HMRC was deemed to act with ‘conspicuous unfairness’ in two recent tribunal cases examining the late filing of P35 penalties.
Penalties usually involve late filing of a tax return (PAYE or self-assessment), inaccurate returns (negligence) or late payment of tax. Recent cases heard by the tribunals have overturned penalties that have been raised and concluded that HMRC had acted unfairly.
In two recent tribunals, HMRC has been criticised by the tribunal judge for ‘unfairly’ issuing penalty notices for late filing of the employer’s annual return (P35) some four months after the filing deadline.
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 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 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 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, 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 20 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.’
In the first tier tribunal case 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 2009/10 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.’