Friday, March 25, 2011

BLOG 105


A couple of First-tier Tribunal decisions on penalties caught my eye recently. They are both decisions of Judge Anne Redston and both were dealt with under the Default Paper cases procedure.

Simple cases are allocated by the Tribunal to the Default Paper route. Under this route HMRC set out their statement of case in writing, the taxpayer is entitled to send a written response to the Tribunal (with a copy to HMRC) and the Tribunal decides the case based on those two documents (and any attachments to them) without a hearing. The taxpayer is entitled to ask for a hearing. If he wishes to do so he must do this when he submits his response to the Tribunal.

The idea is partly to save money by eliminating “unnecessary” hearings on minor matters (the taxpayer often did not bother to turn up to hearings before the General Commissioners but simply sent them a letter setting out his case) and partly because some taxpayers are likely to be more comfortable in making their case in writing.

The downside is that the taxpayer only has one chance to make his case and in doing so may not realise what is or is not important.

Heronslea Ltd v HMRC was concerned with a penalty for a late return under the construction industry deduction scheme (CIS). HMRC take CIS very seriously and seem to automatically demand the maximum penalty when things go wrong. In this case Mr Clifton, the owner of Heronslea, had explained that he had posted the return due on 19 June 2009 “in good time so as to meet the deadline”. HMRC did not receive it though until 22 June. It is up to the taxpayer to displace a penalty. Judge Redston cancelled the penalty. She pointed out that the Interpretation Act provides that service of any document “is deemed to be effected by properly addressing, pre-paying and posting a letter containing the document and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post”. As she believed Mr Clifton, she set aside the penalty (albeit that there were previous late returns where HMRC had accepted a succession of excuses as reasonable).

Alan German v HMRC was concerned with a penalty for late submission of a tax return. Judge Redstone upheld the penalty, albeit very reluctantly. The decision begins, “Mr German is an elderly, disabled unrepresented taxpayer who has been taxed via the PAYE system for many years. In the 2007-08 fiscal year he changed employers and too little tax was deducted from his PAYE income”. Here the Interpretation Act worked against the taxpayer as HMRC showed that they had posted a tax return to him, but he had not completed it. The decision quotes that Mr German had said that some of his mail during 2008 may not have been delivered because “a local woman was found guilty having not posted mail and hid it outside where it was damaged”. Judge Redston does not seem to have regarded that as proof that delivery had not been effected, although as HMRC had issued a duplicate return in April 2009 it did not matter unduly. Mr German eventually made an appointment to attend his nerarest HMRC office on 5 January 2010, where they told him what he needed to do, and he ultimately submitted his return on 5 March 2010.

I have concerns about HMRC forcing an elderly, disabled taxpayer to visit them rather than send someone round to talk to him. I share Anne Redston’s concerns that where there is an error in calculating PAYE by an employer it is normally the employer, not the employee, who is required to bear the consequences of his error and to pay the tax, but where there is an error by HMRC (in issuing an incorrect Code number) the taxpayer is expected to bear the consequences of HMRC’s error. I am also sad that HMRC chose to impose penalties (and surcharges for late payment of the tax) on an elderly disabled person who appeared clearly confused about why he should owe tax.

However that is not the purpose of this note. My concern is that in the Heronslea case, Judge Redston said that “HMRC state that all CIS returns are date stamped on the day of receipt and this date is then recorded on the HMRC computer. However, the Tribunal were not provided with the date-stamped CIS return, nor a computer print-out showing the date of receipt, nor any evidence, in relation to the particular HMRC office concerned, as to procedures for opening the post and logging it. The Tribunal thus had evidence … to support HMRC’s case that the return was delivered late”.

I do not have much sympathy for HMRC, who can surely be expected to know what they have to prove. I have a lot of sympathy for Mr German though. Judge Redston pointed out that, “while penalties and surcharges can be susceptible to an insufficiency of funds reasonable excuse defence in accordance with the Steptoe principles, there is insufficient evidence before the Tribunal as to Mr German’s financial situation to allow the Tribunal to consider this argument. Lack of funds therefore does not excuse Mr German from the penalties or surcharges”.

