Fitzpatrick v Revenue & Customs [2010] UKFTT 241 (TC)

FTT-Tax
Fitzpatrick v Revenue & Customs
[2010] UKFTT 241 (TC) · 2010-05-26
[1]Mr FitzPatrick appeals against the imposition of a surcharge of £149.71. Although the amount of the surcharge is relatively modest, his appeal raises a question of principle, which is why we are issuing a full decision. The facts[2]The evidence consisted of a bundle of documents prepared by the Respondents (“HMRC”), a number of documents shown to us by Mr FitzPatrick, and information given by him in the course of his argument, which we treated as evidence given on an informal basis. In the course of the hearing, which lasted three and a half hours, Mr FitzPatrick presented factual information covering a longer period than that to which the appeal specifically relates, in order to provide context and explanation for his understanding of the position at the relevant time. We find the following facts relating to the relevant period, and take into account in arriving at our decision the broader background which he provided to us concerning his later dealings with HMRC.[3]Mr FitzPatrick had for some years been an employee of IBM. In May 2007 he left that employment and registered as self-employed. In January 2008 he submitted a self-assessment return for 2006-07. In March 2008 he received a tax calculation from HMRC showing that £371.65 was due. In April 2008 he paid this amount, together with interest of £5.71. In October 2008 he submitted his return for 2007-08.[4]On 3 December 2008 he received HMRC’s tax calculation showing tax due of £6,988.44. HMRC’s Statement of Account showed three amounts as being due on 31 January 2009, namely £6,988.44, £3,494.22, and £10,482.66. On the following day he travelled to the United States, where he stayed for ten days. Due to this and other commitments, he did not immediately contact HMRC for an explanation of these figures.[5]On 16 January 2009 he telephoned HMRC’s National Advice Service helpline. A transcript of this conversation was included in the evidence [but with various omissions shown as ‘(Inaudible)’]; Mr FitzPatrick is referred to in the transcript as “TP”, and the helpline operator as “HL”. Where we reproduce extracts, we adopt the spellings used in the transcript. Mr FitzPatrick explained that he did not understand the letter sent with the self-assessment tax calculation. He said that if he added up the first payment of £3,494.22 [incorrectly transcribed as “£3,492.2”] due on 31 January and that of the same amount due on 31 July, that was great; the remainder of his comment is shown as “Inaudible”. His explanation to us was that this added up to the total of £6,988.44; his understanding at the time of this conversation was that the tax for 2007-08 was to be collected in two instalments, on 31 January and 31 July 2009.[6]In his conversation with the helpline, he then asked about the reference to the amount of £10,482.66 [transcribed as “482”]. The helpline operator explained that when HMRC had had the tax return for 2007-08, the tax had been calculated at £6,988.44 [transcribed as “6.44”]. The operator then said:
“HL. Now what the system does (Inaudible) for a particular year there’s a liability (Inaudible) it then charges what we call payments on account for the future. TP. Yeah okay. HL. It’s basically the (Inaudible) of the same liability . . . TP. Right okay. HL. . . . at the end of this tax year.”
[7]Mr Fitzpatrick then asked:
“TP. Is that going to be, is that accurate or inaccurate and I’ll tell you why I’ve a huge ex gratia payments [ sic ] of a separation package from IBM you know there’s like a lump sum like sixty thousand pounds (Inaudible) year or that tax (Inaudible) doesn’t exist in the current (Inaudible).”
[8]The response was:
“HL. Basically what we’re saying to you at the moment what (Inaudible) you need to pay the £6,988.44 [transcribed as ‘69 (Inaudible) 44’] for the whole of 07 and then pay half (Inaudible). TP. (Inaudible). HL. Yeah that’s right but if that’s (Inaudible). TP. I don’t know what exact (Inaudible) this year but I do know I’ve not received (Inaudible). HL. Not a problem what we can [ sic ] is those payments (Inaudible) they can be reduced to any figure that you give us. What you need to do really is try and estimate what you expect this year. I mean is most of your income (Inaudible) just pensions? TP. Well (Inaudible) because I started in my career (Inaudible) but the money that comes in has been frequent you know so (Inaudible). HL. What you have to really try (Inaudible) work out roughly what you’ve had so far (Inaudible), estimate what you think you might get from now to April TP. Yeah. HL. . . . and the payments (Inaudible) to reflect those amounts.”
