “HMRC contends that a reasonable excuse must be based upon exceptional circumstances or exceptional event.  As a matter of law, that is wrong.  If Parliament had intended to say that a person could only avoid a penalty by establishing that an exceptional event or exceptional circumstance had arisen, it would have said so.  Parliament chose to use the phrase “reasonable excuse” which is an ordinary expression in everyday usage which must be given its natural meaning.  A reasonable excuse may involve an exceptional event but need not necessarily do so.”

“In this case the reasonable excuse relied upon by the applicant is that he was given misleading information, at least by omission, by HMRC.  Whilst HMRC may not be obliged to give advice or guidance as to what a person must do, in any given circumstances, if it does seek to assist or give advice, then that advice must be complete and accurate.  If it is not, it provides a potential trap for the taxpayer who, some two years later, is said to be liable for a penalty of £800 absent any wilful default or moral fault on his part.  Not only is that offensive to the ordinary person’s sense of fairness and justice, it is not required by the statutory regime which identifies an exception to the penalty if a reasonable excuse exists.”

The appeal was allowed.

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Mr Alan Thomas Davies v HMRC Commrs (TC01165), another trader within the Construction Industry Scheme, submitted a return for the period to 5 June 2010 and paid the tax due on 19 June. However, although the payment was received by 19 June, the due date, the monthly return was not received until 22 June and a penalty notice was issued. The taxpayer had personally gone to the post office and posted the cheque and the return to separate addresses, on the same day. He appealed against the penalty.

The Tribunal accepted that, although there was no proof of posting, the cheque had arrived in good time and it was highly unlikely that the taxpayer would have made two separate trips to post the return and the cheque.

He accepted that the delay was on the part of the post office and upheld the appeal.

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Mr Fred Allen, managing director of the appellant gave evidence for the appellant. He had been telephoned by HMRC on 28 February 2011 and informed that the VAT returns for the past three quarters had not been submitted.  It was the first Mr Allen had heard of the matter and he immediately arranged for the returns to be submitted and the VAT paid.

He checked with his accountant, who said that the returns had been submitted but failed to produce the file.  She had previously been discovered misappropriating funds and had been moved to another position where she had no access to funds, but prepared the VAT returns.  Prior to electronic filing, he would have seen and signed the returns.

Reliance on another person is not normally a reasonable excuse, but Mr Allen believed that her demotion had caused her to act maliciously. 

He also pointed out that had it not been for the change to electronic filing he would have known straight away.  He also submitted that HMRC should have phoned him and not the accountant.  As soon as he was informed, he dealt with the matter.

The Tribunal found that her malicious acts were an exceptional circumstance and a reasonable excuse for the late submission of the returns.  They allowed the appeal and cancelled the surcharges.

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Mrs Zoe Hamar (TC01529) appealed against an assessment to capital gains tax for 2002-3.  She was notified of the assessment under section 282 TCGA 1992 in a letter dated 18 August 2009.

Her father had owned three flats, one of which he transferred to her in 2001-2 and two that he transferred in 2002-3.  These transfers gave rise to a CGT liability which was unpaid at his death in June 2003.  Although payment of the liability was agreed by the executor, it remained unpaid.

Until 18 August 2009, when she received the letter from HMRC, Mrs Hamar was unaware of the liability.  HMRC also claimed interest from 2002-3.

The Tribunal held that, given that the liability had arisen on the donor and subsequently his estate, HMRC were entitled to raise an assessment on Mrs Hamar in 2009-10.  The assessment was raised for 2002-3 and was not valid, as ‘it is impossible to say that an assessment for one specified fiscal year can ever be or take effect as an assessment for another fiscal year’.

A consequence of this conclusion was that the interest assessment was also not valid; if it were, it would be possible for interest to be paid for a period before any liability to pay CGT had arisen.  The appeal was allowed.

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JMS Aggregate Supplies (TC01279) appealed against 9 default surcharges in relation to late payment of VAT.  All returns were completed on or before their respective dates.  The Tribunal accepted that the business had difficulty in recovering money due to it, from both customers and a tenant who owed it £18,000.  It had applied to the court for redress and received little success in recoveries.

It is established that lack of funds is not a reasonable excuse for late payment of VAT, but the leading case of Customs & Excise v Steptoe [1992] STC 757 established that the cause of that insufficiency might be.

