Salford Van Hire Ltd v Revenue & Customs [2013] UKFTT 52 (TC) (11 January 2013)

DECISION

Introduction

1. This is an appeal against a penalty assessment (as amended) of £36,996.15 imposed under Schedule 56 of the Finance Act 2009 ("Schedule 56") in respect of the late payment by the Appellant of monthly payments of PAYE and National Insurance contributions ("NICs") in months of the year ending 5 April 2011.

2. The dates and amounts of the PAYE payments due and made were not in dispute. The appeal was based on whether the Appellant had a "reasonable excuse". The Appellant argued that the main reason for late payments was insufficiency of funds and that the insufficiency was attributable to events outside its control. The Appellant also argued that it was unaware of the new penalty regime and that it was unfair for HMRC not to take such steps as may be necessary to ensure the Appellant was aware of the new penalty regime. The Appellant argued that HMRC's decision to impose penalties was disproportionate.

Background

3. The Appellant provides fleet rental and contract hire vehicles and is based in Manchester.

4. From 6 April 2010, a new penalty regime was introduced by HMRC for late payment of monthly PAYE and NIC by employers. Previously, there was a mandatory electronic payment surcharge on large employers (those with over 250 employees). The surcharge ranged from 0% to 0.83% of the amount paid late and depended on the number of defaults in any one year. It was therefore possible for many employers to delay payments to HMRC without incurring any material costs. Under Schedule 56 Finance Act 2009, however, this possibility was removed. Schedule 56 imposes penalties for late payment of PAYE. The legislation in relevant part is set out in below.

5. The penalties under Schedule 56 are based on a sliding scale as shown in the table below. The penalty varies as provided by paragraph 6, subparagraphs (4) to (7). The first default in any year is disregarded altogether. The remaining defaults trigger a penalty of 1%, 2%, 3% or 4% depending on their number. A 4% penalty is payable if there are ten or more defaults during the tax year.


	No of failures	Penalty
	1	no penalty providing the payment is less than six months late
	2-3	1%
	4-6	2%
	7-9	3%
	10 or more	4%

The penalty will not be levied if a) a time to pay agreement has been agreed in advance of the due date(s), b) if there are "special circumstances in terms of paragraph 9 Schedule 56 or c) if the Appellant can establish that there was a reasonable excuse for each or any default, and that each payment was made as soon as the reasonable excuse ended. Reasonable excuse is not defined by legislation, but it can be considered to be an event or events beyond the taxpayer’s control which prevented the payments being made by the due date.

6. The Appellant was late in paying its monthly PAYE and NICs to HMRC in eleven months of the 2010 -11 tax year. The first default month is disregarded in accordance with the regulations and following the decision in Agar any default in month twelve does not crystallise in the default year 2010 – 11, but instead falls in the year 2011-12. Therefore there were nine defaults for which penalties are payable. HMRC produced for the hearing, a table showing the amounts of PAYE and NIC due for each of the relevant months, the penalty trigger date for each month, the date that payment was made for each of the months, and number of days that the payment was late in each of the months in which payment was said by HMRC to have been late. The amounts, the due dates, the actual payment dates and the penalty amounts charged are set out in the table below.


PAYE and NIC Due and paid late	Due Date	Payment Date	Days Late	Penalty @ 3%
£122,404.85	19.05.2010	02 June 2010	13	disregarded
£125,274.16	19.06.2010	23 June 2010	4	£5010.97
£0	19.07.2010	19 July 2010	0	£0
£124,300.66	19.08.2010	28 August 2010	9	£4972.03
£123,676.27	19.09.2010	05 October 2010	16	£4947.05
£152,823.92	19.10.2010	05. Nov 2010	17	£6112.96
£146,421.61	19.11.2010	17. Dec 2010	29	£5856.86
£138,036.50	19.12.2010	08 January 2011	19	£5521.46
£147,895.42	19.01.2011	25 January 2011	6	£5915.82
£135,271.52	19.02.2011	26 February 2011	7	£5410.86
£139,305.22	19.03.2011	29 March 2011	7	£5572.21
£0	19.04.2011	29 April 2011	N/A	£0
£1,233,005.30		TOTALS		£36,990.15

7. HMRC assessed a penalty at 3% of the total amount of defaults and notified it to the Appellant in a letter dated 06 June 2011. The Appellant asked HMRC for an independent review. By letter dated 12 July 2011 HMRC confirmed the decision. The Appellant appealed to the Tribunal on 18 July 2011.

