“6(1) P [the taxpayer] is liable to a penalty under this paragraph of an amount determined by reference to the number of defaults in relation to the same tax that P has made during the tax year. (2) P makes a default in relation to a tax when P fails to pay an amount of that tax in full on or before the date on which it becomes due and payable. (3) But the first failure during a tax year to pay an amount of tax does not count as a default in relation to that tax during that tax year. (4) If P makes 1, 2 or 3 defaults during the tax year, P is liable to penalty of 1% of the total amount of those defaults. (5)If P makes 4, 5 or 6 defaults during the tax year, P is liable to penalty of 2% of the total amount of those defaults. (6)If P makes 7, 8 or 9 defaults during the tax year, P is liable to penalty of 3% of the total amount of those defaults. (7)If P makes 10 or more defaults during the tax year, P is liable to penalty of 4% of the total amount of those defaults. (8)In this paragraph– (a) in accordance with sub-paragraph (1), the references in sub-paragraphs (4) to (7) to a default are references to a default in relation to the tax mentioned in sub-paragraph (3), (b) the amount of a default is the amount which P fails to pay, and (c) a default counts for the purposes of sub-paragraphs (4) to (7) even if the default is remedied before the end of the tax year.” 13. The amended paragraph 6, in force from25 January 2011 to the end of that tax year, read as follows: “(1) P [the taxpayer] is liable to a penalty, in relation to each tax, of an amount determined by reference to— (a) the number of defaults that P has made during the tax year (see sub-paragraphs (2) and (3)), and (b) the amount of that tax comprised in the total of those defaults (see sub-paragraphs (4) to (7)). (2) For the purposes of this paragraph, P makes a default when P fails to make one of the following payments (or to pay an amount comprising two or more of those payments) in full on or before the date on which it becomes due and payable— (a) a payment under PAYE regulations; (b) a payment of earnings-related contributions within the meaning of theSocial Security (Contributions) Regulations 2001 (SI 2001/1004); (c) a payment due under theIncome Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045); (d) a repayment in respect of a student loan due under theEducation (Student Loans) (Repayments) Regulations 2009 (SI 2009/470) or the Education (Student Loans) (Repayments) Regulations (Northern Ireland) 2000 (SR 2000 No 121). (3) But the first failure during a tax year to make one of those payments (or to pay an amount comprising two or more of those payments) does not count as a default for that tax year. (4) If P makes 1, 2 or 3 defaults during the tax year, the amount of the penalty is 1% of the amount of the tax comprised in the total of those defaults. (5) If P makes 4, 5 or 6 defaults during the tax year, the amount of the penalty is 2% of the amount of the tax comprised in the total of those defaults. (6) If P makes 7, 8 or 9 defaults during the tax year, the amount of the penalty is 3% of the amount of the tax comprised in the total of those defaults. (7) If P makes 10 or more defaults during the tax year, the amount of the penalty is 4% of the amount of the tax comprised in the total of those defaults. (8) For the purposes of this paragraph— (a) the amount of a tax comprised in a default is the amount of that tax comprised in the payment which P fails to make; (b) a default counts for the purposes of sub-paragraphs (4) to (7) even if it is remedied before the end of the tax year. (9) The Treasury may by order made by statutory instrument make such amendments to sub-paragraph (2) as they think fit in consequence of any amendment, revocation or re-enactment of the regulations mentioned in that sub-paragraph.” 14. It will be seen from both versions of paragraph 6(3) that seven, eight or nine defaults in the tax year renders a taxpayer such as the appellant liable to a penalty of 3% of the total amount of tax comprised in those defaults. 15. Schedule 56 also contains provisions relating to a reduction in a penalty for "special circumstances" (paragraph 9), removing liability (subject to re-imposition) to a penalty during the period of a deferred payment agreement (paragraph 10) and removing liability to a penalty where there was a "reasonable excuse" for the failure (paragraph 16). Paragraph 9 provides: "(1) If HMRC think it right because of special circumstances, they may reduce a penalty under any paragraph of this Schedule. (2) In sub-paragraph (1) “special circumstances” does not include— (a) ability to pay, or (b) the fact that a potential loss of revenue from one taxpayer is balanced by a potential over-payment by another. (3) In sub-paragraph (1) the reference to reducing a penalty includes a reference to— (a) staying a penalty, and (b) agreeing a compromise in relation to proceedings for a penalty." 16. Paragraph 10 of Schedule 56 states as follows: “(1) This paragraph applies if— (a) P fails to pay an amount of tax when it becomes due and payable, (b) P makes a request to HMRC that payment of the amount of tax be deferred, and (c) HMRC agrees that payment of that amount may be deferred for a period (“the deferral period”). (2) If P would (apart from this sub-paragraph) become liable, between the date on which P makes the request and the end of the deferral period, to a penalty under any paragraph of this Schedule for failing to pay that amount, P is not liable to that penalty. (3) But if— (a) P breaks the agreement (see sub-paragraph (4)), and (b) HMRC serves on P a notice specifying any penalty to which P would become liable apart from sub-paragraph (2), P becomes liable, at the date of the notice, to that penalty. (4) P breaks an agreement if— (a) P fails to pay the amount of tax in question when the deferral period ends, or (b) the deferral is subject to P complying with a condition (including a condition that part of the amount be paid during the deferral period) and P fails to comply with it. (5) If the agreement mentioned in sub-paragraph (1)(c) is varied at any time by a further agreement between P and HMRC, this paragraph applies from that time to the agreement as varied.” 