Patel v Revenue & Customs (INCOME TAX - fixed and daily penalties) [2019] UKFTT 453 (TC) (10 July 2019)

DECISION

INTRODUCTION

1. This is an appeal by Mr Siraz Patel (‘the Appellant’) against fixed and daily penalties totalling £850 imposed by the Respondents (‘HMRC’) under Paragraph 3 and 4 of Schedule 55 Finance Act 2009, for his failure to file a self-assessment (‘SA’) tax return on time for the tax year ending 5 April 2017.

BACKGROUND

2. The Appellant’s return for 2016-17, was due if filed electronically no later than 31 January 2018.

3. 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.

(ii) If after a period of 3 months beginning with the penalty date the return remains outstanding, daily penalties of £10 per day up to a total of £900 are imposed under Paragraph 4 of Schedule 55 FA 2009.

(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.

(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.

4. The Appellant’s electronic return for 2016-17 was filed on 14 July 2018. It was therefore not filed on time and penalties of £100 and £750 were imposed, under (i) and (ii) above.

Filing date and Penalty date

5. Under s 8(1D) TMA 1970 a non-electronic return must normally be filed by 31 October in the relevant financial year or an electronic return by 31 January in the year following. The ‘penalty date’ is defined at Paragraph 1(4) Schedule 55 FA 2009 and is the date after the filing date.

Reasonable excuse

6. 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.

7. 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.

8. 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).

9. 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.

10. The onus lies with HMRC to show that the penalties were issued correctly and within legislation. If the Tribunal find that HMRC have issued the penalties correctly the onus then reverts to the Appellant to show that he has a reasonable excuse for the late filing of his SA tax return.

The background facts

11. The Appellant’s 2016-17 return was issued to him on 6 April 2017 and was due to be returned by 31 January 2018 if returned electronically. The Notice to file a return was issued to the correspondence address provided by the Appellant.

12. The Appellant’s grounds of appeal are that he did not expect to have to file a return and did not receive the notice to file. Accordingly, he had a reasonable excuse for the delay in filing a return.

13. The SA return was received electronically by HMRC on 14 July 2018. It was over five months late.

14. HMRC imposed a fixed penalty of £100 together with daily penalties [at £10 for each day], totalling £750.

15. The Appellant appealed to the Tribunal on 30 January 2019.

The Appellant’s case

16. The Appellant’s grounds of appeal are that because he only acts as a company Director he believed that he was not required to file an assessment. He sought advice upon receipt of the penalty letter.

HMRC’s Case

17. A late filing penalty is raised solely because a SA tax return is filed late 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.

18. Where a return is filed after the relevant deadline a penalty is charged. The later a return is received, the more penalties are charged.

Reasonable Excuse

19. Under Paragraph 23 (1) Schedule 55 FA 2009 liability to a penalty does not arise in relation to failure to make a return if the taxpayer has a reasonable excuse for failure.

20. ‘Reasonable excuse’ was considered in the case of The Clean Car Company Ltd v The Commissioners of Customs & Excise by Judge Medd who said:

“It has been said before in cases arising from default surcharges that 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?” [Page 142 3rd line et seq.].

21. HMRC considers a reasonable excuse to be something that stops a person from meeting a tax obligation on time despite them having taken reasonable care to meet that obligation. HMRC’s view is that the test is to consider what a reasonable person, who wanted to comply with their tax obligations, would have done in the same circumstances and decide if the actions of that person met that standard.

22. If there is a reasonable excuse it must exist throughout the failure period.

23. The Appellant has not provided a reasonable excuse for his failure to file his tax return for the year 2016-17 on time and accordingly the penalties have been correctly charged in accordance with the legislation.

24. 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

25. 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.

26. 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).

27. 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’.

28. HMRC have considered the Appellant’s grounds of appeal but assert that his circumstances do not amount to special circumstances which would merit a reduction of the penalties.

29. Accordingly, HMRC’s decision not to reduce the penalties under paragraph 16 was not flawed. There are no special circumstances which would require the Tribunal to reduce the penalties.

FINDINGS OF FACT

30. Mr Patel states that he had relied upon a previous agent when a Director of his previous company. He states that they filed tax returns on his behalf. In order to file tax returns on his behalf they would still have required his explicit agreement each time a return was filed. He therefore must have been aware that he had previously been required to file SA tax returns as a company Director.