The Tribunal also concluded that the lack of money was not due to lack of foresight and the Appellant’s exercise of reasonable foresight, due diligence and proper regard for the fact that the tax had become due on a particular date must have led to payment of the tax due as soon as the insufficiency of funds could be overcome. They concluded that the appellant had a reasonable excuse.

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Ast Systems Ltd was heard on 26 September 2011.  This was an appeal against a fixed penalty of £500 in respect of the appellant’s late filing of its P35 for the year ended 5 April 2010. 

The appellant is a small company carrying on business as an installer of home automation systems, intruder alarms and similar equipment.  It has two employees, Mr and Mrs Redman, who are also the directors of the company.  In 2010, for the first time, the P35 was required to be filed online, and The first case to consider is that of Ast Systems Ltd heard on 26 September 2011.  This was an appeal against a fixed penalty of £500 in respect of the appellant’s late the deadline for doing so was 19 May 2010.

Mrs Newham, for HMRC alleges that an electronic “employer notification” was sent to the appellant on 17 January 2010.  This notification’s purpose was to remind Ast Systems ltd of the requirement to file the forthcoming P35 online.  Mr Redmond could not recall seeing this notification, but admitted that he may well have received it.  He explained that he is “an engineer, not a tax collector”, and made mistakes sometimes, as, in a small business, such as the appellant, he had to deal with everything.

The return was not filed because Mr Redmond simply overlooked it.  He only became aware of this oversight when, shortly before 11 October 2010, he received a penalty notice for £400 dated 27 September 2010.  He filed the return online on 11 October 2010.  On 20th October HMRC issued a further penalty notice for £100 in respect of the period 19 September to 11 October.

The PAYE and NIC due for 2009/10 was £1,045.68 and had all been paid on time.  Mr Redmond had filed a return every year since 2002, and had been late once before in 2005.  He paid the penalty of £100 due as a result without protest.

The judge believed that Mr Redmond forgot to file the 2009/10 return because it was the first year of compulsory online filing, so he did not receive a paper P35, which may have served as a reminder.  This is not a reasonable excuse for late filing as Mr Redmond should have been well aware of the appellant’s obligations.

Mr Redmond did not argue that it was reasonable to forget in these circumstances; his argument was that “a £500 penalty seems incredibly harsh for the late return of one form”, given that HMRC already had all the necessary information, no reminders were sent, and all PAYE and NIC due had been paid on time.

The tribunal had no power to reduce the statutory amount on proportionality grounds. Mrs Newham submitted that the penalty regime had been set by Parliament, that there was no basis to set it aside, and that was the end of the matter.

The judge disagreed.  Using the reasoning set out in Enersys Holdings UK Limited v HMRC [2010], that the Tribunal does have power to strike down a penalty if it is “not merely harsh but plainly unfair” and with no power to reduce the penalty, it was set aside in full.  The Tribunal concurred that HMRC has no statutory obligation to notify a taxpayer of penalties promptly, but the judge went on to say: “HMRC cannot be surprised to be faced with a proportionality argument if they delay notifying a penalty to a defaulter until a penalty which Parliament set at £100 per month is allowed to escalate to £500 while HMRC apparently sit on their hands.  If the delivery of the return is so important that it merits a fine at such a level, it seems surprising (to put it at the very lowest) that they should take no steps for over four months to chase it.”

“Whilst the comment is not relevant to our decision, when HMRC delay issuing penalty notices for over four months, it is hard to escape the conclusion that the penalty regime is being used as a revenue earning device rather than for its proper purpose as a mechanism to encourage prompt compliance by taxpayers with their obligations.”

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In Talkabout Publishing v the Commissioners for HMRC on 26 November 2011, the Tribunal judge Geraint Jones was equally scathing about HMRC’s motives.

This was also an appeal against a £500 penalty for late filing of the 2009/2010 P35.  The appellant accepted that a P35 was not submitted by 19 May 2010, but this was because of a belief that the filing was not necessary, as there was no outstanding liability in relation to the year in question.  JPO Accountancy Ltd, on behalf of the appellant, also submitted a letter stating that the appellant’s office, including all the business records, had been destroyed by fire.  The fire is relevant because the appellant sought leave to appeal out of time.

The judge concluded that leave to appeal out of time should be granted and that the appeal must succeed and the penalty be reduced to £100.  The reason for the appeal being part allowed was that HMRC put forward no explanation whatsoever for its failure to send out a First Penalty Notice within a reasonable time of the default being known about.