[9]The remainder of this conversation related to the practical way in which the payments on account could be varied. In the final stages of the conversation Mr FitzPatrick asked whether there was any other way of dealing with the question and whether he could just pay it in January. The operator explained that if the liability was over five hundred pounds, payments on account had to be made, but if the liability fell below that amount, they would not be required.[10]On 26 January 2009 Mr FitzPatrick made another call to HMRC’s National Advice Service helpline. He explained the history of his enquiry, and that the amount shown on his self-assessment statement for payments on account was large because he had received an ex gratia payment from IBM. He calculated that for the current tax year his tax obligations would be around a thousand pounds.[11]The conversation continued:
“HL. Right okay, okay so if I so you want me to split those in half then the payments it would make the payments on account what’s the actual figure you want me to make them for you? TP. Well what he said cos I was confused by the letter it gave me these two numbers of 3494 . . . HL. Hmm. TP. . . . and then it said please the next sentence reads please note the paid amount due by 31st January is 10,482 . . . HL. Yes. TP. . . . which is like (Inaudible) it’s not it’s just like an extra 3494 . . . HL. Yes TP. . . . and he explained that’s because of the way you need to do the accounts. HL. Right. TP. And he said if it’s not going to be as big a number in 2008-09 . . . HL. Yes. TP. . . . give you an estimate and that’s what I’m doing. HL. That’s, that’s right so what you’re saying to me then is you only want to pay payments on account and a total of a thousand pounds in the year. TP. Say again sorry. HL. What you’ve got to do you’ve got to give me a figure cos the two payments on account obviously half of your, you get two payments on account for the year. TP. Two parts. HL. Yes and you want to they’ve got to be half they are literally half the amount that you’re going to owe for that year yeah. TP. Is that 2007-08. HL. That’s right. TP. Yeah. HL. Yeah well that’s the same for 0, 0, 08-09 so what you have it’s, it’s silly really but I’ve got to ask you how much you want your payments on account to be? TP. Aha well (Inaudible). HL. It won’t let me it won’t let me. TP. Yeah, yeah. HL. So you’ve got to say you know do you want them five hundred pounds each you know . . . TP. Alright. HL. . . . you’ve got to tell me how much you want. TP. Right now what I need to understand first of all what you mean by payments on account. HL. Well they are towards your 08-09 amount that you, you will owe for the year 08-09 when you next do your self assessment tax return. TP. Right so it’s not the payments on account for 07-08? HL. No 07-08 you owed six thousand nine hundred and eighty eight pounds forty four. TP. Right. HL. Right, the other two balance in payments [ sic ] are for next year for 08-09 . . . TP. Yeah. HL. . . . so they’re towards 08-09 so you pay them now and they will go towards your tax bill for that year for the 08-09. TP. I think so if I say to you I want my sort of amount to be for the year to be a thousand pounds . . . HL. Yeah. TP. . . . you will say to me okay then I’ll add five hundred to this first payment and five hundred in the second. HL. Yeah, do you want them to be five hundred pounds each? TP. Yes but. HL. That’s fine that’s all I’ve got to you say because I can’t do it you know. TP. No I understand it’s just to make sure I understand correctly . . . HL. Right yeah. TP. . . . the total amount is a thousand . . . HL. Yeah. TP. . . . and I can decide how to split that between the two . . . HL. Absolutely yes. TP. . . . okay alright well just split it between the two. HL. Okay so you so what’s the amount you want me to make them? TP. Erm well three no add, add five hundred each one so. HL. OK that’s fine I just have to get you to say the amount that’s fine right okay. TP. Alright. HL. I know it’s, I know it’s not but that’s how it goes. TP. (Inaudible). HL. Okay what I’ll do I’ll do that I’ve done that for you and I’ll send out erm a letter confirming that I’ve done that for you okay.”
