Khan Properties Ltd v Revenue & Customs (CORPORATION TAX - penalty) [2017] UKFTT 830 (TC)

FTT-Tax
Khan Properties Ltd v Revenue & Customs (CORPORATION TAX - penalty)
[2017] UKFTT 830 (TC) · 2017-10-09
[39]If there is a decision maker it is the computer. In Morgan & anor v HMRC [2013] UKFTT 317 (TC) (“ Donaldson ”) Judge Barbara Mosedale said, in relation to the requirement in paragraph 4(1)(b) Schedule 55 FA 2009 that “ HMRC decide that such a penalty should be payable”:[40]“While I am not satisfied that an action by HMRC’s computer is a decision by HMRC , …. 40. I also note from that decision that HMRC’s submissions in Donaldson included this:[27]“ Meaning of “HMRC decide”[28]In particular, it is HMRC’s case that the requirement for “HMRC” to “decide” was met. It says this for a number of reasons.[29]Decision by authorised officer not required: Firstly, it contrasts it with the requirement for any particular officer to make a decision. For instance, certain penalties can only be imposed by an officer of the Board authorised by the Board for the purpose. The most obvious example is in s 100(1) TMA which provides:
‘….an officer of the Board authorised by the Board for the purposes of this section may make a determination imposing a penalty under any provision of the Taxes Acts and setting it at such amount as, in his opinion, is correct or appropriate.’
Subsection (2) contains exceptions to this rule. As s 100C(1) makes clear, any penalty within the exception could only be imposed by an officer of the Board with the permission of this Tribunal. So penalties under the Taxes Acts require a decision of an authorised officer.” 41. When Donaldson reached the Court of Appeal, the Upper Tribunal having given no view on the “computer decision” point, Lord Dyson MR said:[18]“I do not, therefore, need to deal with Mr Vallat’s alternative submission that para 4(1)(b) is satisfied by HMRC’s computer, programmed in accordance with that policy decision, automatically issuing a penalty notice. I must confess to having considerable doubts as to whether it is correct. ”42. Thus the question has not been decided authoritatively by a Tribunal or Court above this one. I was party to the Donaldson decision in the FTT and I did not dissent from the statement by Judge Mosedale I have quoted at §39. Indeed I expressly agreed with it – see the FTT decision in Donaldson at [173].43. But if it is to be read as saying that a computer cannot make a decision I think it goes too far. I say that because of a provision to be found in the standard commercial compilations of tax (and particularly) National Insurance Contributions law, s 2 Social Security Act 1998 (“SSA”):
“ Use of computers (1) Any decision, determination or assessment falling to be made or certificate falling to be issued by the Secretary of State under or by virtue of a relevant enactment, or in relation to a war pension, may be made or issued not only by an officer of his acting under his authority but also— ( a ) by a computer for whose operation such an officer is responsible; and ( b ) in the case of a decision, determination or assessment that may be made or a certificate that may be issued by a person providing services to the Secretary of State, by a computer for whose operation such a person is responsible.” 44. This section envisages that in social security matters a decision can be taken by a computer, as it gives authority for that to be done in cases where legislation requires the Secretary of State or an officer acting under his authority to make the decision. 45. There is no equivalent in TMA or any tax legislation that I can find [2] , although it seems likely that s 2 SSA applies to decisions taken by an officer of HMRC in accordance with s 8 Social Security Contributions (Transfer of Functions, etc.) Act 1999 in relation to NICs etc., which is why it is reproduced in the standard tax compilation volumes. 46. The conclusion I draw is that it was obviously thought necessary to authorise a computer to make a decision where the relevant legislation required the Secretary of State to make it. 47. The lack of any equivalent provision in TMA (and s 113(1B) and (1D) is not equivalent – it does a different and more limited job) means that a determination under s 100 must be made by an officer of HMRC, that is a human being. 48. What is more, s 100(1) TMA provides that the human being concerned must be authorised to make the determination. There is also some case law on this point. In Barrett v HMRC [2015] UKFTT 329 (TC) (“ Barrett ”) this Tribunal (Judge Roger Berner) was faced with a challenge about the meaning of “authorised” in s 100(1). The first challenge related to the downgrading of the officers who were authorised to make determinations in relation to penalties charged under s 98A TMA. Barrett shows that until 2011 only officers at Grade 6 (senior principal, the grade immediately below the Senior Civil Service and typically the grade of a District Inspector in the Inland Revenue) and above were authorised. From 2011 all officers of HMRC were authorised whatever their grade. 49. However, it is clear from Barrett neither the original order of the Commissioners (or Board of Inland Revenue) nor the 2011 change related to penalties under paragraph 17 Schedule 18 FA 1998, the ones in this case. It is therefore not possible to say if, even if I am wrong to say that a computer-made determination is not valid, that any officer of HMRC who might have had some input into the penalty arrangements is an authorised officer for this purpose. 50. The other challenge to a determination in Barrett that is relevant here was that the officer in that case failed to exercise discretion under s 100 TMA, which uses the word “may”