8. The arguments in the Appellant's notice of appeal and letters to HMRC were that:

1. The Appellant had always paid in full on a monthly basis and never missed a PAYE payment. There have been no previous penalties.

2. Due to cash flow considerations during the default year the Appellant made PAYE payments only a few days late. The Appellant tried its best to make payments on time. On average the Appellant was 13 days late.

3. A penalty of £56,928.40 (since reduced to £36,990.15) is excessive in relation to the circumstances affecting the Appellant and could have a catastrophic effect on its business during a very fragile economic climate.

4. HMRC's review of its decision was hasty and the Appellant representations were not fairly considered.

5. Hardship to the business.

6. The Appellant was unaware of the new penalty regime and HMRC did not at any stage warn the Appellant that it was liable to significant penalties on an increasing and incremental basis.

The legislation

9. The relevant legislation is contained in Finance Act 2009, Schedule 56.

Paragraph 1 of Schedule 56 states as follows:

‘(1) A penalty is payable by a person ("P") where P fails to pay an amount of tax specified in column 3 of the Table below on or before the date specified in column 4.

(2) Paragraphs 3 to 8 set out—

(a) the circumstances in which a penalty is payable, and

(b) subject to paragraph 9, the amount of the penalty.

(3) If P's failure falls within more than one provision of this Schedule, P is liable to a penalty under each of those provisions.

(4) In the following provisions of this Schedule, the "penalty date", in relation to an amount of tax, means the date on which a penalty is first payable for failing to pay the amount (that is to say, the day after the date specified in or for the purposes of column 4 of the Table)’.

10. The table lists numerous various categories of taxes of which those referred to in items 1 and 2 (as shown in the extract from the Table below) are relevant to this appeal.

	Tax to which payment relates	Amount of tax payable	Date after which penalty is incurred
PRINCIPAL AMOUNTS
1	Income tax or capital gains tax	Amount payable under section 59B(3) or (4) of TMA 1970	The date falling 30 days after the date specified in section 59B(3) or (4) of TMA 1970 as the date by which the amount must be paid
2	Income tax	Amount payable under PAYE regulations ...	The date determined by or under PAYE regulations as the date by which the amount must be paid
3	Income tax	Amount shown in return under section 254(1) of FA 2004	The date falling 30 days after the date specified in section 254(5) of FA 2004 as the date by which the amount must be paid

11. Regulations 67A and 67B of the Social Security Contributions Regulations (SI 2001/1004 as amended) provide that Schedule 56 applies also to Class 1 National Insurance contributions as if they were an amount of tax falling within item 2 of the above Table, and to Class 1A and Class 1B National Insurance contributions as if they were an amount of tax falling within item 3 of the above Table.

12. Paragraph 5 of Schedule 56 states that paragraphs 6 to 8 of Schedule 56 apply in the case of a payment of tax falling within item 2 or 4 in the Table.

13. Paragraph 6 of Schedule 56 states as follows:

(1) P is liable to a penalty, in relation to each tax, of an amount determined by reference to--

(a) the number of defaults that P has made during the tax year (see sub-paragraphs (2) and (3)), and

(b) the amount of that tax comprised in the total of those defaults (see sub-paragraphs (4) to (7)).

(2) For the purposes of this paragraph, P makes a default when P fails to make one of the following payments (or to pay an amount comprising two or more of those payments) in full on or before the date on which it becomes due and payable--

(a) a payment under PAYE regulations;

(b) a payment of earnings-related contributions within the meaning of the Social Security (Contributions) Regulations 2001 (SI 2001/1004);

(3) But the first failure during a tax year to make one of those payments (or to pay an amount comprising two or more of those payments) does not count as a default for that tax year.