17. Paragraph 16 contains the provisions relating to "reasonable excuse". As was the case with paragraph 6, paragraph 16 was amended as regards PAYE payments with effect from25 January 2011 (SI 2011/132 art 3). The original version of paragraph 16, in force from6 April 2010 to24 January 2011 read as follows: "(1) Liability to a penalty under any paragraph of this Schedule does not arise in relation to a failure to make a payment if P satisfies HMRC or (on appeal) the First-tier Tribunal or Upper Tribunal that there is a reasonable excuse for the failure. (2)For the purposes of sub-paragraph (1)– (a) an insufficiency of funds is not a reasonable excuse unless attributable to events outside P’s control, (b) where P relies on any other person to do anything, that is not a reasonable excuse unless P took reasonable care to avoid the failure, and (c) where P had a reasonable excuse for the failure but the excuse has ceased, P is to be treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased." 18. From25 January 2011 , paragraph 16 read as follows: "(1) If P satisfies HMRC or (on appeal) the First-tier Tribunal or Upper Tribunal that there is a reasonable excuse for a failure to make a payment— (a) liability to a penalty under any paragraph of this Schedule does not arise in relation to that failure, and (b) the failure does not count as a default for the purposes of paragraphs 6, 8B, 8C, 8G and 8H.] (2) For the purposes of sub-paragraph (1)— (a) an insufficiency of funds is not a reasonable excuse unless attributable to events outside P's control, (b) where P relies on any other person to do anything, that is not a reasonable excuse unless P took reasonable care to avoid the failure, and (c) where P had a reasonable excuse for the failure but the excuse has ceased, P is to be treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased." 19. In our view, the different versions of paragraph 16 do not materially affect the outcome of this appeal. 20. Paragraph 13 of Schedule 56 introduces the provisions relating to appeals against penalties imposed under that Schedule. Paragraph 13 provides: "(1) P may appeal against a decision of HMRC that a penalty is payable by P. (2) P may appeal against a decision of HMRC as to the amount of a penalty payable by P." 21. An appeal in respect of the deferred payment agreement provisions of paragraph 10 and "reasonable excuse" provisions of paragraph 16 would fall under paragraph 13(1) because if a reasonable excuse is found to exist no liability to a penalty arises. On the other hand, an appeal relating to "special circumstances" under paragraph 9 would fall under paragraph 13(2) because it would relate to the amount of the penalty payable. 22. Paragraph 15 of Schedule 56 sets out the tribunal's jurisdiction in relation to such appeals. Paragraph 15 provides: "(1) On an appeal under paragraph 13(1) that is notified to the tribunal, the tribunal may affirm or cancel HMRC's decision. (2) On an appeal under paragraph 13(2) that is notified to the tribunal, the tribunal may— (a) affirm HMRC's decision, or (b) substitute for HMRC's decision another decision that HMRC had power to make. (3) If the tribunal substitutes its decision for HMRC's, the tribunal may rely on paragraph 9— (a) to the same extent as HMRC (which may mean applying the same percentage reduction as HMRC to a different starting point), or (b) to a different extent, but only if the tribunal thinks that HMRC's decision in respect of the application of paragraph 9 was flawed. (4) In sub-paragraph (3)(b) “flawed” means flawed when considered in the light of the principles applicable in proceedings for judicial review. (5) In this paragraph “tribunal” means the First-tier Tribunal or Upper Tribunal (as appropriate by virtue of paragraph 14(1))." 23. Thus, in relation to an appeal involving the deferred payment agreement or whether the Company has a reasonable excuse, paragraph 15 (1) allows the Tribunal either to affirm or cancel HMRC's decision. In relation to an appeal involving the issue of special circumstances, the Tribunal may rely on paragraph 9 to a different extent from HMRC only if the Tribunal considers HMRC's decision to be flawed in the judicial review sense of that expression. Submissions 24. Mr Watson’s primary submission on behalf of the Company was that paragraph 10(2) of Schedule 56 meant that the Company was not liable to pay a penalty for late payment. Paragraph 10(2) states that a person is not liable to a penalty for failing to pay tax between the date on which the person makes a request for deferral of payment of the amount of tax and the end of the deferral period. Mr Watson referred us to Budget Note 90 of 2009 which was issued at the time of the legislation introducing the new penalty regime. Paragraph 12 of the Note stated that “late payment penalties will not be charged during an agreed time to pay arrangement with HMRC unless the taxpayer defaults or misuses the arrangement”