McDonnell v Revenue & Customs (INCOME TAX/CORPORATION TAX : fixed and daily penalties) [2018] UKFTT 692 (TC)

FTT-Tax
McDonnell v Revenue & Customs (INCOME TAX/CORPORATION TAX : fixed and daily penalties)
[2018] UKFTT 692 (TC) · 2018-11-18
[1]This is an appeal by Margaret McDonnell (‘the Appellant’) against penalties totalling £620 imposed by the Respondents (‘HMRC’) under Paragraphs 3 and 4 of Schedule 55 Finance Act 2009 for the late filing by the Appellant of her self-assessment (‘SA’) tax return for the tax year ending 5 April 2016.[2]The penalties for late filing of a return can be summarised as follows: i. A penalty of £100 is imposed under Paragraph 3 of Schedule 55 Finance Act (‘FA’) 2009 for the late filing of the Individual Tax Return for the year ending 5 April 2016. ii. If after a period of 3 months beginning with the penalty date the return remains outstanding, daily penalties up to a total of £900 are imposed under Paragraph 4 of Schedule 55 FA 2009 for the year ending 5 April 2016. iii. If after a period of 6 months beginning with the penalty date the return remains outstanding, a penalty of £300 is imposed under Paragraph 5 of Schedule 55 FA 2009 for the year ending 5 April 2016. iv. If after a period of 12 months beginning with the penalty date the return remains outstanding, a penalty of £300 is imposed under Paragraph 6 of Schedule 55 FA 2009 for the year ending 5 April 2016.[3]Penalties of £100 and £520 were imposed under (i) and (ii) above.[4]The Appellant’s appeal is against both of the penalties. Filing date and Penalty date[5]Under s 8(1D) TMA 1970 a non-electronic return must be filed by 31 October 2016 and an electronic return by 31 January 2017. The ‘penalty date’ is defined at Paragraph 1(4) Schedule 55 FA 2009 and is the date after the filing date.[6]A late filing penalty is chargeable where a taxpayer is late in filing their Individual Tax return. Reasonable excuse[7]Paragraph 23 of Schedule 55 FA 2009, provides that a penalty does not arise in relation to a failure to make a return if the person satisfies HMRC (or on appeal, a Tribunal) that they had a reasonable excuse for the failure and they put right the failure without unreasonable delay after the excuse ceased.[8]The law specifies two situations that are not reasonable excuse:(a) An insufficiency of funds, unless attributable to events outside the Appellant’s control, and(b) Reliance on another person to do anything, unless the person took reasonable care to avoid the failure.[9]There is no statutory definition of “reasonable excuse”. Whether or not a person had a reasonable excuse is an objective test and “is a matter to be considered in the light of all the circumstances of the particular case” ( Rowland V HMRC (2006) STC (SCD) 536 at paragraph 18).[10]HMRC’s view is that the actions of the taxpayer should be considered from the perspective of a prudent person, exercising reasonable foresight and due diligence, having proper regard for their responsibilities under the Tax Acts. The decision depends upon the particular circumstances in which the failure occurred and the particular circumstances and abilities of the person who failed to file their return on time. 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.[11]If there is a reasonable excuse it must exist throughout the failure period. The background facts[12]The notice to file for the year ending 5 April 2016 was issued to the Appellant on 6 April 2016.[13]The filing date was 31 October 2016 for a non-electronic return or 31 January 2017 for an electronic return.[14]As the return was not received by the filing date, HMRC issued a notice of penalty assessment on or around 7 February 2017 in the amount of £100.[15]The Appellant’s electronic return for the year 2015-16 was received on 21 June 2017 and was processed on 22 June 2017.[16]As the return had not been received three months after the penalty date (that is by 30 April 2017) HMRC issued a notice of daily penalty assessment on or around 25 July 2017 in the amount of £520, calculated at £10 per day for 52 days.[17]On 4 July 2017 the Appellant’s agent, Crudden Dolan Ltd, appealed against the penalties, on the grounds :
“Further to your notice of late filing penalty issued 18th May 2017, demanding £100 from our client, we wish to appeal the penalty. Our client visited her local tax office in Enniskillen, Co Fermanagh BT74 7JL in 2013 approximately 2 weeks before the local tax office closed its services to the public. She gave her income details for the year ended 5th April 2016 to the staff member in the tax office and she assured our client that her tax return was now filed and that she had completed the necessary paperwork on her behalf. She could not then go back to the local tax office to query this. Our client was unaware of any issue until she started receiving demands for late filing penalties. Our client also did not receive a request from HMRC to complete a SA other than retrospective requests. Our client has since engaged our services and has already submitted the late return. As a result can you please clear the penalty from her record at your earliest convenience?”