(4) If P makes 1, 2 or 3 defaults during the tax year, the amount of the penalty is 1% of the amount of the tax comprised in the total of those defaults.

(5) If P makes 4, 5 or 6 defaults during the tax year, the amount of the penalty is 2% of the amount of the tax comprised in the total of those defaults.

(6) If P makes 7, 8 or 9 defaults during the tax year, the amount of the penalty is 3% of the amount of the tax comprised in the total of those defaults.

(7) If P makes 10 or more defaults during the tax year, the amount of the penalty is 4% of the amount of the tax comprised in the total of those defaults.

(8) For the purposes of this paragraph--

(a) the amount of a tax comprised in a default is the amount of that tax comprised in the payment which P fails to make;

(b) a default counts for the purposes of sub-paragraphs (4) to (7) even if it is remedied before the end of the tax year.

(9) The Treasury may by order made by statutory instrument make such amendments to sub-paragraph (2) as they think fit in consequence of any amendment, revocation or re-enactment of the regulations mentioned in that sub-paragraph.

14. Paragraph 9 of Schedule 56 allows HMRC to reduce a penalty if special circumstances exist.

Paragraph 9 states as follows:

(1) If HMRC think it right because of special circumstances, they may reduce a penalty under any paragraph 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.

15. Paragraph 10 of Schedule 56 states as follows:

(1) This paragraph applies if--

(a) P fails to pay an amount of tax when it becomes due and payable,

(b) P makes a request to HMRC that payment of the amount of tax be deferred, and

(2) If P would (apart from this sub-paragraph) become liable, between the date on which P makes the request and the end of the deferral period, to a penalty under any paragraph of this Schedule for failing to pay that amount, P is not liable to that penalty.

(3) But if--

(a) P breaks the agreement (see sub-paragraph (4)), and

(b) HMRC serves on P a notice specifying any penalty to which P would become liable apart from sub-paragraph (2),

P becomes liable, at the date of the notice, to that penalty.

(4) P breaks an agreement if--

(a) P fails to pay the amount of tax in question when the deferral period ends, or

(b) the deferral is subject to P complying with a condition (including a condition that part of the amount be paid during the deferral period) and P fails to comply with it.

(5) If the agreement mentioned in sub-paragraph (1) (c) is varied at any time by a further agreement between P and HMRC, this paragraph applies from that time to the agreement as varied.

16. Paragraph 11 states in mandatory terms that HMRC must levy a penalty where P is liable:

11(1) Where P is liable for a penalty under any paragraph of this Schedule HMRC must-

(a) assess the penalty,

(b) notify P, and

17. Paragraphs 13-15 of Schedule 56 provide for appeals to the Tribunal against a decision of HMRC that a penalty is payable, or against a decision by HMRC as to the amount of the penalty that is payable. The Tribunal's powers are laid down in paragraph 15:

15(1) On an appeal under paragraph 13(1) that is notified to the Tribunal, the Tribunal may affirm or cancel HMRC's decision.

(2) On an appeal under paragraph 13(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 9--

(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 9 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.

(5) In this paragraph "Tribunal" means the First-tier Tribunal or Upper Tribunal (as appropriate by virtue of paragraph 14(1)).

18. As observed in Dina Foods Limited, [TC01546] under paragraph 15 the Tribunal is given power:

‘to confirm or cancel the penalty, or substitute for HMRC's decision another decision, but only one that HMRC had the power to make. The Tribunal can only rely upon the "special circumstances" provision in paragraph 9 to a different extent than that applied by HMRC if it thinks that HMRC's decision in that respect was flawed. Applying judicial review principles, the Tribunal must consider whether HMRC acted in a way that no reasonable body of commissioners could have acted, or whether they took into account some irrelevant matter or disregarded something to which they should have given weight. The Tribunal should also consider whether HMRC have erred on a point of law.’

