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Tax tribunal severely criticises HMRC for using the penalty system as a cash generating scheme
Monday, August 8th, 2011
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The First-tier Tax Tribunal suggests that HMRC is acting like a “disreputable debt collector” and uses the penalty system as a “cash generating scheme”…
We thought the Tax tribunal comments that we reported last week would be enough to force HMRC to change its policy towards year-end filing penalties. But another decision goes further and criticises HMRC in the strongest possible terms.
In the case HMD Response International v Revenue & Customs, given on 15 July by the First-tier Tax Tribunal, HMD was appealing against a £500 penalty, levied by HMRC in September 2010, for not filing its P35 by 19 May 2010. The agent acting on behalf of HMD believed that the return had been properly filed on time.
Like a number of such decisions recently, the appeal was upheld on the grounds that it was for HMRC to prove first of all that the return had not been filed, not the employer, and that HMRC had failed to do so. However, it is not the decision that is interesting here, but the terms used by the Tribunal Judge in severely criticising HMRC in handling this specific case and penalty cases in general. We are quoting extracts from the judgement verbatim.
In February 2011, HMRC sent a threatening letter to HMD before the initial appeal process had been completed. The judge said:
“In those circumstances it was, in our judgement, quite wrong of HMRC to send a letter which threatened, in its second paragraph, to levy distraint by sending somebody to the appellant’s premises to seize goods to be sold at public auction. Such high-handed threatening action was not justified. It smacks more of the conduct of a disreputable debt collector than of responsible conduct by an organ of the state.”
The penalty for filing P35 and P14 returns late is £100 per 50 employees for each month or part-month that they are outstanding. In HMD’s case, the penalty had reached £500 when HMRC issued the notice in September 2010. The judge defined the common law principle requiring public bodies to act fairly in the context of its decisions as to whether someone is liable for a penalty. The judge said:
“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 upon somebody whose sin may amount to no more than oversight or forgetfulness.”
In rejecting HMD’s initial appeal against the penalty, HMRC’s documents explained to HMD that, in order to appeal against the penalty notice, it had to show that it had a “reasonable excuse” for failing to file the P35, explaining that this excuse had to be some exceptional event beyond its control. The judge reiterated the decisions of other recent First-tier Tribunal decisions that this is a misinterpretation of the legislation. In fact, HMRC’s representative at the hearing agreed that,
“if a person genuinely and honestly believes that a successful online filing has been completed, that might amount to a reasonable excuse, at least until such time as that person is informed that that belief is incorrect.”
Also, HMRC policy towards penalty notices states that it runs a:
“structured programme to enable penalties to be issued regularly throughout the year, rather than waiting for the late return to be submitted and then issue a final penalty.”
Commenting on the four month delay in issuing the penalty notice, the judge said:
“The effect of HMRC desisting from sending out a penalty liability notice very soon after 19 May of the relevant year, and choosing deliberately to delay that penalty notice until four months has gone by, is to result in the taxpayer facing a minimum penalty of £500 … 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 unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing. 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. The penalty system has a legitimate aim, which is to ensure that appropriate filings take place in good time and to discourage default. Given that that is the legitimate aim, it is inexplicable why HMRC deliberately delays sending out a penalty notice for four months, with the effect that a penalty for five months becomes payable, that is, £500. 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).
HMRC makes the point that it is not under an obligation to remind a taxpayer of its obligation to file documents. It is true that it is under no obligation to do so, but that does not mean that good practice and conscionable conduct does not require it either (i) to send a reminder soon after 19 May in each year when it knows that a default has taken place or, more likely (ii) soon after 19 May each year to issue a £100 penalty notice which would levy the penalty then due and also have the effect of acting as a reminder before further monthly penalties are incurred.
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, HMRC has neither acted fairly nor in good conscience…”
We asked a week ago for HMRC to provide a statement on these recent adverse decisions. We are still waiting.
Update:
We have since received a reply from HMRC with regard to the Tribunal decisions and they had this to say:
“The “reasonable excuse” provision ensures that no one will pay a penalty if they have a strong reason for being unable to meet the deadline. Only a small proportion of the millions of decisions HMRC make each year are challenged by taxpayers, with most disputes resolved by agreement between HMRC and the taxpayer.
Some divergence of opinion is inevitable but the independent Tribunal has upheld HMRC’s view in more than 70% of cases.
HMRC appeals decisions of the First Tier Tribunal where necessary in line with its litigation and settlement strategy.”
Further information:
HMD Response International v Revenue & Customs