[18]On 7 August 2017 HMRC sent the Appellant a decision letter rejecting her appeal and offering a review.[19]On 14 August 2017 Crudden Dolan Ltd requested a review of HMRC’s decision of the £100 late filing penalty, saying:
“Further to your letter date 7th August 2017, we would ask you to reconsider your decision. We believe our client does have a reasonable excuse. Our client's sister is also a client of ours. Her sister was in the same position, in the same employment and same circumstances regarding attending our local tax office to have the tax return removed. They were both assured that the requirement to file tax returns for the year in question was removed. I note your comments that how can she have provided income details for 15/16 in 2013. When she visited the local office in 2013, she explained that she wished to be removed from the need to file a return, as she only had PAYE income and there was no need for her to be filing a return going forward. She was under the impression and told by the local tax office at this point that this had been actioned, and going forward she would no longer need to file a return ...”
[20]HMRC carried out a review and issued their review conclusion on 25 October 2017. The outcome of the review was that HMRC’s decision should be upheld. HMRC explained that if, during her visit to the Enquiry Centre, she had informed the advisor that she only had PAYE income, and this did not exceed £100,000.00, she would have been correctly advised that there was no requirement to complete future returns. However, as she claimed employment expenses in excess of £2,500, she had self-assessment criteria and, as she had completed returns for this reason for a number of years, unless her circumstances had changed, the requirement to complete a return for 2015-2016 should not have been unexpected. All reviews are made by HMRC on their own merit, based on the facts and information held. The fact that the Appellant’s sister had an appeal settled with a favourable outcome did not alter the fact that HMRC regarded the penalties as correctly imposed[21]On 30 October 2017 the Appellant’s agents appealed to the Tribunal. The stated grounds of appeal were:
“We reject the outcome of the review as we would argue a precedent was set when this individual’s sister's penalty was appealed on exact same circumstances and merit and yet her penalties were overturned. This simply is not fair and how is the taxpayer in question expected to accept this decision. Our client's sister is also a client of ours. Her sister was in the same position, in the same employment and the same circumstances regarding attending our local tax office to have the tax return removed. They both attended the tax office together on the same day and were both assured that the requirement to file tax returns for the year in question was removed. Our clients were under the impression and told by the local tax office at this point that this had been actioned, and that going forward they would no longer need to file a return, hence they did not think she was due to file 15/16 and were not aware or made aware by HMRC that they needed to file. I have enclosed copies of the original appeal letters sent to HMRC for both individuals by our offices, appealing these penalties, along with HMRC's acceptance of Mrs Tracey Mc Donnell's appeal and removal of penalty letter dated 25th July 2017”
. Relevant statutory provisions Taxes Management Act 1970 Section 8 - Personal return - provides as follows: (1) For the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, [and the amount payable by him by way of income tax for that year,] he may be required by a notice given to him by an officer of the Board- a) to make and deliver to the officer, on or before the day mentioned in subsection (1A) below, a return containing such information as may, reasonably be required in pursuance of the notice, and b) to deliver with the return such accounts, statements and documents, relating to information contained in the return, as may reasonably be so required. (1A) The day referred to in subsection (1) above is- (a) the 31st January next following the year of assessment, or (b) where the notice under this section is given after the 31st October next following the year, the last j day of the period of three months beginning with the day on which the notice is given] (1AA) For the purposes of subsection (1) above- (a) the amounts in which a person is chargeable to income tax and capital gains tax are net amounts, that is to say, amounts which take into account any relief or allowance a claim for which is included in the return; and (b) the amount payable by a person by way of income tax is the difference between the amount in which he is chargeable to income tax and the aggregate amount of any income tax deducted at source and any tax credits to which [section 397(1) [or [397A(1)] of ITTOIA 2005] applies.] (1B) In the case of a person who carries on a trade, profession, or business in partnership with one or more other persons, a return under this section shall include each amount which, in any relevant statement, is stated to be equal to his share of any income, [loss, tax, credit] or charge for the period in respect of which the statement is made. (1C) In subsection (1B) above "relevant statement" means a statement which, as respects the partnership, falls to be made under section 12AB of this Act for a period which includes, or includes any part of, the