19. Under paragraph 16 of Schedule 56, the Appellant may escape liability for a penalty if the Tribunal is satisfied that there was a reasonable excuse. Paragraph 16 was amended by Schedule 11 of the Finance (No 3) Act 2010 (c, 33). As originally drafted, paragraph 16 provided that liability to a penalty did not arise in relation to any failure for which there was a reasonable excuse. In the amended version, the paragraph also went on to say: "the failure does not count as a default for the purposes of paragraph 6...” The effect of this change is therefore that under the amended legislation, it is clear that defaults for which there is a reasonable excuse are not to be counted when fixing the appropriate rate of penalty to be charged.

Paragraph 16 of Schedule 56 states as follows:

(1) If P satisfies HMRC or (on appeal) the First-tier Tribunal or Upper Tribunal that there is a reasonable excuse for a failure to make a payment-

(a) liability to a penalty under any paragraph of this Schedule does not arise in relation to that failure, and

(b) the failure does not count as a default for the purposes of paragraph 6...

(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.

20. In considering a reasonable excuse the Tribunal examines the actions of the Appellant from the perspective of a prudent tax payer exercising reasonable foresight and due diligence and having proper regard for its responsibilities under the Taxes Acts.

21. The operation of Schedule 56 was considered in Dina Foods. It was observed that:

‘(1) the legislation became operative with a commencement date of 6 April 2010, so that the first time penalties could be raised under these rules was after the end of the 2010/11 tax year, given the way that the penalties talk in terms of the number of defaults during the year in question (at [11]);

(2) except in the case of special circumstances, the scheme laid down by the statute gives no discretion: the rate of penalty is simply driven by the number of PAYE late payments in the tax year by the employer (at [31]);

(3) the scheme of the PAYE legislation requires taxpayers to pay over PAYE on time; the legislation does not require HMRC to issue warnings to individual employers, though it would be expected that a responsible tax authority would issue general material about the new system (at [33]);

(4) lack of awareness of the penalty regime is not capable of constituting a special circumstance; in any event, no reasonable employer, aware generally of its responsibilities to make timely payments of PAYE and NICs amounts due, could fail to have seen and taken note of at least some of the information published and provided by HMRC (at [37]);

(5) any failure on the part of HMRC to issue warnings to defaulting taxpayers, whether in respect of the imposition of penalties or the fact of late payment, is not of itself capable of amounting either to a reasonable excuse or special circumstances (given that there is no separate penalty for each individual default, and the penalty can only be assessed once the aggregate of the late paid tax comprised in the total of the defaults for a particular tax year has been ascertained) (at [38]-[39]);

…………

Evidence and submissions

22. HMRC's bundle of documents included copies of correspondence, computerized records of telephone attendance notes and HMRC notices, together with the materials by which the new penalty system had been publicised.

23. It was not in dispute that the Appellant was required throughout the relevant year to make monthly payments of PAYE and NICs by the 19^th day of each month. Nor was there any dispute between the parties as to the amount of PAYE and NIC to be paid by the Appellant in each of the months in question. It was accepted by the Appellant that each of the payments in respect of which a penalty has been imposed was indeed late. There was also no dispute as to the calculation of the penalties apart from the potential application of paragraphs 9 and 16 of Schedule 56

24. HMRC produced for the hearing a revised penalty notice dated 12 April 2012. This revised penalty notice revised the amount of the penalty previously imposed to take account of the decision in Agar Ltd v Revenue & Customs [2011] UKFTT 773 (TC). The revised penalty was calculated on the basis that the effect of Agar is that the twelfth penalty should not have been included in the penalty notice, as the Appellant did not become liable to it until after the end of the tax year in question. Consequently the original penalty total of £56,928 .40 was reduced to £36,990.15.

The Appellants submissions

25. Mr. Frost reiterated and expanded upon the grounds of appeal stated in the Appellant’s Notice of Appeal. These can be summarised as follows

1. The penalties should not be confirmed because the Appellant had a reasonable excuse for the default. The reasonable excuse on which the Appellant sought to rely was that the company was suffering from a severe shortage of funds during the relevant period. This was attributable to a number of reasons, but mainly circumstances and events entirely outside its control. Due to the recession, a number of bad debts and lack of support from the company's bank, the Appellant was at the limit of its overdraft facility, despite the injection of significant capital sums into the company by the proprietors.