[12]The remainder of the conversation related to the method of making payment to HMRC. Although Mr FitzPatrick indicated a preference for the use of online banking, he was not comfortable with making a payment to an account with the name “AO Shipley”, and decided that he would telephone to make payment. The operator confirmed that she would confirm the payments on account by letter.[13]On 31 January 2009 Mr FitzPatrick made a payment to HMRC. On the basis of his understanding of his conversations with the HMRC helpline, the amount which he paid was £3,994.22. This was made up of what he understood to be the instalment of tax for 2007-08 due on 31 January, namely £3,494.22, plus the reduced payment on account for 2008-09 of £500.[14]According to the internal record maintained by HMRC relating to Mr FitzPatrick’s self-assessment account, an automatically generated outstanding debt letter (recorded as a “RITA500”) was issued to him on 20 March 2009. Mr FitzPatrick maintained that he had never received this communication; we consider this below.[15]The statement prepared by HMRC as at 1 March 2009 showed that the balancing payment for 2007-08 of £6,988.44 had been offset by the payment of £3,994.22 shown as made on 29 January and credited to HMRC the next day. Interest to 1 March amounted to £8.32, resulting in a balance for 2007-08 of £3002.54. For 2008-09, the first payment on account was shown as reduced to £500. The total amount due in respect of Mr FitzPatrick’s liabilities for both years was therefore £3,502.54.[16]The next that Mr FitzPatrick heard was on 9 April 2009, when he received a “Late Payment/Surcharge Notice” dated 3 April (HMRC’s copy contained in the bundle is dated 6 April, but nothing turns on this difference). This showed that the amount of the late payment was £2,994.22. The notice also showed the surcharge amounting to £149.71.[17]Immediately on receipt of the notice he telephoned HMRC. This call does not appear to have been recorded; no transcript of the call was available. The operator suggested that he should pay the tax due, and dispute the surcharge. Mr FitzPatrick told us that in this conversation he was not advised to pay the first payment on account. He then contacted HMRC to make a payment of the tax due of £2,994.22.[18]On the same day he wrote a letter to HMRC to dispute the surcharge. He explained that he had found HMRC’s letter of 3 December 2008, which showed three different amounts being asked for by 31 January 2009, confusing; he had not understood the terminology “payment on account”. He said that he had called HMRC towards the end of January to seek clarification. The officer had explained payments on account, and Mr FitzPatrick had thought that he had understood what the officer meant. At the end of the conversation Mr FitzPatrick had agreed that he would pay £3,494.22 plus £500 and had been left in no doubt in his mind that this would meet the needs of 31 January 2009; his interpretation of what had been discussed had left him clear that he was not underpaying in any way. He had never received an updated letter after making payment. Based on the conversation, his understanding and expectation was that the letter would state that he would owe a further £3,994.22 on 31 July 2009, and that any further amounts would be collected (he assumed, in January 2010) as his 2008-09 position “unravelled” during 2009, and after submitting his return covering 2008-09. For reasons set out in his letter (and reiterated to us in the course of his argument) he asked for the case to be reviewed and for the surcharge to be rescinded.[19]HMRC wrote on 13 May 2009 to acknowledge his appeal. The letter stated that interest was charged on unpaid amounts from the date payment was due until the date payment was made. This had not been mentioned to him in the call on 9 April. On 26 May he called HMRC in order to pay the surcharge. He discovered “by chance” that he also had to pay the first payment on account, and that surcharge had been added to it; he paid £522.85.[20]HMRC’s letter dated 26 June 2009 set out the response to Mr FitzPatrick’s appeal. The surcharge was upheld. The letter offered the option of a review. On 13 July 2009 he completed the form requesting a review. He also sent a lengthy letter to HMRC. Following a telephone conversation on 6 August, HMRC’s Appeals Review Unit wrote to him to record the agreement that the deadline for the review period could be extended by 45 days.[21]On 8 September 2009 the Appeals Review Unit wrote to him to inform him of the result of the review; the conclusion was that the decision in HMRC’s letter dated 26 June 2009 should be upheld. The letter responded in some detail to the points which Mr Fitzpatrick had made.[22]On 7 October 2009 Mr Fitzpatrick signed his Notice of Appeal, which was received by the Tribunals Service on 9 October 2009. Arguments put by Mr FitzPatrick[23]Mr FitzPatrick argued that the documents demonstrated that HMRC were capable of flaws; this was germane to his “defence”. He had been very, very confused about what he needed to pay. In his call to HMRC on 9 April, he had asked the helpline operator to slow down, as he did not understand. She had advised him to dispute the penalty and write a letter to HMRC. The Late Payment/Surcharge Notice referred to the late payment of the 2007-08 tax, but did not refer to the £500 which he was also late in paying. In contrast, the tax calculation referred to the two years.