Five Star (Development) Homes Limited v The Commissioners for HMRC [2025] UKFTT 1255 (TC)

[2025] UKFTT 01255 (TC)Case No TC09668
FIRST-TIER TRIBUNAL
TAX CHAMBER
Date Judgment date: 21 October 2025
Appeal reference: TC/2025/01273
VAT - late filing of returns - penalty points and financial penalties - whether a reasonable excuse? - third party software, reliance on an employee, insufficiency of funds – no - appeal dismissed
Before
TRIBUNAL JUDGE ANNE SCOTT
Between
FIVE STAR (DEVELOPMENT) HOMES LIMITEDAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentDECISION

Introduction

[1]This was a hearing of an appeal against late submission penalty points and penalties charged under Schedule 24 to the Finance Act 2021 (“FA 21”) in respect of the late submission of Value Added Tax (“VAT”) returns.[2]FA 21 introduced a new penalty regime which applies to returns and payments due after 1 January 2023. Under section 116 and Schedule 24 a new points system was introduced for penalties for failing to submit returns on time. When five points have been awarded under paragraph 6(1) Schedule 24, a fixed £200 late submission penalty under paragraph 16(1) Schedule 24 is charged for each subsequent failure whilst the maximum penalty points remain in force.[3]The Tribunal received an appeal from the appellant on 24 February 2025. That appeal was late but HMRC have raised no objection to the late appeal, so it is admitted. The appeal letter did not comply with Rule 20 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (as amended) (“the Rules”) but I waive that requirement and treat it as a valid appeal.[4]In compliance with Directions issued by the Tribunal, on 17 April 2025, HMRC lodged with the appellant and the Tribunal a Statement of Reasons and bundle of documents.[5]On 7 July 2025, the appellant lodged a reply thereto (“the Reply”). HMRC then applied to lodge a supplementary response and related bundle and that application was granted on 18 August 2025.[6]On 1 September 2025, the appellant lodged an application for the scheduled video hearing to be postponed or alternatively for the appeal to be heard on the papers.[7]On 3 September 2025, HMRC confirmed that they did not object.[8]On 9 September 2025, Judge Bailey refused the application for postponement and allowed the application for the appeal to be heard on the papers.

The facts

[9]There is no dispute about the facts.[10]The appellant has been registered for VAT since 1 November 1979 and was required to file VAT returns monthly. The appellant was in a repayment position with HMRC.[11]The VAT returns for periods 02/23 to 09/24 inclusive were all filed after the due date for filing (ie 17 returns). The first three of those returns were filed on 5 July 2023 and the remaining 14 were filed on 25 November 2024.[12]The Schedule of Late Submissions Points and Penalties (“the Schedule”) is annexed hereto. The appellant received five penalty points (the maximum) and then 12 individual financial penalties of £200 each.[13]The first Late Submission Penalty Notice was issued on or about 15 April 2023 and then monthly thereafter until on or about 15 November 2024.[14]Every Notice included the following wording:
“If you reach the maximum number of points, we charge you a financial penalty of £200.00. To avoid receiving late submission penalty points in the future, you need to submit your returns on time.”
[15]The Notices also said that the maximum number of points when filing monthly was five points and those points would be removed once six returns had been filed on time. It explained where more information could be found online and also gave details as to how to contact HMRC.[16]On 6 December 2024, the appellant wrote to HMRC appealing the last two points and the 12 financial penalties totalling £2,400 arguing that:(1) The appellant was a SME company run by the managing director (“MD”) and an assistant. That assistant, or trainee since she lacked experience (the “trainee”), was responsible for “everyday accounting and numerous other duties”.(2) Due to lack of sales there was very little income.(3) The MD had “only just been made aware” that the online software (“the ANNA software”) used by the appellant had “failed to correctly submit” 14 returns (periods 09/23 to 09/24 inclusive). The returns had been uploaded to the ANNA software each month but the final stages of completing the submission including paying a monthly fee of £4.20 had defaulted.(4) It had taken some time to work out what had gone wrong.(5) The total amount of VAT due to be repaid was £12,125.46.(6) The error was attributable to the trainee who had not told the MD about the penalty letters and had “tried to figure it out herself” (because she feared losing her job) but she now understood the ANNA software.[17]On 8 January 2025, HMRC issued a Review Conclusion letter upholding the two points and the 12 financial penalties (ie periods 09/23 to 09/24). HMRC explained that they did not accept that the appellant had a reasonable excuse for the late filing because:(1) It was the MD’s responsibility to ensure VAT compliance and, where a task was delegated to an employee, that included having processes and procedures in place to check that there had been compliance.(2) There had been no response to the Late Submission Penalty Notices.(3) It was the appellant’s responsibility to ensure that the accounting systems and software that were used worked.(4) The fact that no repayments of VAT had been received should have alerted the MD to the fact that there was a problem.[18]On 24 February 2025, the Tribunal received an undated letter which stated that it was an appeal. The Grounds of Appeal were:(1) Due to covid, the appellant had had very few sales, currently had no work in progress and thus had very little income.(2) The two directors of the appellant were both 81 and the trainee was their granddaughter and if the appeal failed the trainee would have to be made redundant and the appellant might have to close down.(3) It was the trainee’s “lack of knowledge” of the ANNA system that had caused the late returns; she had made the returns but had not realised that they had not actually been filed.[19]In the Reply the appellant amplified the Grounds of Appeal to the effect that:(1) The MD had concentrated on running the business and in the absence of any complaints, including from HMRC, had assumed that the accounting system was working well.(2) The MD was only alerted to the problem with 14 of the returns (the appellant has only ever appealed periods 09/23 to 09/24) when the trainee showed him the Penalty Notices.(3) “…the problem has only occurred coincidentally at the very same juncture that the new ANNA system was introduced”.(4) The trainee was adamant that she had filed the returns timeously and it was only after further investigation that they identified the fact that the problem lay with the software that they had used, ie the ANNA software. They had then filed all 14 returns together.(5) The appellant does have a reasonable excuse for the late filing because they had never had a problem before they started to use the ANNA software.(6) HMRC had suffered no loss; the only loss was to the appellant since it had not received repayments of VAT totalling £12,125.46 by the end of period 09/24.[20]On 7 October 2025, the appellant wrote to HMRC asking for detailed information about whether, and to what extent, HMRC were aware of other taxpayers having issues with the ANNA software. HMRC responded on 10 October 2025 stating that they did not keep statistics relating to each individual software provider.[21]On 14 October 2025, the appellant wrote to the Tribunal with a copy of a letter that had been sent to HMRC enclosing an adverse review of the ANNA software that had been found on Trustpilot. The appellant stated that “out of 4,259 reviews…450 of those were 1 star reviews, some of which included complaints regarding VAT submissions”.[22]In the interests of fairness, since ANNA software are not represented in this appeal I point out that, in the link to Trustpilot that was included in the letter, 84% of the reviews were 5-star reviews.[23]The appellant relied on a reply to the review from ANNA software which included the following sentence:
“Occasionally, VAT submissions can fail due to connection issues between HMRC and our software, even if everything appears to be in order on your side. While these problems are rare, they can be particularly disruptive when they occur.”
[24]In the letter, the appellant argued that since the trainee had been unaware of any problems and “….it was only upon looking onto the GOV website after receiving late penalty letters that she became aware of this issue and resolved it immediately by resubmitting all 14 returns on 26th November 2024.” the appeal should succeed because there must have been a malfunction.