2. Mr. Frost explained that historically, the company borrowed money to purchase new vehicles for fleet and contract hire. The company had approximately 10 to 12 large regional/national regular customers, which provided the bulk of the company's turnover. The company had an overdraft of approximately £9 million in 2009. Levels of business had always been more than sufficient to accommodate the overdraft. However in 2008 the company had incurred a loss and the company's bankers insisted that the overdraft was reduced to £3 million. The company had to borrow £6 million secured against its unencumbered assets. The book value of these assets was £24 million, but they were devalued at £12 million, by the bank,. The bank advanced 50% of that figure but this meant that the entirety of the company’s previously unencumbered assets were in charge to the bank leaving the company with no scope to raise further capital or increase its overdraft. The proprietors of the business then had to inject further monies totalling £3 million in order to maintain the company's overdraft below £3 million in compliance with covenants given to the bank.

3. Mr. Frost said that in previous years bad debts were running at approximately £25,000 per annum but in early 2010 the company suffered a bad debt of £117,000. The debtor had previous had been a very good customer paying approximately £50,000 a month. This represented a total annual loss of revenue amounting to £600,000. In previous years the company would be able to accommodate that sort of reduction in turnover, but the recession had seriously affected many of its customers who were de-hiring vehicles at an alarming rate. It was a condition of the loan from the bank that the £6 million had to be repaid over a period of two years, which imposed enormous financial constraints on the company’s cash flow. The Appellant was eventually able to move its banking facilities to another bank and relatively recently had been able to partially recover from its difficulties

4. The management of the company always did its best make PAYE payments to HMRC in a timely manner. The Appellant may have been a few days late occasionally but had never missed a payment. Payments were usually about 17 days late. The company had never missed a PAYE payment in previous years.

5. HMRC failed to notify the Appellant that it might be liable for penalties if its PAYE was paid late. Mr. Frost could not recollect receiving any information relating to the new penalty scheme. He was concerned that none of HMRC’s correspondence made any reference to significant penalties. He said that given the significant changes in the penalty regime, it was not unreasonable, to have expected letters which followed the initial warning to have included a reference the likelihood of penalties in the event of any further defaults. None of the reminders or telephone calls from HMRC mentioned that penalties had already been incurred.

6. Mr. Frost was totally unaware of the new PAYE penalty regime. The first time the Appellant was informed that a penalty had been incurred was in the notification of 06 June 2011. HMRC should have notified the Appellant preferably after the first default and certainly no later than the second default that it had already incurred penalties. HMRC should at that time, have informed the Appellant of the position or raised a penalty so that the Appellant could endeavour to put in place measures to avoid further defaults.

7. The penalties are unfair and totally disproportionate to the delays that had occurred in PAYE payments. On six occasions the PAYE was less than 10 days late. All but one of the other payments were no more than 19 days late. He considered the penalties to be entirely disproportionate to any costs incurred by HMRC which at a maximum was no more than £2000

8. Mr. Frost accepted that he had received notices and reminders from HMRC but assumed that because HMRC never mentioned a change in the penalty system, there was no problem. In previous years, there had never been any difficulty when the company was just a few days late with its payments. It had always paid interest without difficulty.

HMRC’s submissions

26. Mr. Jones for HMRC said that the Respondents accepted that the onus is on them to show default, but as the Appellant had accepted the payments were late it was for them to show why the penalty should not be charged and that the standard of proof is on the balance of probabilities.

