Friday, November 11, 2011

BLOG 115


HMD Response International is a small charity. As it has a few employees it has to file a P35 (end of year PAYE return) by 19 May each year. It engages a Chartered Accountant to do this. The accountant filed the 2009/10 return on 16 May 2010. Unfortunately HMRC say they never received it. On 27 September 2010 HMRC issued a penalty notice for £400 (£100 because the return was not filed by 19 May, £100 because it was not filed by 19 June, £100 because it was not filed by 19 July and £100 because it was not filed by 19 August). The accountant immediately sent HMRC a copy of the return – so the company would only incur a further £100 penalty because it was not filed by 19 September. He asked for the penalties to be cancelled in the circumstances. HMRC said, “No”. He asked for an Internal Review. The reviewer upheld the penalties. So the accountant took the appeal to the First-tier Tribunal.

The Tribunal was scathing! “In our judgement, the appellant is entitled to rely upon the common law duty of a public body to act fairly not just in its decision-making process but also in administering its statutory powers. We are in no doubt that such a body does not act fairly when it deliberately desists from sending a penalty notice, for four months or more, knowing that the effect will be to impose a minimum penalty of £500 on somebody whose sin may amount to no more than oversight or forgetfulness. We should also add that when HMRC sent the result of its review to the appellant on 30 March 2011, it made it clear that it had undertaken the review process on the basis that, for the appellant to show that it had a “reasonable excuse” … it needed to demonstrate that there had been some exceptional event beyond its control that had prevented it from sending its return on time. As a matter of law, that is not the correct test and is totally misleading. Thus HMRC misdirected itself in law. Parliament has said that an appellant must demonstrate that it has a “reasonable excuse”. These are ordinary English words in everyday use. They must be given their ordinary and natural meaning. If Parliament had intended to say that an appellant must prove some exceptional circumstances, it could and should have said so. It did not choose to do so. Instead it used the expression “reasonable excuse” which HMRC has quite wrongly sought to elevate to something more onerous than the test specified by Parliament”.

And later, “We asked Miss Weare [for HMRC] whether she accepted that if a person genuinely and honestly believes that a successful online filing has been completed that might amount to a reasonable excuse … She agreed that such circumstances would amount to a reasonable excuse. We take the view that she was entirely correct to do so. We are equally sure that those circumstances could not possibly be described as exceptional. That is a simply illustration of why the exceptionality test propounded by HMRC is, as a matter of law, wrong. We should also add that HMRC sets out that it runs a “structured programme to enable penalties to be issued regularly throughout the year … Thus, HMRC deliberately waits until four months have gone by and does not issue the first interim penalty notice until, as in this case, September of the year of default. By that time a penalty of £400, being four times £100 per month, is said to be due … We appreciate that HMRC takes the stance that it … has no obligation to issue any reminder. However, we have no doubt that any right-thinking and fair-minded member of society would consider that to be unfair and falling very far below the standard of fair dealing and conscionable conduct to be expected of a manifestation of the State that is empowered to issue penalties as a means of ensuring compliance.

There can be no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months so that, in effect, a minimum penalty of £500 will be levied … Its computers could be set to issue a penalty notice at any time after 19 May in each year; but it chooses to wait until mid/late September in each year.

HMRC is a manifestation of the State. It is no function of the State to use the penalty system as a cash generating scheme … In our judgement it would be a very simple matter for HMRC to set its computer settings so that a default or penalty notice is sent out soon after 19 May in any year, instead of some four months later. That fair approach might generate less penalty cash for the State, but it would be fair and conscionable as between the taxpayer and the State (acting by HMRC) …

It has long been part of the common law of this country that manifestations of the State must act fairly and in good conscience with its citizens. In our judgement there is nothing fair or reasonable in setting a computer system so that it does not generate a penalty notice until four months have gone by … thereby ensuring that a penalty of not less than £500 will be due. We are in no doubt that the computer system could easily be set to generate a single £100 penalty notice soon after the 19 May in each year. That is the course that a fair manifestation of the State, acting in good conscience towards the citizens of the State, would adopt”

I have quoted at length from the Tribunal decision because their strictures reflect my own view.

I am not wholly convinced that their decision in the taxpayer’s favour is correct in law though. Will HMRC have the nerve to take it to appeal? I expect so! Past Tribunal decisions suggest that HMRC is rarely protective of its staff where it believes that blaming a staff failure will enable it to collect money.

And actually in this instance I do not want to blame HMRC. I want to blame parliament. In virtually every Finance Act since 2008, parliament has given HMRC more and more powers. It has substantially increased the penalties on taxpayers who get things wrong (other than if they can demonstrate that they took reasonable care). I think that this is the first case that shows how HMRC have chosen to exercise their new powers.

I hope that it reflects what your MP expected when he or she voted to give the powers to HMRC!