year of assessment or its basis period. (1D) A return under this section for a year of assessment (Year 1) must be delivered— (a) in the case of a non-electronic return, on or before 31st October in Year 2, and (b) in the case of an electronic return, on or before 31st January in Year 2. (1E) But subsection (1D) is subject to the following two exceptions. (1F) Exception 1 is that if a notice in respect of Year 1 is given after 31st July in Year 2 (but on or before 31st October), a return must be delivered- (a) during the period of 3 months beginning with the date of the notice (for a non-electronic return), or (b) on or before 31st January (for an electronic return). (1G) Exception 2 is that if a notice in respect of Year 1 is given after 31st October in Year 2, a return (whether electronic or not) must be delivered during the period of 3 months beginning with the date of the notice. (1H) The Commissioners- (a) shall prescribe what constitutes an electronic return, and (b) may make different provision for different cases or circumstances. (2) Every return under this section shall include a declaration by the person making the return to the effect that the return is to the best of his knowledge correct and complete. (3) A notice under this section may require different information, accounts and statements for different periods or in relation to different descriptions of source of income. (4) Notices under this section may require different information, accounts and statements in relation to different descriptions of person.] (4A) Subsection (4B) applies if a notice under this section is given to a person within section 8ZA of this Act (certain persons employed etc. by person not resident in United Kingdom who perform their duties for UK clients). (4B) The notice may require a return of the person's income to include particulars of any general earnings (see section 7(3) of ITEPA 2003) paid to the person.] (5) In this section and sections 8A, 9 and 12AA of this Act, any reference to income tax deducted at source is a reference to income tax deducted or treated as deducted from any income or treated as paid on any income. Schedule 55 Finance Act 2009[22]The penalties at issue in this appeal are imposed by Schedule 55 FA 2009.[23]Paragraph 1 (4) states that the ‘penalty date’ is the date after the ‘filing date’.[24]Paragraph 3 of Schedule 55 imposes a fixed £100 penalty if a self-assessment return is submitted late.[25]Paragraph 4 of Schedule 55 provides for daily penalties to accrue where a return is more than three months late as follows:(1) P is liable to a penalty under this paragraph if (and only if)-- (a) P's failure continues after the end of the period of 3 months beginning with the penalty date, (b) HMRC decide that such a penalty should be payable, and (c) HMRC give notice to P specifying the date from which the penalty is payable.(2) The penalty under this paragraph is £10 for each day that the failure continues during the period of 90 days beginning with the date specified in the notice given under sub-paragraph (1)(c).(3) The date specified in the notice under sub-paragraph (1)(c)-- (a) may be earlier than the date on which the notice is given, but (b) may not be earlier than the end of the period mentioned in sub-paragraph (1)(a).[26]Paragraph 5 of Schedule 55 provides for further penalties to accrue when a return is more than 6 months late as follows:(1) P is liable to a penalty under this paragraph if (and only if) P's failure continues after the end of the period of 6 months beginning with the penalty date.(2) The penalty under this paragraph is the greater of-- (a) 5% of any liability to tax which would have been shown in the return in question, and (b) £300.[27]Paragraph 23 of Schedule 55 contains a defence of “reasonable excuse” as follows:(1) Liability to a penalty under any paragraph of this Schedule does not arise in relation to a failure to make a return 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[28]Paragraph 16 of Schedule 55 gives HMRC power to reduce penalties owing to the presence of “special circumstances” as follows:(1) If HMRC think it right because of special circumstances, they may reduce a penalty under any para-graph 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.[29]Paragraph 20 of Schedule 55 gives a taxpayer a right of appeal to the Tribunal and paragraph 22 of Schedule 55 sets out the scope of the Tribunal’s jurisdiction on such an appeal. In particular, the Tribunal has only a limited jurisdiction on the question of “special circumstances” as set out below:(1) On an appeal under paragraph 20(1) that is notified to the tribunal, the tribunal may affirm or cancel HMRC's decision.(2) On an appeal under paragraph 20(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 16-- (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 16 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. Appellant’s Case[30]The Appellant’s grounds of appeal are as set out in his Notice of Appeal to the Tribunal. HMRC’s Case[31]HMRC’s records show that the Appellant was set up for SA on 19 June 2007, as her expenses exceeded £2,500 in her employment.[32]HMRC’s records show the Appellant has been successfully filing her SA tax returns from the 2006-07 tax year and claiming her expenses which exceed £2,500, from 2006-07 to 2014-15. The Appellant has been completing an annual return for a number of years and would be aware of the filing obligations for self-assessment.