27 Mr. Jones submitted that the Appellant had no reasonable excuse for the late payment of the PAYE. He submitted that under paragraphs 11 of Schedule 56, HMRC had no discretion as to the imposition of the penalty. He submitted that the amount of the penalty was set down in paragraph 6 of Schedule 56 and if the tax payer paid late, HMRC were obliged to impose the penalty. He said that in the first year of the penalty regime HMRC had targeted taxpayers who were the most persistent defaulters on a risk-assessed basis. Mr. Jones said the 2010/11 was not the first year that the Appellant had been late in making PAYE payments. The Appellant had been consistently late in making PAYE payments since 2005/06

28. Mr. Jones submitted that lack of awareness of the penalty regime was not a special circumstance. He said that HMRC publicised the late payment penalties for PAYE and NICs extensively both before and after they came into effect. An employer pack including a CD-ROM was mailed to all employers in February 2010; flyers were mailed to employers and factsheets were distributed at face to face events (such as "Employer Talk" and published on the HMRC website). Late payment penalties also featured in issues of Employer Bulletin, on the PAYE pages of the website (and on a podcast); on Businesslink and in published guidance and employer help books. He said that this should have acted as an early warning to the Appellant that the penalty regime was about to change. HMRC made every effort to educate employers on the changes. There was also communication with accountants and other tax agents, and publication in local and national media. HMRC’s Employer Bulletins refer employers to HMRC’s website. The website makes the deadlines for payment quite clear:

‘PAYE/Class 1 NICs electronic payment deadline

Your cleared payment must reach HMRC's bank account no later than the 22^nd of the month following the end of the tax month or quarter to which it relates.

PAYE/Class 1 NICs postal payment deadlines

.....please ensure your cheque reaches HMRC no later than the 19^th of the month following the end of the tax month or quarter to which it relates.’

29. Mr. Jones said that the Appellant was sent a warning letter on 28 May 2010 advising that the payment had been late, that any further late payments might incur a penalty, and giving an internet address at which further information about the penalty regime could be found. HMRC were not able to produce a copy of the original letter as it was a computer-generated letter, which had not been copied. However he was able to produce a copy of the format of the letter, which warned that, continued late payment could result in a penalty being charged. As referred to above the letter gave links to various web pages were more information could be obtained. The letter also included an offer to sign up to receive e-mail alerts as due dates approach, and informs the addressee to contact the business payment support service in the event of the employer being unable to pay PAYE on time. Mr. Jones said that there was nothing in the Appellant’s payment history to suggest that they had suffered from an unexpected event, which caused its PAYE to be paid late. The company had not contacted HMRC to request a payment deferral. He said that this demonstrated a continuing behaviour of paying late despite being warned of penalties by letter and in telephone calls. HMRC had spoken to Mr. Frost, the financial controller during the default year and given ample opportunity for the Appellant to bring PAYE payments into line. HMRC spoke to Mr. Frost on three occasions in September 2010, 10 January 2011 and in March 2011. In December 2010 one of HMRC's officers visited the Appellant's business premises and met with Mr. Frost to warn him about penalties and advise of the due dates. Mr. Jones said that in short, the Appellant had a poor compliance record. The new penalty regime had been introduced in 2010 as a deterrent, and to encourage employers to pay on time. Since receiving the penalties the Appellant had been paying on time, indicating that the new regime has been effective.

30. Mr. Jones said that HMRC had achieved significant media coverage in national trade, regional and online press. The Appellant appeared to have made no effort to acquaint itself of its obligations under the new penalty system. The Appellant had spoken to HMRC officers during the default year and was warned of penalties. The Appellant did not ask for any further information in connection with the new penalty regime.

31. Mr. Jones said that difficult trading conditions are normal part of business suffered by most companies. The company had not demonstrated anything unusual or unexpected beyond the problems encountered during the normal course of trade.