The judge noted that when a taxpayer defaults in sending in a VAT return on time, a Default Notice is usually sent within 14 – 21 days.  In a VAT default case the penalty does not increase with the passage of time, by contrast to the penalty regime for failing to file an end of year return by 19 May.  Thus in a VAT case HMRC has no interest in delaying sending out the Penalty Notice as the penalty does not increase as time goes by.

The judge went on to say: “In my judgement it was conspicuously unfair of HMRC to fail to send out a First Penalty Notice until four months post default.  That is a serious but inevitable charge to be laid at the door of HMRC in this kind of penalty case.  The appellant was not given a timely de facto reminder of its default during a period exceeding four months during which, had an appropriately timed First Penalty Notice been sent, the appellant could, and as I find, would have avoided all but the first monthly penalty of £100 accruing.”

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Cases where the taxpayer was unsuccessful:

Claranet Ltd (TC 01446) made an appeal against VAT default charges.  The appeal was made late and an application for it to be heard out of time had been granted. 

The appellant did not argue that it had a reasonable excuse for the period 10/09 but, due to the cumulative nature of the rate of penalty, a reasonable excuse for 07/09 would reduce the penalty for the following period.  There was some confusion over the VAT payments, as the company had been making stage payments and payments had been made and repayments received.

Unfortunately there was no one available to give evidence in respect of this as the persons concerned were no longer employed by the company. 

The Tribunal took the view that the company did not take prompt action to resolve the matter and dismissed the appeal.

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The taxpayer appealed against a penalty in the sum of £479.57 for its failure to submit form P35 (employer’s annual return) for the year to 5 April 2010, which should have been filed online by 19 May, 2010.  It was eventually filed on 11 October 2010 and the company was liable to a fine of £100 for each month that it was in default.  HMRC exercised its discretion and mitigated the fine to the actual amount of tax due, which was £479.57.

Unlike HMRC, the Tribunal has limited jurisdiction in penalty cases and can either uphold a penalty or quash it.  It is for the taxpayer to satisfy the Tribunal that it has a reasonable excuse for not filing the return on time.  In considering this, the Tribunal examines the taxpayer’s action from the point of view of a prudent employer exercising reasonable foresight and due diligence and having proper regard for his responsibilities under the Tax Acts.

In this case the reasons claimed were that HMRC should have informed the taxpayer that the returns were late and that the company’s default was due to illness.  The Tribunal found that the illness did not constitute a reasonable excuse as it did not correspond with the period of the default. It was also not for HMRC to remind the company of the filing deadline.  The appeal was dismissed.

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The Church appealed against the imposition of penalties in the sum of £400 for failure to submit its employer’s return (P35) online for the year to 5 April 2010, by 19 May 2010.  The grounds for the appeal were:

• The Church was a small congregation of 50, of whom no-one has experience of online taxation service;
• The Church did not possess a computer;
• The Treasurer tried to use his own computer, which could not deal with some of the software supplied by HMRC to assist with the registration process;
• The taxpayer would have filed a paper return, but this was not permitted by HMRC.

The taxpayer’s reason for not filing the return on time was that it did not have the technical facility to complete a return online.  In February 2010 HMRC issued the Church with the Employer’s Bulletin, which gave guidance of the limited exemptions from online filing, but there was no evidence of the taxpayer having sought assistance or applied for exemption.

The Tribunal found that a prudent employer would have availed itself of help from HMRC or sought help outside the congregation.  The appeal was dismissed and the penalty confirmed.  The Tribunal requested HMRC to take the initiative and help the Church to find a solution to its difficulties and, if the Church is co-operative, to exercise restraint in the imposition of further penalties.

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This case relates to an appeal against a surcharge in the amount of £1,572.75 imposed for late payment of tax due for the year to 5 April, 2009.  The self assessment return for the year to 5 April, 2009 was filed online on 8 April, 2010.  The due date for filing was 31 January, 2010.  The HMRC online system calculated the 2008-9 tax liability at £33,777.80 payable by 31 January 2010.  The liability was paid in full on 23 April 2010 and a surcharge notice was issued on 13 May, 2010.  The taxpayer appealed against the surcharge.