Being a pedant, that is not quite right. Lack of funds may well excuse him in law. What actually does not excuse him, as “an elderly, disabled, unrepresented taxpayer” is that he did not have a good enough understanding of tax law to have appreciated what he needed to put in his letter for the Tribunal to enable it to consider his excuse. Judge Redston similarly said that, “it is possible that Mr German’s disability, or the pain killers, which lead him to be forgetful, might provide him with an alternative reasonable excuse. But Mr German did not put this forward to the Tribunal. I therefore cannot consider it …”.

I am a big fan of paper decisions. I know that a lot of people will be prepared to write a letter to the Tribunal but will be too scared to turn up and explain their case. Accordingly I believe that in the General Commissioners era many people did not pursue their appeals because they were too scared to do so and they were not aware that, if they wrote in, their letter would be considered, albeit possibly in the context that the Commissioners would already be uptight that the taxpayer had not bothered to turn up. (I should stress that I do not believe that would have happened; I am simply saying that the system created a perception that it might).

On the other hand these two cases raise a question in my mind as to what extent under the paper track justice is actually done! It may well be that Mr Clifton and Mr German would not have turned up to a General Commissioners hearing and that the result would have been the same. On the other hand, the General Commissioners sit locally. In theory the First-tier Tribunal is entitled to do so where necessary but the appeal form does not say this; it simply asks, “Please state if you have a preference for the hearing of your appeal to take place, if practicable, in any particular city or town”. It does not invite the taxpayer to say, “Because I am disabled I need the hearing to take place in a part of London that is within two miles of where I live”. The appeal form does say, “If you or anyone coming to a Tribunal has a disability or a particular need, please set out the details below” but this seems to be asked in the context of the venue needing to be able to accommodate the disability; not in the context of the disability needing to determine the locality of the venue.

I do not know what information is given to a taxpayer when his case is allocated to the Default Paper category. The explanatory booklet, “At your hearing” which gives some guidance about evidence says, “Please note that if your appeal is in the Default Paper category, the information provided in this booklet does not apply”, so Mr German might reasonably have concluded that the advice given there was irrelevant to him The booklet, “Making an Appeal” says “Default Paper cases, by their nature, are generally decided by the Tribunal after reading the Notice of Appeal and the other written material provided by you and HMRC. Default Paper cases are dealt with without a hearing, though you may ask for your appeal to be decided at a hearing”. There is no indication there that you may be disadvantaged without a hearing and ought to at least consider asking for one.

Will you really be disadvantaged? I think that if Mr German had turned up for a General Commissioners hearing on his case, the Commissioners would have explained to him the meaning of “reasonable excuse” and why they did not have enough information to decide if he had one. They would then have asked him to explain orally whether there was a reason why he did not have the money to pay the tax – I suspect it may well have been because the tax bill was wholly unexpected and he had little or no savings, but that is simply a guess – and whether his pain killers affected his memory. In the light of the amounts involved they might well have accepted his explanation. Alternatively they would probably have explained to him what further documents they wanted to see (e.g. a summary of his assets and liabilities and income and outgoings, and a letter from his doctor) and adjourned the case for a month to give him time to provide them.

Anne Redston is a friend of mine. I think that If Mr German had asked for an oral hearing she would have done the same. In theory she could herself have imposed an oral hearing on Mr German when she read the papers had she realised that the information they disclosed was inadequate for her to ensure that she fully understood Mr German’s case. But she would have had no means of knowing whether he would have turned up for such a hearing and I suspect that, judicially, she would not even have been entitled to explain to him precisely why she felt that an oral hearing would be sensible. I also suspect that, judicially, once she had started to consider the case in detail, she could have turned it into a hearing; the rules do not seem to me to allow even a judge to change track in midstream.

I think that these two cases highlight two major problems with Default Paper appeals. By excluding oral evidence, they exclude the opportunity for the Tribunal to assess the veracity of the taxpayer (or of the HMRC Officer) so forcing the Tribunal to look for confirmatory evidence. They also prevent the Tribunal from telling the parties what sort of confirmatory evidence it feels that it needs.

I think that practitioners should think twice before allowing an appeal to follow the paper track. That is not of much help to unrepresented taxpayers though, as they are unlikely to read this article. I think that there is a need to enable the Tribunal to call for further paper evidence once it has started to consider the case. There may also be a need for a Tribunal guidance booklet on the evidence standard to which the Tribunal works and the minimum information that a taxpayer needs to produce to have a chance of meeting that standard.



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