. This, said the appellant, required HMRC to consider their powers of mitigation in s 102 TMA before making the assessment. That argument was dismissed by the Tribunal. 51. Barrett also considered whether the Tribunal has jurisdiction to consider questions of the sort that I have raised. Clearly I do not have the jurisdiction to consider public law arguments not expressly reserved to the Tribunal (of which there are none here). But at [93] Judge Berner said: “… Accordingly, I find that in respect of s 50(6) this tribunal’s jurisdiction is limited to determining whether, under the provisions of the legislation, there has been an overcharge (or, as the case may be, undercharge) to tax. That involves consideration of the statutory requirements for a valid assessment or determination , as well as the question of the proper liability to tax, but it does not enable the tribunal to consider public law questions.” [My emphasis] 52. In this case s 50(6) TMA is ousted by s 100B(2) but similar provisions apply in that subsection. 53. I am aware that an argument along the lines of the decision I have reached about s 100(1) requiring an individual officer of HMRC to make a decision, not a computer, was mentioned in Bosher v HMRC [2013] UKUT 579 at [69] as an argument that Mr Gordon of counsel wished to run as a new ground of appeal. The Upper Tribunal decided not to consider whether to grant Mr Gordon leave to put the additional argument, partly because it was thought that it would be decided in Barrett , where Mr Gordon was also counsel for the appellant. It was not however argued in Barrett . There is then clearly no binding decision of the Upper Tribunal on this point. 54. I should also make it clear that in any case what I say is limited to the position as it applies to the penalty in paragraph 17 Schedule 18 FA 1998. In particular it should not be read as applying to any of the penalties in Schedules 55 and 56 FA 2009. Reasonable excuse 55. If I am wrong on the previous point, then I need to deal with the appellant’s claim that they had a reasonable excuse within the meaning of s 118(2) TMA. 56. I should say that nowhere in the submission have HMRC explained why s 118(2) applies to a penalty under Schedule 18 FA 1998. That explanation is needed because s 118(2) applies “for the purpose of this Act”, ie TMA. The “failure” which s 118(2) may excuse is the failure to file a return referred to in paragraph 17 Schedule 18 FA 1998 which obviously is not part of TMA. But after a bit of research I think the answer is in s 117(2) FA 1998 which says: “Schedule 18 to this Act, the Taxes Management Act 1970 and the Tax Acts shall be construed and have effect as if that Schedule were contained in that Act.” 57. The appellant’s grounds of appeal are: (1) This was the first ever late return by the company. (2) The tax was paid on time so the delay caused no loss of revenue to HMRC. (3) The delay was partly caused by HMRC “suddenly withdrawing” their CT Tax filing software for 2016 and it took time to make alternative arrangements. 58. HMRC say in response that: (1) They agree that this was the first time there was a late return but say it is irrelevant. (2) On the third ground of appeal they say that HMRC together with Companies House developed a new free online service, Company Accounts and Tax Online (CATO) for companies to file their returns. The previous free software was available for accounting periods ending on or before 31 December 2015 and remained available until 31 December 2016, the filing date for an accounting period ending on 31 December 2015. This gave a year for affected agents to make alternative arrangements. HMRC do not address the second ground of appeal. 59. The only ground which could amount to a reasonable excuse is the argument that the appellant’s accountants did not have enough time to acquire third party software following HMRC’s decision to “suddenly” withdraw their free software. Section 118(2) TMA, unlike more recent provisions about what amounts to a reasonable excuse, does not contain any limitation where a person acts on behalf of another, so reliance on another such as an accountant may be a reasonable excuse. 60. In these circumstances I also find Barrett instructive: “154. The test of reasonable excuse involves the application of an impersonal, and objective, legal standard to a particular set of facts and circumstances. The test is to determine what a reasonable taxpayer in the position of the taxpayer would have done in those circumstances, and by reference to that test to determine whether the conduct of the taxpayer can be regarded as conforming to that standard. Whilst other cases in the First-tier Tribunal may give an indication of the approach that has been taken in the particular circumstances at issue, those cases cannot be regarded as providing any universal guidance. 