[24]He had been within the self-assessment system for the first time, and the sums involved were significant. HMRC had said that there was a great deal of information available on their website and in their forms, but as they also provided helplines, he had chosen to telephone. The Self-Assessment Statement of Account showed the date of 31 January three times, with different amounts of money mentioned. He had not understood the expression “payments on account”, and did not understand how much he had to pay.[25]When he had finished the two conversations on 16 and 26 January, he had been in no doubt that the amount that he had to pay was none of those amounts. He had failed to recognise that the years were different. His reason for getting into these conversations had been that he simply wanted to know how much he had to pay.[26]His understanding had been that the sum of £6,988.44 due for 2007-08 would be collected over two periods, ending on 31 January 2009 and 31 July 2009.[27]He had never received a self-assessment statement showing the surcharge, interest and amounts due, as shown on the relevant form. He emphasised to us that at the time he was in a position more than adequately to pay the tax due, and supplied documentation to support this.[28]He criticised the transcripts, which gave an inadequate account of his conversations, and in particular failed to reflect the nuances of the conversations and in particular of his responses. In particular, the length (and the content) of the parts shown as “Inaudible” could not be appreciated from mere reading of the transcripts. He had asked HMRC to listen to the recorded conversations, to take account of the words and his tone of voice. The text did not convey such reactions as his shock. HMRC had made no attempt to listen to the recording.[29]HMRC had chosen to introduce the subject of a separate tax year, and this had forced him to telephone the helpline. HMRC had confused him with their processes.[30]In retrospect he did not understand why he had delayed until 26 May before paying the surcharge. He thought that it might have been suggested that if the matter was in dispute, he did not have to pay.[31]He referred to further correspondence and to HMRC’s “Vision Statement” and to the Charter. He also referred to later correspondence, which he argued demonstrated continuing flaws in HMRC’s approach. Arguments for HMRC[32]Mr Riordan provided a skeleton argument setting out the point at issue and the relevant legislation, and setting out HMRC’s contentions. In his oral argument, he summarised the issue in this case as being whether or not Mr FitzPatrick had shown reasonable excuse. Mr Riordan was grateful for sight of Mr FitzPatrick’s documents, as HMRC’s version generated by their computer system did not set them out in the same form.[33]Reasonable excuse was not defined. He summarised the interpretation of the expression as something extraordinary, out of the control of the taxpayer. Each case had to be examined on its own merits. HMRC had attempted to look in detail at the transcripts in Mr FitzPatrick’s case; this was unusual. Mr Riordan accepted that one transcript was missing. The gaps in the transcripts were where the transcriber had been unable to establish what had been said.[34]HMRC was not suggesting that Mr FitzPatrick had failed deliberately to pay. The “penalty” applied no matter what the taxpayer had considered or done, unless reasonable excuse could be demonstrated. HMRC had considered seriously Mr FitzPatrick’s explanation for the delay in his payment of the tax.[35]The relevant information was shown on the internet. Further, the first page of the Self-Assessment Return showed the words:
“If you pay late you will be charged interest and possibly a surcharge.”
[36]The Self-Assessment Tax Calculation showed the amount of tax calculated for 2007-08 as £6,988.44, due by 31 January. It also said that the payments on account for 2008-09 had been calculated at £3,499.22. This was based on half the known tax liability for 2007-08. These payments on account were later adjusted to £500. There was no payment on account for 2007-08; this year had already gone. Referring to the transcripts, Mr Riordan submitted that HMRC had clarified what was due.[37]He argued that once the reminder had been issued in March, any reasonable excuse would not be regarded as continuing thereafter. The requirement was that such an excuse must continue throughout the continuous period to the point at which the tax was paid. The position had been explained to Mr FitzPatrick in the second telephone conversation, that he owed £6,988.44 for 2007-08; the rest of the conversation had concerned payments on account for 2008-09. Mr FitzPatrick should have known that the whole of the tax for 2007-08 was due on 31 January. As he had failed to pay, the surcharge was properly imposed. Discussion and conclusions[38]There are two issues in this case. The first, of wider interest than the particular facts of the present case, is whether being misled by HMRC can constitute a reasonable excuse for a taxpayer’s failure to pay tax on the due date. (This decision relates only to direct tax, as other legislative provisions apply to indirect taxes such as VAT, and have not been considered here.) The second question, if the answer to the first is “yes”, is whether Mr FitzPatrick has established on the facts shown that he was so misled.[39]Section 59C(9) of the Taxes Management Act 1970 provides that on an appeal against a default surcharge:
“. . . the tribunal may— (a) if it appears . . . that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax, set aside the imposition of the surcharge; or (b) if it does not so appear . . ., confirm the imposition of the surcharge.”