The Law

[25]I have explained the late submission points and penalties regime in terms of Schedule 24 FA 21.

Reasonable excuse

[26]A taxpayer is not liable to either penalty points or a financial penalty for late submission if they can establish that they had a reasonable excuse for their failure and put that failure right without unreasonable delay after the excuse has ended.[27]It is statutorily provided that neither an insufficiency of funds (unless attributable to events outside the taxpayer’s control), or reliance on another person to do anything (unless the person took reasonable care to avoid the failure) is a reasonable excuse.

Special reduction

[28]HMRC may reduce a late payment penalty if they think it right to do so because of special circumstances. The phrase special circumstances is not defined but does not include, amongst other things, the ability to pay.

Burden of Proof

[29]The burden of establishing that they have issued and served on the appellant valid in time Notices of the penalty points and penalties for late submission, rests with HMRC. The standard of proof is the balance of probabilities or “more likely than not”.[30]The burden of establishing that the appellant had a reasonable excuse or that it should benefit from a special reduction because of special circumstances lies with the appellant. The appellant must establish these on the balance of probabilities.

Discussion

[31]As evidence of the issue and service of the penalty points and financial penalties, HMRC have provided copies of their electronic records together with specimen notices.[32]This is not particularly strong evidence of such issue or service. However, in light of the fact that the appellant has mounted no challenge to HMRC’s assertion that the appellant was sent and received valid Notices, I am prepared to accept it. I therefore find as a fact that HMRC did serve valid Notices on the appellant on or around the dates specified in their records and noted in the Schedule.[33]There is no statutory definition of “reasonable excuse” which, as HMRC rightly say on the basis of the decision in Rowland v HMRC (2006) STC (SCD) 536 at paragraph 18, is that it “… is a matter to be considered in the light of all the circumstances of the particular case”.[34]The test I adopt in determining whether the appellant has a reasonable excuse is that set out in the Clean Car Co Ltd v C&E Commissioners [1991] VATTR 234, in which

Judge Medd QC said:

"The test of whether or not there is a reasonable excuse is an objective one. In my judgment it is an objective test in this sense. One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time, a reasonable thing to do?"
[35]Firstly, although the appellant had clearly read the Statement of Reasons which made it explicit that there were 17 late filings (those were listed at paragraph 3) no appeal has been made in relation to the first three penalty points. HMRC had noted at paragraphs 35 to 47 that there were only appeals in respect of periods 09/23 to 09/24.[36]The argument that since the appellant started using the ANNA software, the trainee had thought that all of the VAT returns had been filed before the due date for filing is problematic because it is also argued that no return had ever been late before the appellant started using the ANNA software. As can be seen from the Schedule the three returns for periods 02/23 to 04/23 inclusive were all filed on 5 July 2023 and that was after three Penalty Notices had been received.[37]Beyond what is recorded at paragraph 19(3) above, I do not know when the appellant started using the ANNA software. However, on the balance of probabilities it would appear that the appellant changed software supplier in period 02/23 since all defaults are blamed on the use of ANNA software. The date of the change in the software is not material in itself but what is material is that a problem had been identified, at least by the trainee, by 5 July 2023 and nothing changed.[38]Firstly, the argument in the letter of 13 October 2025 (see paragraph 24 above) that the trainee took immediate action after receiving the penalty letters is in apparent conflict with the letter of 6 December 2024 (see paragraph 16 above) where it is indicated that the trainee did not disclose the Notices to the MD and had tried to figure it out herself.[39]Secondly, as far as the letter of 13 October 2025 is concerned, I point out that the ANNA software, albeit very highly rated, is merely a third party interface with HMRC and it was the appellant’s responsibility to ensure that the returns were actually filed. There appear to have been no internal systems in place to achieve that.[40]Thirdly, there were 17 consecutive failures in this instance. It is inherently unlikely that, what is described as a rare problem, the interface connection failed on all of those occasions.[41]Perhaps the trainee was muddled about what she should have done, but the question as to whether a genuine mistake can amount to a reasonable excuse has been considered in Garnmoss Limited t/a Parham Builders v HMRC [2012] UKFTT 315 (TC) where Judge Hellier said in the context of reasonable excuse for VAT default surcharges at paragraph 12: “What is clear is that there was a muddle and a bona fide mistake was made. We all make mistakes. This was not a blameworthy one. But the Act does not provide shelter for mistakes, only for reasonable excuses. We cannot say that this confusion was a reasonable excuse.…”.[42]As I have indicated at paragraph 23 above reliance on another person to do anything cannot be a reasonable excuse unless the taxpayer took reasonable care to avoid the failure.[43]It is indeed unfortunate that the trainee did not tell the MD about the Penalty Notices until late 2024 but ultimately it is the MD’s responsibility to ensure that a trainee is adequately trained and supervised and that the VAT returns are filed timeously. At paragraph 6 in Ryan v HMRC [2012] UKUT 9 (TCC), Judge Bishopp, when looking at an argument that Mr Ryan was entitled to rely on his solicitor to have done something, said:
“On the other hand I have to agree with Mr Ryan that if he was represented in the transaction by a solicitor, he should be entitled to expect the solicitor not merely to advise him of his obligation to submit a return but to perform the obligation for him. But that is not the same as saying that he has a reasonable excuse, within the meaning of the legislation. The plain purpose of the legislation is to encourage the prompt submission of returns by imposing penalties on those who submit them late. The penalty is imposed on the person concerned, and not upon his solicitor or any other representative. The purpose of the legislation would be defeated if a penalty could be escaped by the expedient of placing the blame on a dilatory solicitor. If Mr Ryan believes he has been let down by his solicitor, his remedy is to take the matter up with the solicitor.”
[44]HMRC referred to the decision of Macpherson of Cluny J in Profile Security Services Limited v Customs and Excise Commissioners [1996] STC 808 where, when looking at an argument about reliance on a trusted employee, said that: “The company should have more control over its own servant than over an outside advisor".[45]Shortly put, reliance upon the trainee’s failure to tell the MD about the first three Late Submission Penalty Notices, the receipt of which should have averted the imposition of financial penalties, cannot amount to a reasonable excuse.[46]The fact that the appellant was in financial difficulties due to lack of sales cannot amount to a reasonable excuse. Indeed, objectively considered, that should have alerted the appellant to the fact that, during a period of 17 months, no VAT repayments were received. That alone should have alerted any business to the fact that there was a problem.[47]In a similar vein, the fact that the fees for filing the returns were not paid should have been an indication that the returns had not been filed.[48]Lastly, as far as insufficiency of funds is concerned, as I have indicated at paragraph 24 above, the Tribunal cannot take into account the appellant’s potential inability to pay the penalties, if they are upheld, or indeed any other consequence of the imposition of the penalties.[49]I have considered every argument that has been brought to my attention but I find that there are no special circumstances in this appeal.[50]I find that the penalty points and financial penalties were all timeously and validly issued and the appellant has not established that there was a reasonable excuse for the late filing and nor are there special circumstances.

Decision

[51]For all these reasons the appeal is dismissed.

Right to apply for permission to appeal

[52]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. Release date: 21 October 2025