Conclusion

32. At the end of the hearing the Tribunal reserved its decision which now follows.

33. The adverse trading circumstances affecting the Appellant and the fact that it had suffered a substantial bad debt were not in dispute. We accept that the Appellant’s late payments were almost entirely due to cash flow pressures on its business. However as clearly stated in paragraph 6(2)(a) of Schedule 56, an insufficiency of funds does not qualify as a reasonable excuse. An inability to pay does not represent special circumstances, which might justify a reduction in a penalty. An exceptional or unforeseen event, which caused the insufficiency of funds may amount to a reasonable excuse but on the facts of this appeal there was no such event. Since 2005 the Appellant had a poor compliance record. Late payments did not start in 2010 when the Appellant suffered the £117,000 bad debt. Adverse economic conditions and particularly late payments by customers, which happen on a regular basis, do not suffice. Something specific and related to the particular taxpayer is required. A shortage of funds that is not unusual and can be anticipated is something which it is reasonable to expect an employer to be able to manage perhaps by arranging short-term finance. There may be exceptional unforeseeable events outside the employers control and outside the normal cycle of business that creates a severe cash flow shortage that cannot be managed. If the shortage of funds is the cause of the failure to make a payment on time then the employer may have a reasonable excuse. However, the employer must remedy the failure without unreasonable delay after the excuse has ended. In this case there were no unusual circumstances, which might have caused the insufficiency of funds. Since the imposition of the penalties the Appellant’s PAYE and NIC have been paid on time, which clearly suggests that the Appellant could have similarly put in place measures to avoid late payments of PAYE and NIC in the default year.

34. HMRC were not under any statutory duty to seek to warn the Appellant of change and potential penalties. The legislation does not require HMRC to issue warnings to individual employers. It is settled law that that any failure by HMRC to give warning of the penalty regime, cannot provide a reasonable excuse. The obligation is to make payment by the due date – see Rodney Warren & Co [2012] UKFTT 57 (TC) and Dina Foods Limited above.

35. The Tribunal is satisfied that there was an extensive campaign of advance publicity and that there was no reason why Appellant should not have been sufficiently alerted. The Appellant's apparent lack of awareness of the new penalty regime is not capable of constituting a special circumstance or reasonable excuse.

36. The Appellant received an initial Penalty Default warning letter in May 2010 (which explained about time to pay arrangements) and numerous enforcement warning letters. The first default would have attracted no penalty if there had been no further defaults for the remainder of the tax year. There was a considerable amount of contact with HMRC throughout the year about late payments of PAYE. There were several telephone conversations with representatives of the company. A reasonably prudent employer, aware of its responsibilities to make timely payments of PAYE and NICs amounts, would have been prompted to make enquiries of HMRC to ascertain the cause of the problem and obtain information about the penalty regime.

37. On the evidence, we find that in telephone conversations, which followed the initial warning letter, the Appellant was not told in unequivocal terms that it had already incurred penalties and would incur penalties if there were any further late payments after the first disregarded month. As the Appellant says, had HMRC informed the Appellant that a penalty or penalties had already been incurred following the first late payment that counted as a default, steps possibly could have taken to reduce or eliminate the possibility of further defaults. Nonetheless this does not absolve the Appellant of its obligations or liability to penalties. HMRC’s use of terminology such as ‘may’ conveys the impression that liability to a penalty is not certain, which if there has been more than one default and no reasonable excuse is not the case. As HMRC say however the penalty is set down in paragraph 6 of Schedule 56 and if the taxpayer pays late, HMRC are obliged to impose the penalty. In any event the word ‘may’ does not lack clarity and is not inconsistent with the provisions of Schedule 56. It is only when the end of the tax year has elapsed that HMRC can consider whether a penalty (or penalties) has been triggered and only then can they consider, whether special circumstances exist or whether there is a reasonable excuse for late payment.

38. In Dina Foods, at [40]-[42], the Tribunal considered whether the penalty was disproportionate, and said as follows:

‘40. In its initial appeal letter and in its formal notice of appeal, the company referred to the penalty being excessive. It is clearly not excessive on the terms of Schedule 56 itself because the system laid down prescribes the penalties. Nonetheless, whilst no specific argument was addressed to us on proportionality, we have considered whether, in the circumstances of this case, the 4% penalty that was levied on the total of the relevant defaults in the tax year can be said to be disproportionate.