[33]The Appellant’s agent states that the Appellant was not aware that she needed to complete a SA tax return for 2015 -16 and was not made aware by HMRC that she needed to file a return. HMRC’s records show a Notice to File a Tax Return was issued to the Appellant on 6 April 2016, to the address on HMRC’s records at that time. There is no evidence that the tax return was returned to HMRC as undelivered, and therefore the return is deemed to have been served within the ordinary course of post, pursuant to s 7 of the Interpretation Act 1978.[34]The Appellant’s agent also states that their client was unaware of any issue until she started receiving demands for late filing. HMRC’s records show a late tax return penalty notice was issued on or around 7 February 2017, a Statement of Account was issued on the 14 March 2017 and a 30 day penalty reminder on 6 June 2017. HMRC’s records do not show any contact was made by the Appellant until her agent contacted HMRC on 18 July 2017, following the late filing daily penalty issued on 18 May 2017. Late filing penalty reminders were issued by the Debt Management and Banking department on 3 May 2017 and 18 May 2017. These were issued to the address on the Appellant’s records, 13 Corporation Street, Enniskillen, BT74 6AF. There is no evidence that the above late filing penalty notices, statement and reminder were returned to HMRC as undelivered, and therefore the documents are deemed to have been served within the ordinary course of post.[35]HMRC’s SA records show that the Appellant attended an appointment at the Enniskillen Enquiry Centre on 7 November 2013, to complete her 2012-13 SA tax return. HMRC’s PAYE records also show that the Appellant attended an appointment at the Enniskillen Enquiry Centre. The note shows the Appellant requested her expenses to be removed from her tax code in the future, as this was creating underpayments of tax as her mileage expenses claimed varied. The Appellant’s 2013-14 tax code was amended on 7 November 2013 by removing her expenses.[36]The tax code issued prior to this amended tax code, on 12 November 2012, showed expenses of £6,026. The notes with the tax code show the tax code was changed by using information from the Appellant’s tax return. Each time the Appellant submitted a tax return her tax code would have been changed to reflect the expenses claimed. HMRC therefore consider the Appellant would have been aware of the relationship between her completed tax return and her tax code changes. The notes on the on the tax code issued to the Appellant advised that HMRC will carry on using the tax code unless she tells HMRC her circumstances have changed. Also, the Appellant should have been aware that once her expenses were removed from her tax code, the only way to claim the tax relief on these expenses was by using a SA tax return.[37]On 6 April 2014 HMRC issued the Appellant with a 2013-14 tax return and on 6 April 2015 HMRC issued the Appellant with a 2014-15 tax return. There are no notes on HMRC’s SA notes showing any contact from the Appellant or her agent querying why these returns were issued. Therefore the Appellant was aware that HMRC had issued her with further returns following her visit to the Enniskillen Enquiry Centre.[38]HMRC contend that if the Appellant believed she did not need to complete a SA tax return after 5 April 2013, following her visit to the Enniskillen Enquiry Centre on 7 November 2013, she should have contacted HMRC to see why these returns had been issued. A prudent person exercising reasonable foresight and due diligence would have contacted HMRC when she received the 2013-14 and 2014-15 SA tax returns to check why they had been issued. Both of these returns were completed on time. It is HMRC’s view that the 2015-16 SA short tax return was issued correctly.[39]Since the closure of HMRC’s Enquiry Centres there have been a number of different routes a taxpayer can contact HMRC. Information about SA, the completion of returns, tax payment dates, penalties and so on, is well within the public domain and widely available via the internet including HMRC’s website. Other outlets that allow access to contact to HMRC can be made at Public Libraries, internet cafes, Citizens Advice and by telephone.[40]Where a return is filed after the relevant deadline a penalty is charged. The later a return is received, the more penalties are charged. This information was clearly shown on the 2015-16 notice to file issued to the Appellant on 6 April 2016.[41]This appeal is not concerned with specialist or obscure areas of tax law. It is concerned with the ordinary every day responsibilities of the Appellant to ensure her 2015-16 tax return was filed by the legislative date and payment made on time.[42]SA places a greater degree of responsibility on customers for their own tax affairs. This includes ensuring that HMRC receive payment of the correct amount of tax and National Insurance at the correct time. The tax guidance and HMRC’s website give plenty of warning about filing and payment deadlines. It is the customer’s responsibility to make sure they meet the deadlines.[43]Penalties are in place to promote efficient operation of the taxation system and are intended as a measure of fairness, so that customers who file late do not gain any advantage over those who file on time.