He claimed that the unpaid tax arose as a result of basic rate tax being deducted from his redundancy payment, whereas a 40% deduction should have applied.  He had delayed submission of his return, as he had struggled to reconcile the P60 information.  He felt that whilst he did not dispute the fact that his tax return and payment were late and interest should apply, the surcharge was inappropriate and excessive.

HMRC confirmed that it was standard practice that only basic rate tax is applied to redundancy payments if made after the employee has left employment; it was up to the taxpayer to resolve any under- or over-payment of tax. The taxpayer had also been very experienced in the self assessment system and would have known that he could have submitted a provisional return and amended it within a further year. 

The appeal was dismissed and the surcharge confirmed.

The facts are similar to the case of Yusuf Budiadi (TC01098), but the outcome is very different. Perhaps the Tribunal was influenced by the fact that Mr McCann was familiar with the working practices of HMRC and the facility for altering a self-assessment return within a year of its filing date and unconvinced that he had done all he could to meet his obligations.

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Mr Clarke appealed against a penalty of £300 imposed upon him for failure to comply with an information notice given on 23 March 2010 to produce certain documents and information. He did not dispute the validity of the notice, but maintained that the state of his health made it unreasonable for him to comply with it and that, in his circumstances the location of the documents sought by HMRC meant that they were not in his possession or power.

Mr Clarke submitted his tax return for the year ended 5 April 2006 and, on 10 October 2007, an enquiry was opened and has not been closed.  An information notice was issued on 14 November 2007 and Mr Clarke appealed against it.  The appeal was heard by the Special Commissioners, who confirmed the notice with minor alterations.

On 25 March 2009 Mr Alexander, the HMRC officer dealing with the enquiry wrote to Mr Clarke requesting various documents.  On 20 May, he gave a formal notice to produce certain documents and information within 30 days (by 19 June 2009).  On 26 May, Mr Clarke wrote to say he was unwell and Mr Alexander responded on 1 June 2009 to say that he would hold the matter in abeyance until 13 July 2009.

On 8 July Mr Clarke provided some of the information sought and on 24 July, Mr Alexander wrote to pursue his other requirements and on 13 August 2009, Mr Clarke provided some further information. On 11 September Mr Alexander wrote to repeat his request of 20 May 2009 and on 20 October, wrote again to ask for the information requested on 20 May 2009 to be provided by 16 October 2009. On 7 October, Mr Clarke wrote to say that his hips had deteriorated and that he could not access the documents sought. On 16 October Mr Alexander extended the time limit to 7 December 2009. On 4 November 2009 Mr Clarke wrote to say that he would let Mr Alexander know when he would be fit enough to access the documents sought. On 9 December 2009 Mr Alexander issued a penalty notice. Mr Clarke appealed.

On 23 March 2010 Mr Alexander, saying that there were concerns that the previous information notice had been too vague, withdrew the penalty notice and issued a fresh information request.  The new notice required the information and documents within 30 days (by 22 April 2010).  The notice sought:

(i) sales, purchases and legal costs invoices;

(ii) a reconciliation of the nominal ledger to the tax return;

(iii) a print out of nominal ledger accounts; and 

(iv) details of the matching of invoices with nominal ledger entries.

No appeal was made against this notice but Mr Clarke wrote to say he now also had problems with his back and could not comply with the notice.

Mr Alexander sent a letter warning of a penalty for failure to comply with the information notice of 23 March 2010 on 26 April 2010.  It is against that penalty that Mr Clarke appealed.

The Tribunal accepted that Mr Clarke does have serious health problems and that he would have had difficulty climbing into a loft to access the invoices, but given the time elapsed, he could have been expected to find someone else to do it on his behalf. He had no excuse for his failure to provide the information in (ii) and (iii).

The penalty was upheld.  The Tribunal decided that, although they were able to mitigate the penalty, they would decline to do so. The appeal failed.

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The taxpayer appealed to the Upper Tribunal against a decision of the First-Tier Tribunal in respect of three discovery assessments, for the years 2000-1, 2001-2 and 2002-3 and against an amendment to his self assessment for 2003-4.

He had submitted returns for those years, but had followed informal advice from an ‘accountant’ and had deducted capital losses from his bank interest when declaring his investment income.  He had also submitted details of his calculations along with the tax return.  The First-Tier Tribunal found him to have been negligent in the preparation of his return and had dismissed his appeal in respect of the consequent penalties.

