Knowles Warwick Ltd v Revenue & Customs [2014] UKFTT 222 (TC)

FTT-Tax
Knowles Warwick Ltd v Revenue & Customs
[2014] UKFTT 222 (TC) · 2014-02-25
[52]Mrs Howe was unable to point to any ambiguity in the terms of Schedule 56 that would justify us considering extracts from Hansard. The intention of Parliament can only be derived from the wording of Schedule 56 itself. In the absence of any ambiguity it is not permissible to conduct a general review of Parliamentary debates to ascertain a different intention where the intention is clear from the statute - Pepper v Hart [1993] AC 593 .53. We must therefore focus in this appeal on whether there were special circumstances which might have justified a reduction in the penalty. Even that is not sufficient, because we must then go on to consider whether HMRC’s decision that there were no special circumstances was flawed in the sense described above. Meaning of Special Circumstances54. We were referred to various HMRC manuals as to the meaning of special circumstances. In particular HMRC’s compliance handbook states at CH170600:
“… Special circumstances are either: · uncommon or exceptional, or · where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law.” 55. HMRC’s manuals reflect their view as to the meaning of the term special circumstances, but they do no more than that. They do not really assist us in ascertaining how the term should be construed. There is no authority as to the meaning of the term in the context of Schedule 56. However there was no real dispute between the parties as to what it meant. 56. In Clarks of Hove Ltd v Bakers’ Union [1979] All ER 152 the House of Lords considered the meaning of “special circumstances” in the context of employment law. Geoffrey Lane LJ said that “… to be special the event must be something out of the ordinary, something uncommon …”
. Similarly, in Crabtree v Hinchcliffe [1971] 3 All ER 967 in the context of share valuations for the purposes of capital gains tax, Lord Reid said “‘special’ must mean unusual or uncommon – perhaps the nearest word to it in this context is ‘abnormal’.” In the same case, Viscount Dilhorne said “for circumstances to be special they must be exceptional, abnormal or unusual …”. 57. Those cases have all been quoted and adopted by the First-tier Tribunal in the context of Schedule 56. See for example White v Commissioners of HM Revenue & Customs [2012] UKFTT 364 (TC) . In the appeal before us both parties agreed that special circumstances will involve something unusual, exceptional, abnormal or out of the ordinary. Existence of Special Circumstances 58. The appellant argues that the following matters, individually or taken together amount to special circumstances: (1) The financial position of the appellant caused by the unexpected loss of major clients and abnormal costs incurred by the business in 2010 and 2011. (2) The fact that if the appellant had allocated payments to ongoing liabilities rather than the accrued liability for 2010-11 then there would have been no penalty. (3) The failure of HMRC to inform the business during 2011-12 firstly that it was incurring a liability for penalties and secondly that it could allocate payments so as to avoid a penalty. 59. The appellant argues that a taxpayer in the position of the appellant, with its director making personal sacrifices to ensure the future viability of the business, should not be subject to a penalty. Imposing a penalty would simply make future compliance more difficult. The appellant submitted that this could not have been the intention of Parliament and hence Parliament must have considered that this would amount to special circumstances. 60. We do not accept that any difficulty in future compliance caused by the imposition of a penalty is in any way inconsistent with the scheme of Schedule 56. In rare circumstances a penalty might be set aside as being disproportionate (see HMRC v Total Technology (Engineering) Ltd [2012] UKUT 418 (TCC) but that is not the position in the present appeal. It does not seem to us that the financial effect of a penalty of £3,124 in the present context could be described as disproportionate. Nor could the financial effect be considered as giving rise to special circumstances. 61. We accept that the appellant could not reasonably have anticipated that 3 out of 8 fee earners would all indicate within the space of 6 months from autumn 2010 their intention to go on maternity leave. The appellant also had to deal with the other challenges we have described above. We accept that the incremental effect of these matters contributed in large measure to the difficult financial position the appellant found itself in during 2011-12. 62. In considering whether there are special circumstances or whether there is a reasonable excuse for a default, the provisions in Schedule 56 are clear. Special circumstances do not include “ability to pay”. Inability to pay therefore falls to be considered in the context of reasonable excuse. Subject to the proviso that an “insufficiency of funds” is not a reasonable excuse “unless attributable to events outside [the taxpayer’s] control”. 63. It seems to us therefore that financial difficulties which cause a default can never, at least on their own, give rise to special circumstances. If anything, such financial circumstances may amount to a reasonable excuse but only where they are attributable to events outside the taxpayer’s control. 64. We are satisfied that the appellant was right not to pursue an argument based on reasonable excuse. The difficulties described by the appellant are, whilst significant, simply part of the exigencies of business. It is notable that there was no suggestion the appellant had ever sought to agree a time to pay arrangement either in relation to the 2010-11 liabilities or those liabilities which gave rise to the penalties in 2011-12. The loss of clients occurred at the beginning of 2010 and the other difficulties occurred over a period of time from the end of 2010 onwards. The defaults with which we are concerned commenced in April 2011. The appellant had sufficient breathing space in which it could have sought a time to pay arrangement with HMRC, either in relation to the 2010-11 liabilities or the ongoing 2011-12 liabilities. 65. We do not accept, as suggested by Ms Bartup, that the appellant chose to expand at the expense of paying its tax on time. That is an over-simplification of the position. We have no doubt that throughout the period from 2010 to 2012 Mr Knowles was trying to balance the interests of employees, creditors and clients as best he could. We accept that there was no real possibility of the appellant obtaining further finance any earlier than the loans described above. 