31. In their letter dated 17 July 2018 Maya Associates Ltd state that he did not receive any income as PAYE employee and that (in part) led to his belief that he did not need to submit a tax return, however, his return was subsequently amended to show that he did receive such income , and so he cannot have been misled for that reason. That letter indicates that Maya Associates Ltd would have told him that he needed to file if he had asked, and that they did not have instructions to file on his behalf either in the relevant year or the future. He was not therefore told by them that they would be filing any returns on his behalf.

32. The Checklist that Mr Patel has submitted with his appeal clearly states that a Director will be required to submit a SA return if HMRC have indicate that one is required. The notice to file was sent to Mr Patel’s registered address on 6 April 2017. He states that he did not receive that notice. Mr Patel gave that address as a correspondence address to HMRC. There is no suggestion within the papers before me that there were any postal difficulties around the relevant time and he has received subsequent correspondence. Having received notices to file in previous years, he ought to have noticed a lack of correspondence from HMRC that year. It is likely therefore that he received the notice to file. I conclude that the notice to file was properly issued to the correspondence address provided by Mr Patel.

33. A person is liable to a penalty if (and only if) HMRC give notice to the person specifying the date from which the penalty is payable. I am satisfied that the penalty notices dated on or around 13 February 2018 and 17 July 2018 gave proper notice (Donaldson v The Commissioners for HM Revenue & Customs [2016] EWCA Civ 761) and were sent to the postal address linked to the Appellant’s SA account.

34. Mr Patel accepts that he received the later penalty notice albeit not the February notice, and not a statement of account sent in March 2018. He further appears to be suggesting that he did not received the request for payment issued on 20 March 2018. It is unclear then how it came to his attention that he had failed to file. His agent indicated in the letter of 17 July 2018 that he sought their advice after receiving the penalty notice, and he filed his return three days before that letter. The HMRC computer system indicates that he was not issued a penalty notice until 17 July, but that did not specify the £850 total and only referred to the daily penalties totalling £750. A 60 Daily Penalty reminder was sent on 3 July 2018 but this did not specify the £850 total, which is the first indication that Mr Patel says that he had of the penalties accrued. That total of £850 was first set out in a statement of account dated 11 September 2018, and yet he filed the return two months earlier. He must therefore have received some of those earlier documents, to have sought advice prior to the 14 July 2018 as his agent states.

35. It is agreed that the return was in fact submitted electronically on 14 July 2018. The HMRC computer system does not allow a customer to submit a tax return for the same tax year twice. Therefore, the return having been submitted on 14 July 2018 effectively, it must not have been submitted effectively prior to that. I accept that the return was not properly submitted on or around 31 January 2018, or prior to 14 July 2018.

DISCUSSION

36. Relevant statutory provisions are included as an Appendix to this decision.

37. I have concluded that the tax return for the 2016-17 tax year was not submitted on time. It should have been submitted by 31 January 2018. Subject to considerations of “reasonable excuse” and “special circumstances” set out below, the penalties imposed are due and have been calculated correctly.

38. 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. A reasonable excuse is normally an unexpected or unusual event, which prevents him or her from complying with an obligation which otherwise they would have complied with.

39. Having been a Director of a company for a number of years – albeit a different company – Mr Patel must have been aware that he would be required to submit a SA return. In addition, he received income as a PAYE employee and I consider it likely that he received the notice to file. He has indicated throughout proceedings that he initially did not feel a return was required, and it may therefore be that he felt that he had been issued with the return in error and disregarded it.

40. A tax return was issued to the Appellant on 6 April 2017. Having been issued there is an obligation that it is submitted prior to the filing date, whether any tax is due or not.

41. In Perrin v HMRC [2018] UKUT 156, the Upper Tribunal had explained that the experience and knowledge of the particular taxpayer should be taken into account. The Upper Tribunal had concluded that for an honestly held belief to constitute a reasonable excuse it must also be objectively reasonable for that belief to be held. In my judgment it is not objectively reasonable to have failed to check whether the requirement to file remained or to have failed to check whether he had met his tax requirements, particularly in circumstances where he had an agent who could have advised him had he asked.

42. I have also borne in mind the recent comments of the Tribunal in Hesketh v HMRC [2017] UKFTT 871 about whether ignorance of an obligation to file could excuse late filing. Judge Mosedale held that Parliament intended all of its laws to be complied with, and that ignorance of the law was not an excuse. I agree with those conclusions and consider that if ignorance of the obligation cannot be a reasonable excuse, then awareness of the obligation but ignorance of the consequences also cannot be a reasonable excuse.