41. The issue of proportionality in this context is one of human rights, and whether, in accordance with the European Convention on Human Rights, Dina Foods Ltd could demonstrate that the imposition of the penalty is an unjustified interference with a possession. According to the settled law, in matters of taxation the State enjoys a wide margin of appreciation and the European Court of Human Rights will respect the legislature's assessment in such matters unless it is devoid of reasonable foundation. Nevertheless, it has been recognised that not merely must the impairment of the individual's rights be no more than is necessary for the attainment of the public policy objective sought, but it must also not impose an excessive burden on the individual concerned. The test is whether the scheme is not merely harsh but plainly unfair so that, however effectively that unfairness may assist in achieving the social objective, it simply cannot be permitted.

42. Applying this test, whilst any penalty may be perceived as harsh, we do not consider that the levying of the penalty in this case was plainly unfair. It is in our view clear that the scheme of the legislation as a whole, which seeks to provide both an incentive for taxpayers to comply with their payment obligations, and the consequence of penalties should they fail to do so, cannot be described as wholly devoid of reasonable foundation. We have described earlier the graduated level of penalties depending on the number of defaults in a tax year, the fact that the first late payment is not counted as a default, the availability of a reasonable excuse defence and the ability to reduce a penalty in special circumstances. The taxpayer also has the right of an appeal to the Tribunal. Although the size of penalty that has rapidly accrued in the current case may seem harsh, the scheme of the legislation is in our view within the margin of appreciation afforded to the State in this respect. Accordingly we find that no Convention right has been infringed and the appeal cannot succeed on that basis’.

We agree with the observations made in Dina Foods as set out above. The principles were endorsed by the recent Upper Tribunal decision in Total Technology (Engineering). We do not consider the penalties to be disproportionate to the defaults involved.

39. As stated in Dina Foods, the penalty regime may be harsh in order to act as a deterrent, but it is not “unfair". The penalty scheme as laid down by the statute provides no discretion (except where "special circumstances" apply, which was not suggested here). The penalty rate rises in accordance with the incidence of default and is a fixed percentage. The penalty cannot be excessive where it was correctly assessed and calculated. We therefore follow Dina Foods Limited, at [40] to [42], and Agar at [46] and find that the penalties raised were not disproportionate.

40. The Tribunal's jurisdiction on appeal against fixed penalties, as these are, was considered by the Upper Tribunal in Hok Ltd, where it was confirmed that the Tribunal’s power is limited to correcting mistakes. It may decide that HMRC were wrong in deciding that a penalty was due and discharge it; or it may decide that HMRC imposed a penalty of the wrong amount, and replace it with the correct amount. However, the Tribunal does not have a power to substitute an amount other than the correct amount, whether on the basis of fairness or otherwise. Thus if HMRC have imposed a penalty in circumstances where one is due, and the penalty imposed is of the correct amount, there is nothing the Tribunal is permitted to do. No such power is granted by statute and none arises under the general or common law. Similarly with regard to the possible existence of ‘special circumstances’ although s9 states that HMRC ‘may’ reduce a penalty, thus affording the Commissioners some discretion, there is no mechanism by which the Tribunal may review the exercise of that discretion. The discretion to mitigate a penalty is conferred on HMRC, but not on the Tribunal, and the legislation does not provide any mechanism by which the refusal of HMRC to exercise that discretion under s 9 may be challenged before the First-tier Tribunal.

41. For the above reasons the Tribunal finds that the Appellant has not established either a reasonable excuse for any of the late payments, or shown special circumstances justifying a mitigation of the penalty. The penalty was not disproportionate and the administration of the penalty regime was not unfair to the Appellant. It therefore follows that the appeal must be dismissed and the penalties confirmed.

42. 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 S CONNELL

TRIBUNAL JUDGE

RELEASE DATE: 11 January 2013

	SALFORD VAN HIRE LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S	Respondents
	REVENUE & CUSTOMS

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Salford Van Hire Ltd v Revenue & Customs [2013] UKFTT 52 (TC) (11 January 2013) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2013/TC02472.html Cite as: [2013] UKFTT 52 (TC)

TRIBUNAL:	JUDGE MICHAEL S CONNELL
	PHILLIP JOLLY

First-tier Tribunal (Tax)