Late corporation tax return and payment cost £34,870
The directors of Caris Properties Ltd failed to understand the penalty regime for late filing and late payment of corporation tax and had no reasonable excuse for the delay which affected just one return.
Caris Properties Limited (Caris) developed and sold high-end properties. Its accounting period ended 30 September 2016, and the filing deadline for its corporation tax (CT) return for that period was 30 September 2017. The return was filed seven months late, on 1 May 2018.
Caris also paid its 2016 corporation tax liability of £348,705.80 late, which was due on 1 July 2017.
Penalties relating to the late filing of a CT return are currently governed by FA 1998, Sch 18, as the penalty provisions under FA 2009, Sch 55 are not yet in effect for this area.
Where a CT return is filed late, paragraph 17 provides for flat-rate penalties of:
- £100 if the return is delivered within three months after the filing date
- £200 in any other case
These amounts increase to £500 and £1,000 for a third successive failure to deliver a CT return.
Additionally, paragraph 18 imposes a tax-geared penalty in instances where a company fails to deliver a CT return:
- Within 18 months after the end of that accounting period, or
- If the filing date is later than that, by the filing date.
The amount of penalty is calculated at 10% of the unpaid tax if the return is delivered within two years after the end of the period for which the return is required.
HMRC issued the following penalties in respect of Caris’ 2016 CT return:
- A £200 fixed penalty under para 17
- A tax-geared penalty of £34,870.58 under para 18, this being 10% of the corporation tax liability for the 2016 accounting period end
- An interest charge of £8,236.44, accruing on the outstanding tax liability of £348,705.80 from its due date of 1 July 2017 to 18 May 2018.
HMRC issued the tax-geared penalty on 18 May 2018, at which time Caris’ CT liability remained unpaid in its entirety. The £200 fixed penalty and interest charge were settled by the taxpayer, leaving the tax-geared penalty of £34,870.58 under appeal [TC07481].
Brexit a reasonable excuse?
Colm Kelly, counsel for the taxpayer, argued that the taxpayer had grounds for reasonable excuse:
- Caris experienced cashflow difficulties arising from the ‘unforeseen’ market conditions following the result of the Brexit referendum. This meant that Caris was unable to pay outstanding fees due to its accountant, Jay Rajani Limited (Rajani)
- Rajani ‘ceased to act’ due to the non-payment of fees and so held back the filing of the CT return. However, the taxpayer was not aware of this, and had a ‘genuine and reasonable belief’ that Rajani would file the return
- ‘There was nothing necessarily unreasonable in relying on an accountant where that reliance leads to failure to comply with an obligation’.
HMRC rejected the appeal, maintaining that they did not consider Caris to have a reasonable excuse for the late filing. HMRC also submitted that, while there is no statutory definition of a reasonable excuse, the insufficiency of funds is excluded from giving rise to a reasonable excuse.
A misunderstanding of payment deadlines
Rajani and Mrs Singh (a director of Caris) made a conscious decision to delay filing the CT return by three months, from June 2017 to September 2017, rather than file in June 2017 at the same time the accounts were filed with Companies House (and when Rajani was presumed to still be acting for the taxpayer).
This was done in the false belief that this would give Caris three additional months to raise the funds to pay the tax due.
The FTT highlighted that the processes for filing a CT return and paying the CT due are distinct and separate. Delaying filing the CT return would only have delayed the demand for the CT payment – it would not have changed the due date, which remained payable from 1 July 2017.
Grounds for reasonable excuse dismissed
Ultimately, the FTT found that it was ‘unable to make a conclusive finding of fact as to the true cause and timing for the decision to hold back the CT filing’ due to inconsistencies that arose in the evidence presented.
Nevertheless, the FTT dismissed the argument that it had been reasonable for the taxpayer to rely on its accountant, drawing attention to the fact that the directors of Caris; Singh and Cooper, were both ‘highly experienced business persons’.
The FTT argued that a responsible taxpayer, who had the same experience and attributes as Singh, would have followed up to matter to ensure the CT return had been filed.
As to the argument of an insufficiency of funds, the FTT found that a prudent taxpayer would have retained part of the company’s free proceeds to meet its CT liability, noting that Caris’ accounts reported a bank balance of £833,710 at year end 30 September 2016.
Consequently, the FTT dismissed the appeal and upheld the penalty of £34,870.58.
The FTT highlighted that a tax-geared penalty can only be imposed under paragraph 18 in cases where there is a twin failure to file a CT return and pay the associated CT. This failing led to a sizeable penalty for Caris that could have been avoided, had the company’s directors actively kept on top of their compliance obligations.