43. Mr Patel suggests that he relied upon his agent to file his return, however no evidence has been put before me that his agent ever led him to believe that he would be taking over this responsibility. If he did, it may indeed be that Mr Patel has some recourse against his agent, however, his reliance upon an agent cannot be a reasonable excuse unless he took reasonable care to ensure that his obligations were complied with. The responsibility for complying with his tax obligations rests with him. He made no efforts to exercise the necessary reasonable care and cannot rely on an assertion of reasonable excuse.

44. I conclude that Mr Patel does not have a reasonable excuse for the late filing of his return for 2016-17.

45. Even when a taxpayer is unable to establish that he has a reasonable excuse and he remains liable for one or more penalties, HMRC have the discretion to reduce those penalties if they consider that the circumstances are such that reduction would be appropriate. In this case HMRC have declined to exercise that discretion.

46. Paragraph 22 of Schedule 55 provides that I am only able to interfere with HMRC’s decision on special reduction if I consider that their decision was flawed (in the sense understood in a claim for judicial review). That is a high test and I do not consider that HMRC’s decision in this case (set out in their Statement of Case) is flawed. Therefore, I have no power to interfere with HMRC’s decision not to reduce the penalties imposed upon Mr Patel.

47. I should add, that even if I did have the power to make my own decision in respect of special reduction, the only special circumstance which Mr Patel relied upon was his belief that he was not required to file a tax return. I have explained above why I do not consider that failure to ensure his tax obligations were complied with can provide Mr Patel with a reasonable excuse for his late filing. The circumstances are not such as to make it right for me to reduce the penalty which has been imposed.

CONCLUSION

48. I therefore confirm the fixed penalties of £100 and £750.

RIGHT TO APPLY FOR PERMISSION TO APPEAL

49. 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.

ABIGAIL HUDSON

TRIBUNAL JUDGE

RELEASE DATE: 10 JULY 2019

APPENDIX

RELEVANT STATUTORY PROVISIONS

Finance Act 2009

50. The penalties at issue in this appeal are imposed by Schedule 55. The starting point is paragraph 3 of Schedule 55 which imposes a fixed £100 penalty if a self-assessment return is submitted late.

51. Paragraph 4 of Schedule 55 provides for daily penalties to accrue where a return is more than three months late as follows:

4—

(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

(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).

52. Paragraph 5 of Schedule 55 provides for further penalties to accrue when a return is more than 6 months late as follows:

5—

(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.

53. Paragraph 6 of Schedule 55 provides for further penalties to accrue when a return is more than 12 months late as follows:

6—

(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 12 months beginning with the penalty date.

(2) Where, by failing to make the return, P deliberately withholds information which would enable or assist HMRC to assess P’s liability to tax, the penalty under this paragraph is determined in accordance with sub-paragraphs (3) and (4).

(3) If the withholding of the information is deliberate and concealed, the penalty is the greater of —

(a) the relevant percentage of any liability to tax which would have been shown in the return in question, and

(b) £300.

(3A) For the purposes of sub-paragraph (3)(a), the relevant percentage is—

(a) for the withholding of category 1 information, 100%,

(b) for the withholding of category 2 information, 150%, and

(4) If the withholding of the information is deliberate but not concealed, the penalty is the greater of —

(a) the relevant percentage of any liability to tax which would have been shown in the return in question, and

(b) £300.

(4A) For the purposes of sub-paragraph (4)(a), the relevant percentage is—

(a) for the withholding of category 1 information, 70%,

(b) for the withholding of category 2 information, 105%, and

(5) In any case not falling within sub-paragraph (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.

(6) Paragraph 6A explains the 3 categories of information.

54. Paragraph 23 of Schedule 55 contains a defence of “reasonable excuse” as follows:

23—

(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.

55. Paragraph 16 of Schedule 55 gives HMRC power to reduce penalties owing to the presence of “special circumstances” as follows:

16—

(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.

56. 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:

22—

(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.

Taxes Management Act 1970

57. 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 the section is given after the 31st October next following the year, the last [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 the 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 the Act for a period which includes, or includes any part of, the year of assessment or its basis period.]

(1D) A return under the 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 the 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 the section may require different information, accounts and statements for different periods or in relation to different descriptions of source of income.

(4) Notices under the section may require different information, accounts and statements in relation to different descriptions of person.

(4A)Subsection (4B) applies if a notice under the section is given to a person within section 8ZA of the 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 the section and sections 8A, 9 and 12AA of the 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.

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