HMRC had discovered understatements in the returns as a result of information received from the taxpayer’s bank manager and had queried the figures.  Unfortunately, Mr Moore, believing that his tax affairs were settled, had destroyed his papers, although his statement of the facts was not disputed.  It was indisputable that the amounts declared were insufficient and as the taxpayer had not relied upon the guidance notes in filling up his tax return, but had relied on informal advice, the Tribunal confirmed the finding of the First-Tier Tribunal and confirmed the amendments and the penalties, ordering the taxpayer to pay HMRC’s costs.

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Blue Forest (UK) Ltd appealed against the imposition of a default surcharge for late payment of VAT.  The VAT in question was paid over several days, split into four amounts: £10,000, £10,000, £10,000 and £4,967.10 as the taxpayer was previously unaware that the daily limit for payment online was £10,000.  The taxpayer had not thought to pay the tax by another means, e.g. banker’s draft or CHAPS payment.  The taxpayer argued that the penalty (£699.34) was excessive for a few days’ delay and that the late payment was an innocent oversight.  The Tribunal decided that no reasonable excuse under VAT legislation had been demonstrated.  The appeal was dismissed.

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Hall Safety and Environmental Ltd (TC01478) appealed against a penalty of £800 for late submission of its end of year return (P35) for 2009-10.  It should have been filed by 19 May 2010, but was not.  The return was finally submitted on 7 February 2011. When asked why the return had not been filed immediately following receipt of the penalty notice, Mr Hall said that he had assumed that his accountant would deal with it.  The Tribunal took the main argument to be that the penalty was disproportionate to the default, but were unable to agree that it was unfair.  The appeal was dismissed and the penalty confirmed.

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Carnbrook Convenience (TC01428) appealed against the first fixed penalty for the late filing of the partnership return.  The normal filing date for a paper return was 31 October 2009; the return was received on 26 November 2009.  The basis of the appeal was that the appellant had been given an extension to submit the return and the return was filed within the extended time limit.

They referred to a letter from a Mrs Fanthorpe, an administrative assistant within HMRC to their accountant and another, giving an extended time limit for a return which omitted partners’ personal details.  However, this was headed Star Groceries; there was no evidence that either letter related to Carnbrook Convenience and the appeal was dismissed. This is in contrast to TJ Fisher (above) where the taxpayer relied upon incorrect advice from someone called ‘Kate’ at HMRC.  In this case, there seemed to be some confusion as to which of the associated entities the letters referred.

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D&H Developments (TC01425) a case heard in Edinburgh, concerned a contractor who failed to deduct VAT. D&H are joinery and building contractors established in 2003.  They were contacted by Mr Kean trading as Kean Slaters to quote for a contract for new offices for Kean.  Mr Kean indicated that the whole contract was to be treated as zero rated on the basis that the building was to double up as a dwelling house to promote the lack of council housing in the area.  This was accepted by the appellant.

D&H contacted their accountant who suggested that the partnership register for VAT.  The accountant and the partners and Mr Kean had a meeting where the accountant queried whether the contract should be positively rated for VAT.  Mr Kean confirmed that there was no VAT element to the contract.

Schedule 8 of the VAT Act 1994 provides that zero-rating can apply to a built solely as a dwelling house, but this did not apply, as the plans submitted referred to ‘offices’.

The Tribunal accepted that D&H had acted in good faith, but it had been their responsibility to deduct and pay VAT at the then rate of 17.5%.  Accordingly the 7/47 of the VAT-inclusive payments should be paid.  The appeal was dismissed.

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Riaz Datoo and others (The Datoo Partnership) (TC01438) appealed against the imposition of default surcharges for late payment of VAT. There was no dispute that the payments were made late.

The appellants moved premises and failed to notify HMRC, but periodically collected mail from the previous address (which they owned and let to a company). The Tribunal considered that the non-receipt of blank returns is not a reasonable excuse for failure to pay the tax. The appeal was dismissed.

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Westbeach Apparel UK Ltd (TC01406) appealed against penalties of £500 imposed in respect of the late filing of its P35 employer’s annual return for the year 2009/10.  The due date for submission was 19 May 2010.

Their agent had submitted the form in ‘test mode’ and received a confirmation of submission.  Apparently, the confirmation in test mode is the same as that in real submission and the real return was not submitted until October 2010, following the imposition of the penalty by HMRC.