[44]The amount of the penalties charged is set within the legislation. HMRC has no discretion over the amount charged and must act in accordance with the legislation. By not applying legislation and as such not to have imposed the penalty would mean that HMRC was not adhering to its own legal obligations. Special Reduction[45]Paragraph 16(1) of Schedule 55 allows HMRC to reduce a penalty if they think it is right because of special circumstances. “Special circumstances” is undefined save that, under paragraph 16(2), it does not include ability to pay, or the fact that a potential loss of revenue from one taxpayer is balanced by a potential overpayment by another.[46]In other contexts “special” has been held to mean ‘exceptional, abnormal or unusual’ ( Crabtree v Hinchcliffe [1971] 3 All ER 967 ), or ‘something out of the ordinary run of events’ ( Clarks of Hove Ltd v Bakers' Union [1979] 1 All ER 152). The special circumstances must also apply to the particular individual and not be general circumstances that apply to many taxpayers by virtue of the penalty legislation ( David Collis [2011] UKFTT 588 (TC) , paragraph 40).[47]Where a person appeals against the amount of a penalty, paragraph 22(2) and (3) of Schedule 55, FA 2009 provide the Tribunal with the power to substitute HMRC’s decision with another decision that HMRC had the power to make. The Tribunal may rely on paragraph 16 (Special Reduction) but only if they think HMRC’s decision was ‘flawed when considered in the light of the principles applicable in proceedings for judicial review’.[48]HMRC submit that its decision not to reduce the penalties under paragraph 16 was not flawed but, if the Tribunal disagrees, HMRC further submit that there are no special circumstances which would require the Tribunal to reduce the penalties. Conclusion[49]When a person appeals against a penalty they are required to have a reasonable excuse which existed for the whole period of the default. There is no definition in law of reasonable excuse, which is a matter to be considered in the light of all the circumstances of the particular case.[50]In considering whether the Appellant has a reasonable excuse for the default it is necessary to consider her actions from the perspective of a prudent tax-payer exercising reasonable foresight and due diligence and having proper regard for their responsibilities provided by legislation. A reasonable excuse is normally an unexpected or unusual event, either unforeseeable or beyond the person’s control, which prevents him or her from complying with an obligation which otherwise would have been complied with.[51]The Appellant had successfully filed previous tax returns and should have been aware of the filing procedures and deadlines.[52]I concur with HMRC’s reasoning, as contained at paragraphs 31-40 above.[53]The late filing penalties have been charged in accordance with legislation and there is no reasonable excuse for the Appellant’s failure to file her tax return on time.[54]I find that there are no special circumstances which would allow the penalty to be reduced under Special Reduction regulations[55]The existence of a different case or cases which have been settled in another manner do not have any impact on this case. The fact that the Appellant’s sister had her appeal settled with a favourable outcome does not alter the fact that in this case the penalties are correctly imposed. None of the circumstances in those other cases is known whereas the circumstances in this case are known. This case must be determined on its own merits.[56]A taxpayer who receives a notice to deliver a tax return is required to complete the form and supply any supplementary material required by the notice and to sign a declaration that the information is correct and complete to the best of his knowledge (s 8(1) TMA). The fact that HMRC may have (or be able to obtain) some of the information does not relieve the taxpayer of his obligation to supply it in the return ( Moschi v Kensington General Commissioners [1980] STC 1; Osborne v Dickinson [2004] STC (SCD))[57]Late filing penalties for the year ended 5 April 2016 are due in accordance with Schedule 55 FA 2009, even if a customer has no tax to pay, has already paid all the tax due or is due a refund.[58]This appeal is not concerned with specialist or obscure areas of tax law. It is concerned with the ordinary every day responsibilities of the Appellant to ensure her 2015-16 tax return was filed by the legislative date and payment made on time.[59]SA places a greater degree of responsibility on customers for their own tax affairs. This includes ensuring that HMRC receive payment of the correct amount of tax and National Insurance at the correct time. The tax guidance and HMRC’s website give plenty of warning about filing and payment deadlines. It is the customer’s responsibility to make sure they meet the deadlines.[60]Penalties are in place to promote efficient operation of the taxation system and are intended as a measure of fairness, so that customers who file late do not gain any advantage over those who file on time.[61]The amount of the penalties charged is set within the legislation. HMRC has no discretion over the amount charged and must act in accordance with the legislation. By not applying legislation and as such not to have imposed the penalty would mean that HMRC was not adhering to its own legal obligations.[62]The appeal is therefore dismissed and the late filing penalties totalling £620 are confirmed.[63]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. MICHAEL CONNELL TRIBUNAL JUDGE RELEASE DATE: 23 November 2018