155. Tribunals should, in particular, be cautious in making generalised statements concerning perceived categories of case, and equally circumspect about judging what is reasonable as a matter of the legal test by reference to perceived policy. Although the relevant statutory provisions may be subject to a purposive construction, that is not the same as the setting of parameters for the application of a reasonable excuse provision by reference to the tribunal’s own perception of underlying policy. In the case of s 118(2) TMA, with which this case is concerned, and which contains no reference to reliance on third parties, it is not in my view possible or permissible to discern any underlying purpose or policy with regard to such reliance from the statutory language. 156. Nor do I consider that there can be any principled distinction between cases which involve complex or “arcane” provisions of tax law, and those which may be regarded as more commonplace. That is nothing more than one of the circumstances to be taken into account in the application of the objective standard. 157. I turn then to the facts and circumstances of Mr Barrett’s case. I am concerned in this respect not with the failure of Mr Barrett to deduct tax and make payments to HMRC, but with his failure to make returns, starting with the annual return for 2006-07 that was due, under regulation 40A of the Income Tax (Subcontractors in the Construction Industry) Regulations 1993, on 19 May 2007, and subsequent monthly returns under the 2005 Regulations. 158. Mr Barrett has, since around 2000, been a self-employed small jobbing builder. He had some experience of the CIS, or at least its predecessor scheme, from the perspective of a sub-contractor, when working as part of a team on more substantial construction projects. That, argued Miss McCarthy, gave Mr Barrett an awareness of the CIS which, when coupled with his experience as an employer after 2000 and the need to operate an analogous deduction system for PAYE, would have put a reasonable taxpayer in Mr Barrett’s position on enquiry as to his obligations as a contractor under the CIS. 159. Mr Barrett did not make any particular enquiry in this regard, whether in informing his choice of accountant, which was done without any investigation into Mr Aspros’ capabilities and experience, but for convenience of access, or in seeking particular advice from Mr Aspros as to his obligations under the CIS. Mr Barrett simply provided Mr Aspros with the relevant paperwork, and signed, without question, everything which Mr Aspros put in front of him. Miss McCarthy submitted that Mr Barrett’s failure to make any check as to the position, whether from Mr Aspros or from HMRC, was unreasonable. 160. I do not agree that Mr Barrett’s actions were unreasonable. In my view, the steps taken by Mr Barrett to employ an accountant who evidently held himself out as able to provide a comprehensive service, both as regards accounting and tax, for a small business such as that of Mr Aspros, and in providing all relevant documentation to Mr Aspros, were the actions of a reasonable taxpayer in the position of Mr Barrett. Whilst Mr Barrett did not undertake any research in to Mr Aspros’ capabilities before appointing him, he was reasonably entitled to assume, from Mr Aspros’ acceptance of the appointment, that Mr Aspros would be competent to deal with both the accounting and tax aspects of his business. I do not accept that such a reasonable taxpayer would necessarily have taken separate steps to inform himself, independently of his accountant, of his obligations to make returns under the CIS, whether by seeking a second opinion, or by consulting HMRC, or HMRC’s published guidance, himself. 161. The test is one of reasonableness. No higher (or lower) standard should be applied. The mere fact that something that could have been done has not been done does not of itself necessarily mean that an individual’s conduct in failing to act in a particular way is to be regarded as unreasonable. It is a question of degree having regard to all the circumstances, including the particular circumstances of the individual taxpayer. There can be no universal rule; what might be considered an unreasonable failure on the part of one taxpayer in one set of circumstances might be regarded as not unreasonable in the case of another whose circumstances are different. 