P35 Filing PenaltiesSunday, November 27th, 2011
We have not been shy of highlighting the spate of cases where HMRC have been criticised for charging penalties. There are two more cases to report this week from the First Tier Tribunal (Tax), together with a statement from HMRC.
Bridge Utilities Ltd v HMRC
Bridge Utilities were fined £800.00 by HMRC in respect of alleged late P35 filing for 2009/10 – £400.00 in September 2010 and £400.00 in January 2011. The employer denied late filing. Although we focus on the Penalties that were issued, it is interesting to note the Tribunal judge’s comments regarding the burden of proof in penalty or surcharge cases. He stated that, in such cases, the reason for the penalty is because some sort of default has taken place, i.e. the P35 was filed late. Given this fact, it is for HMRC to prove that the filing did not occur on time. Where there is a failure to provide evidence, there is no evidence to support the penalty and, therefore, any appeal against it must succeed.
With regard to the first Penalty Notices, the judge notes that it was not sent out until four months after the alleged default and HMRC offered no explanation for this delay. Once again, a comparison was made to VAT cases where a Penalty Notice is sent out within 14-21 days of the default and, further, the penalty does not increase over the course of time. With regard to the increasing penalties, the judge said that HMRC has ‘no interest’ in delaying sending VAT Penalty Notices.
In summary, the Tribunal quashed the £800.00 penalties, making reference to HMRC’s failure to prove the P35 was actually late. Plus, ‘conspicuous unfairness’ was highlighted at them issuing a penalty after four months, when they had demonstrated with VAT that these could be issued earlier. Indeed, the nature of the increasing PAYE penalties meant that HMRC ‘shows no inclination to act with promptitude’.
Cavanagh v HMRC
However, this case appears to come to a different conclusion. Cavanagh was charged £400.00 initial penalty in for the period May – September 2010 for the late submission of the 2009/10 P35 due in May that year. This was not received until February 2011, at which time another Penalty Notice was received in the sum of £500.00 for the period September 2010 to February 2011. Whilst Mr Cavanagh admitted that he was late filing his P35, he stated that if the initial penalty had been sooner than February, he could have prevented a further penalty. HMRC’s own guidance stated that it would be sent out ‘shortly’ after 19 September.
The FTT ruled that the £400.00 penalty should stand, but not the one in the sum of £500.00. No reference was made in the appeal or in the ruling querying or disputing the time delay in issuing the £400.00 Penalty.
HMRC’s Working Together
In the November 2011 issue of Working Together, Derek Allen of the Institute of Chartered Accountants Scotland (ICAS) raises the issue of these increasing penalties directly with HMRC. He quotes cases where HMRC penalties have been overturned or reduced by the First Tier Tribunal and conveys the messages that several judges have given; that HMRC is acting unfairly and generating revenue, neither of which were the original intention of the penalty system.
HMRC’s response is worth publishing in full. Much press is given when they are being criticised, therefore, it is only fair to give space for them to share their side of the argument:
‘Recent cases heard by the First-tier Tribunal have raised important questions around HMRC’s approach to penalties. We’re happy to have this opportunity to set out HMRC’s position in this area.
It seems clear from much of the comment on recent decisions that there’s some misunderstanding of our approach and responsibilities. HMRC does not charge penalties as a money-making exercise – our aim is to minimise the number of cases in which penalties arise. Issuing a penalty is expensive, especially when the taxpayer doesn’t agree that it is due. We issue penalties because the law requires it, and to act as a deterrent. Where taxpayers don’t send in returns, HMRC has to act to get them in – all the more so in the case of employer returns where delays can be detrimental to employees. Even if a taxpayer rectifies their mistake quickly, the delay costs public money. The longer the delay, the greater the cost to HMRC, and the greater the overall compliance risk – regardless of whether the taxpayer has deliberately delayed, or has made ‘a genuine mistake’. It would be unfair on other taxpayers, who may have gone to considerable effort to comply with their responsibilities, to shoulder the costs caused by those that haven’t.
Nor does HMRC deliberately hold back from issuing penalties or reminders in order to charge greater penalties. The reason why we do not issue penalties immediately when a P35 return seems to be late is to allow a reasonable period for employers to tell us they have no return to make. This avoids penalties being issued to those who didn’t need to operate PAYE in the year concerned, but who didn’t let us know until after the deadline. It also gives time for us to make sure all returns and ‘no return to make’ notifications received by the annual deadline have been processed. We’re looking at the way we deal with these cases to see if we can notify taxpayers earlier where a penalty is due, while not causing needless distress in those cases where it’s not.
Although HMRC aims to make people aware of the circumstances in which a penalty may be due, it has no specific responsibility to ‘remind’ people to put in their returns or when a trigger point for a penalty may be imminent. We do undertake campaigns to raise awareness of filing and payment obligations. But we cannot provide a general reminder service. The structure of tax law is built upon the principle that it is a taxpayer’s responsibility to ensure they comply with their tax obligations. If a taxpayer has a reasonable excuse for filing late, they should let us know, so the penalty can be reviewed and, if appropriate, removed. However, we will robustly defend our decisions to charge penalties where taxpayers have failed to comply.’
Working Together shows that others are watching the PAYE penalty culture that HMRC have adopted and have been defending at Tribunal. However, credit must go to them for publishing this comment and devoting two pages in response.
Whilst we understand their argument about the penalty regime, is their argument about holding back issuing notices a valid one? In this world of electronic submissions, surely HMRC computer systems are capable of making sure that all returns are received by the deadline, issuing penalties the next day if not. Even if this deadline is extended to allow for a ‘reasonable period’, this is surely less than the four months we see at the moment. This is the way that it works for VAT, therefore, why not PAYE, an issue that has been raised in Tribunal cases? The underlying variance between the ways that the two tax systems are treated for penalties is one of the issues that needs to be addressed.
What do you think?
- Bridge Utilities Ltd v HMRC
- David L Cavanagh v Revenue and Customs
- HMRC Working Together Issue 46
- Foresight Financial Services Ltd v HMRC, October 2011
- HMRC Website Penalty Guidance
- Payroll-Help, 30 September 2011
- Barron v HMRC, 29 August 2011
- HMD Response International v HMRC, 08 August 2011
- Buxton Rugby Union Football Club v HMRC, 30 July 2011