66. The facts suggest that the business was under-capitalised. It could not pay creditors as and when they fell due, in particular HMRC. Running a business involves difficult decisions and those decisions have implications for the business itself as well as for shareholders, employees and creditors. Those implications might include for example exposing the business to enforcement action, liabilities to interest and, in the case of HMRC, liability to penalties where creditors are not paid on time. 67. If the financial difficulties did not give rise to a reasonable excuse, it is difficult to see therefore how the inability of the appellant to make payment could give rise to special circumstances. There must be something more apart from inability to pay. In this case the appellant seeks to argue that it could have paid the sums falling due in 2011-12 if it had received advice from HMRC as to allocation. 68. On the basis that the financial difficulties do not amount to a reasonable excuse, they simply provide the background against which the appellant might argue special circumstances. 69. Mrs Howe relied on the Taxpayers’ Charter which sets out what taxpayers can expect from HMRC in terms of respect, help and support, even-handed treatment, professionalism and integrity. In the light of the charter, Mrs Howe submitted that the appellant had been let down by HMRC. Firstly in relation to allocation and secondly in relation to warnings about penalties. 70. The question of allocation of payments by taxpayers to avoid or minimise liabilities has been considered by the First-tier Tribunal on a number of occasions. For example in Kelcey & Hall Solicitors v Commissioners for HM Revenue & Customs [2012] UKFTT 662 (TC) the tribunal found that the taxpayer’s allocation was not in their best interests and HMRC staff ought to have suggested a different allocation. It held that this amounted to special circumstances. 71. If there had been a different allocation in the present case, that would not necessarily have been beneficial to the appellant. In particular enforcement action could have been taken by HMRC. That is something that the HMRC Debt Management manual contemplates. The example it gives, referred to above, is that a taxpayer may wish to allocate payment to a debt which is about to be enforced. In the present appeal it is the reverse. The appellant submits that it ought to have been advised not to pay a liability which might be subject to enforcement action. 72. Therein lies the difficulty with the appellant’s argument. Proper advice as to allocation would require a detailed scrutiny of the appellant’s tax affairs and financial position. HMRC have enforcement powers which they are entitled to exercise. It is difficult to see why they should necessarily forego such action save in the context of a negotiated time to pay arrangement. The appellant was well aware that it could have negotiated time to pay with HMRC. 73. In the circumstances we do not consider that HMRC have any duty to advise a taxpayer as to the most beneficial allocation. The circumstances in which such a duty might arise, if at all, would be rare. For example if there was an assumption of responsibility by HMRC. See by way of analogy Neil Martin Ltd v Commissioners for HM Revenue & Customs [2007] EWCA Civ 1041 (not cited). On the facts of this appeal there could be no suggestion of any assumption of responsibility by HMRC. 74. Ms Bartup submitted that the appellant could not retrospectively change the allocation of payments once a penalty had been assessed. We accept that submission. However that is not what the appellant is seeking to do as we understand it. Rather the appellant relies on the failure of HMRC to advise at the time of the payments as to the possibility of a different allocation. In the absence of any duty on the part of HMRC to give such advice we do not accept that it can be criticised for failing to advise. It is the taxpayer, in this case a firm of chartered accountants, which must take responsibility for its own actions. 75. As to the fairness of HMRC not advising the most favourable allocation, notwithstanding it has no duty to do so, we adopt what was said by the First-tier Tribunal in AJM Mansell Limited v Commissioners for HM Revenue & Customs [2012] UKFTT 602 (TC) at [69]: “ It cannot be part of the duty of a public body to advise employers not to comply with their legal obligation for one month, and instead allocate payments to the PAYE debts of a later month, in order that the company can avoid a penalty. We entirely reject the submission that HMRC acted unfairly.” 76. It is clear that we cannot set aside a penalty simply because HMRC have acted unfairly. We have no such jurisdiction – see Commissioners for HM Revenue & Customs v Hok Ltd [2011] UKFTT 433 (TC) . 77. In relation to fairness, we have found as a fact that the appellant was specifically warned as early as February 2010 that defaults could lead to penalties. As a firm of chartered accountants the appellant ought to have been aware of the penalty regime even without a specific warning. We do not consider that HMRC in any way “let the appellant down”. 78. Even if we had been satisfied that the appellant was not aware of the penalty regime, that would not constitute special circumstances. See for example the discussion in Dina Foods Ltd v Commissioners for HM Revenue & Customs [2011] UKFTT 709 (TC) at [37]. 79. The appellant argues that taken together the circumstances were abnormal or exceptional and amount to special circumstances. 80. We do not accept that the circumstances looked at as a whole amount to anything abnormal or exceptional. The appellant was in financial difficulties over an extended period. It was aware of the penalty regime, or at least ought to have been aware of it. If Mr Knowles had addressed his mind to the position he would have realised that a different allocation might have been beneficial and avoided penalties for 2011-12. However he would still have had to negotiate the position with HMRC in relation to the liabilities for 2010-11. In the absence of a time to pay arrangement there was always the possibility that HMRC would have used enforcement measures against the appellant if the arrears were not paid. 81. It follows, for the reasons given above, that HMRC were entitled to conclude that there were no special circumstances. They took into account all relevant factors as urged upon them by the appellant. They did not take into account any irrelevant factor. It cannot be said that their decision was in any way unreasonable or irrational. We are not satisfied therefore that their decision on special circumstances was flawed. 82. In the circumstances we must dismiss the appeal. 83. 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. JONATHAN CANNAN TRIBUNAL JUDGE RELEASE DATE: 25 February 2014

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