In contrast to the case in Hicharms (UK ) Ltd, the Tribunal upheld the penalties, confirming that HMRC demands are not reminders and that reliance on a third party does not amount to a reasonable excuse.  The appeal was dismissed.       The reason may be that a higher level of expertise would be expected from a payroll bureau than from a proprietor of a small business.

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Cases allowed in part:

Year ended 5 April 2006

The taxpayer appealed against a penalty of £86.84 and surcharge of £8.68 for late submission of his self assessment return and failure to pay the tax due. The return was filed on 10 March 2010. The taxpayer’s excuse was that he had ceased self employment from May 2005 and had been paying tax under PAYE. The Tribunal found that there was no evidence that he had informed HMRC that his self employment had ceased and no reason why he should not have paid the tax.

Year ended 5 April 2007

The taxpayer appealed against a penalty of £200 for late filing of his return and surcharges of £55.78 for non-payment of the tax due. The return was filed on 10 March 2010, 769 days late. The tax remains unpaid. The excuse given was that the taxpayer had ceased self employment from May 2005 and was paying tax under PAYE. The Tribunal took the view that the taxpayer did not have a reasonable excuse and dismissed the appeal, confirming the penalties of £200 and surcharge of £55.78.

Year ended 5 April 2008

The taxpayer appealed against a penalty of £200 for late submission of his tax return. It was filed on 10 March 2010, 495 days late. HMRC gave no evidence on the tax due on the return. Under section 93(7) Taxes Management Act 1970, the penalty cannot exceed the tax due. The Tribunal allowed the appeal and reduced the penalties to nil.

Year ended 5 April 2009

The Tribunal noted that HMRC had reduced late filing penalties to nil and confirmed the reduction of the penalties to nil.

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Proportionality:

David Collis (TC01431) appealed against a penalty assessment issued on 28 January 2011 on a careless inaccuracy in his self assessment return.  There was no suggestion that the omission was deliberate, only that it was careless. Mr Collis had submitted his tax return on time, but had omitted to include his benefits in kind, although he had known that they should have been included.  The Tribunal concluded that this was a careless inaccuracy on his part.

HMRC had decided that they could not suspend the resulting penalty, but had neglected to inform the taxpayer, who only found out when he received a bundle of papers for the hearing.  This deprived him of the opportunity to make representations on the subject.

HMRC can reduce a penalty below 15 % if ‘special circumstances’ exist.  They claimed they were not aware of such circumstances.  Mr Collis had appealed because it thought it was too harsh for a ‘first offence’. The Tribunal agreed and the appeal was dismissed.

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Thomas Hardy (TC01435) appealed against a penalty assessment for £31,971 and a decision not to suspend the penalty imposed.  He had an impeccable record for filing returns and paying tax due. 

In 2008-9, his employment ceased.  He was personally involved in the negotiations, as well as receiving legal advice. In October and November 2008, in accordance with the negotiations, Mr Hardy received cash payments of £1million, from which the bank deducted tax at 20%.  Neither of the payments was disclosed on his 2008-9 tax return.

His employer’s end of year return showed the payments and HMRC launched an inquiry.  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.  HMRC imposed a penalty of 15% of the tax due, 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. 

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 reduction where there are special circumstances.  This includes staying a penalty and agreeing a compromise. The Tribunal agreed that the taxpayer had been careless and dismissed the appeal against the penalty.  They also accepted that there were special circumstances, 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%.  It did not consider that the decision not to suspend the penalty was flawed.

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Application to appeal out of time:

Mr Griffiths (TC01480) applied to the Tribunal for leave to appeal out of time two post-clearance C18 demands.  The appeal should have been lodged by 30 October 2009, but was not made until 27 May, 2010.  The appellant understood the liability related to American Pick Up Company Ltd, which was in liquidation and were not personal to him.  He claimed that he had not received any correspondence after the liquidation.  Mr Griffiths had consulted an expert who had contacted HMRC who said Mr Griffiths had no authority to request an interview as the demand was against the company and following the appointment of the liquidator, Mr Griffiths was no longer an officer of the company.  Further C18s were addressed to Mr Griffiths in person.

There was some confusion in the advice received from HMRC as to whether Mr Griffiths had personal liability or not and the Tribunal granted Mr Griffiths permission to appeal out of time.

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