162. I take into account the fact that Mr Barrett had some experience of a deduction scheme in the construction industry. However, that experience was as a sub-contractor in the context of larger projects, and would have given Mr Aspros no particular insight into the filing obligations of a contractor. Mr Barrett was himself unaware of those filing obligations when he first employed sub-contractors, but he had provided Mr Aspros with all the necessary paperwork from which Mr Aspros had been able to prepare Mr Barrett’s accounts, including reference to expense incurred in relation to sub-contractors; accounts referring to such expenses, both for year end 31 January 2006 and 2007, had been completed well before the filing date for the annual return for 2006-07. In my view, a reasonable taxpayer in Mr Barrett’s position, having employed an accountant to deal with both accounting and tax, including, PAYE, and having provided the accountant with all relevant information with respect to his business, would have been entitled to rely on that accountant to draw attention to any relevant filing obligation. It would also have been reasonable for such a taxpayer to have concluded, from his accountant’s silence, that there were no such obligations outstanding. 163. The fact that the filing obligation cannot be described as particularly complex, or arcane, does not alter the position for a notional taxpayer in Mr Barrett’s position. Mr Barrett was an ordinary small trader who, taking account of his previous experience of the CIS, cannot be imbued with any particular sophistication or knowledge of the CIS so as to put him on reasonable enquiry as to obligations he had incurred merely by employing a few sub-contractors in a small way and on individual occasions. In short, it was not unreasonable for a taxpayer in Mr Barrett’s position not himself to have been aware of the particular filing obligations under the CIS. This is not a case in which a taxpayer, knowing of an obligation, merely delegates that task to a third party and does not take reasonable steps to ensure that it has been undertaken. 164. In my judgment, in the circumstances of this case, it was not unreasonable for Mr Barrett to have been unaware of the filing obligations in question, and by appointing an accountant in the way that he did Mr Barrett acted as a reasonable taxpayer, aware of his own limitations in tax and accounting matters, would have done. There was nothing unreasonable in the manner in which Mr Barrett conducted his relationship with Mr Aspros, or in the timely provision of relevant information from which Mr Aspros could reasonably have been expected to identify the relevant filing requirements for a business such as that of Mr Barrett. It was not unreasonable for such a taxpayer to have assumed that Mr Aspros was able to, and would, advise on any relevant tax obligation that was apparent from the information provided to him. Nor was it unreasonable for a taxpayer such as Mr Barrett, having received from Mr Aspros no indication that any filing obligation had been incurred in respect of his use of sub-contractors, not to have raised the question himself whether there might be a filing obligation of which he was unaware, either with Mr Aspros, or HMRC, or indeed anyone else.” 61. The circumstances I take into account here include that this was indeed the first failure by the appellant, and that necessarily means the first failure by Keen, Young & Company on their behalf, to file a company tax return on time. That means that the appellant would have had no reason to doubt that the trust they had placed in their accountant to file the returns was in any way misplaced and would have given them no cause to become involved in checking that the accountants had done their job. I also take into account that the tax was paid on time and that the return was less than two months late so that paragraph 18 penalties did not arise. 62. HMRC say that the accountant had from 13 December 2015 to make alternative arrangements to file the return which was not due until 31 March 2017, thus about 15 months. They do not say what the significance of 13 December 2015 is but I infer that it was the date when HMRC announced to agents that they were withdrawing the free software and advising them where to find commercial alternatives. I take into account that this length of time cannot be regarded as the sudden withdrawal of software such as to give the accountants no time to make arrangements. I also take into account that the accountants attribute the failure to file only “partly” to this withdrawal, without saying what the other reasons were. But I also infer that if the tax was paid on time then the appellants were not at fault for not providing relevant information to the accountants. 63. Taking all these matters into account and bearing Judge Berner’s very helpful statements in Barrett in mind I conclude that the appellant did have a reasonable excuse for its failure to file on time. Decision 64. The penalty is cancelled because: (1) There was no valid determination of the penalty, or, if that is wrong, (2) The appellant had a reasonable excuse for not filing on time. 65. 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. RICHARD THOMAS TRIBUNAL JUDGE RELEASE DATE: 20 NOVEMBER 2017 [1] By s 50 Commissioners for Revenue and Customs Act 2005, references to the Board of Inland Revenue are to be treated as references to the Commissioners for Her Majesty’s Revenue and Customs. [2] Equivalent wording appears in s 50A Child Support Act 1992 and was inserted in that Act by paragraph 51 Schedule 3 Child Maintenance and Other Payments Act on the occasion of the transfer of responsibility for child maintenance from the Secretary of State to the Child Maintenance and Enforcement Commission.

Cited in 7 later judgments