[40]The statutory expression “reasonable excuse” is not defined. On the basis of the relevant authorities, which were not referred to in detail in argument, we consider Mr Riordan’s summary of the interpretation of this expression to be accurate, although subject to our comments in the following paragraph, we question whether the word “extraordinary” should be taken to be closer to the meaning “considerably out of the ordinary” than to a more extreme construction such as “remarkable” or “exceptional”. We accept HMRC’s submission in its skeleton argument that the burden of proof in such appeals falls on the taxpayer.[41]We have not been able to find any previous case covering the question whether being misled by HMRC can amount to a reasonable excuse. We therefore approach the question by reference to basic principles. In our view, being misled by HMRC can amount to something extraordinary, outside the control of the taxpayer. However, in order to amount to this, it must be shown that HMRC actively misled the taxpayer and that the latter either was not part of the process leading to the misunderstanding, or did not contribute to any significant degree to such misunderstanding. If the taxpayer did contribute materially to the misunderstanding, it cannot be said that the process by which the taxpayer was misled was outside the latter’s control.[42]It is clear that reasonable excuse must have a limited scope, as the purpose of the tax payment regime under self-assessment is to ensure general compliance by the whole body of taxpayers. For taxpayers to be given equal treatment, it is necessary to ensure that no taxpayer is provided with undue advantage under the system. As a result, any taxpayer claiming reasonable excuse must demonstrate that there is a clear reason (or “excuse”) for the default in question and that it is reasonable in that taxpayer’s case for him, her or it to be absolved from what would otherwise be the normal consequences of that default.[43]Turning to the facts of Mr FitzPatrick’s case, did HMRC actively mislead him, and did he contribute to any material extent to the misunderstanding which resulted in him paying a lesser amount than the total 2007-08 tax due on 31 January?[44]We accept, as Mr FitzPatrick contended, that the transcripts amount to a limited record of the two telephone conversations with the helpline and that conversational nuances and tones of his reactions cannot be appreciated from the bare text. While recognising this, our interpretation of those conversations is that he and the respective helpline operators were “talking at cross purposes”; the operators did not appreciate that he had misunderstood the system and that he had concluded that the Statement of Account referred only to the liability for 2007-08 to be collected (as he interpreted the position) in two instalments on 31 January and 31 July 2009 respectively. We do not consider the process recorded in the transcripts amounted in any way to HMRC actively misleading him; the operators simply failed to appreciate the way in which he had interpreted the system.[45]The covering letter sent to Mr FitzPatrick with the Statement of Account contained the following paragraphs:
“My calculation shows the tax due under Self Assessment for 2007-08 is £6988.44 due by 31 January 2009. I also calculate the payments on account towards your tax bill for 2008-09 are: 1st payment on account £3494.22 due by 31 January 2009. 2nd payment on account £3494.22 due by 31 July 2009.”
[46]In our view, this letter from HMRC made the position clear, even before Mr FitzPatrick telephoned the helpline. He chose not to look at the relevant page of HMRC’s website, entitled “Understanding and checking your tax calculation”; this contained a sub-heading entitled “If you think your payments on account look too high”. The first paragraph under this heading stated:
“Your covering letter may tell you that you need to make payments on account (advance payments) for the current tax year. If it does, these amounts will be based on the income shown on your tax calculation because HMRC assumes your income next year will be similar.”
[47]We consider that Mr FitzPatrick contributed to the situation resulting in his misunderstanding by his failure to consider carefully the wording of the covering letter sent by HMRC with the Tax Calculation, and by not looking at the relevant part of HMRC’s website. We accept the statement contained in HMRC’s review letter dated 8 September 2009, when referring to the conversation of 26 January 2009, that:
“It appeared that you understood the explanations given. You did not tell the advisor you did not understand. I am sorry you did not receive the letter confirming the reduction in the payments on account. This would only have shown the reduced payments in [ sic ] account for 2008-09.”
[48]We therefore consider that the misunderstanding, derived from Mr FitzPatrick’s own unsupported interpretation of the way in which the system worked, did not amount to a reasonable excuse for his failure to pay the full amount of the tax due for 2007-08 by the due date of 31 January 2009. He implied in his argument that it was inappropriate for HMRC to raise the subject of payments on account for the following year; this fails to recognise that under s 59A of the Taxes Management Act 1970, this is a statutory requirement which follows automatically where tax liability has been established for the previous year and certain conditions relating to the proportion of tax deducted at source on the income for that previous year have not been met. Far from choosing to introduce the subject, HMRC were bound to impose a requirement in accordance with that section.[49]As we do not consider that Mr FitzPatrick had a reasonable excuse for the default constituted by late payment of the tax due, we confirm the imposition of the surcharge and dismiss Mr FitzPatrick’s appeal.[50]In doing so, we question whether proceedings such as this are the best way of resolving such disputes between taxpayers and HMRC. The time and expense involved in bringing this matter to an appeal hearing are out of all proportion to the amount involved. It would be better if such a dispute (and the various other matters which Mr FitzPatrick raised before us but which were not the subject of this appeal) could be dealt with by some other form of dispute resolution if they cannot be satisfactorily resolved by the review process.[51]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. JOHN CLARK TRIBUNAL JUDGE RELEASE DATE: 26 May 2010