ATED: Professionals should know the law
In exceptional cases, ignorance of the law can be a reasonable excuse. Not, however, when the taxpayer should know better. Two companies found this out when they were charged penalties for late filing of ATED returns.
The Annual Tax on Enveloped Dwellings (ATED) is payable by companies, corporate partnerships and collective investment schemes, which hold an interest in a dwelling worth over £500,000.
Property owners can be caught out if they don’t make the annual ATED return by 30 April each year, and pay any ATED charge due by the same date.
Failure to file returns on time is subject to the normal penalty provisions of FA 2009 schedule 55, and late payment of the ATED charge is subject to the usual provisions of FA 2009 schedule 56.
Advantage Business Finance Ltd
In early 2016, the company bought a property in Fulham. Its 2016/17 ATED return was due on 30 April 2016, but was not filed until January 2017.
HMRC issued a £100 late filing penalty, which the company paid. It subsequently issued penalties totalling £1,200 since the return was overdue for more than 6 months. The company appealed (TC06926).
Tysim Holdings Ltd
Sometime before April 2012, the company acquired a property worth £1.1m. Its first exposure to ATED was for the year 2015/16, but the directors did not realise this until November 2017, by which time three years’ ATED returns were overdue. HMRC issued late filing penalties totalling £1,800, together with late payment penalties totalling £2,804.40. The company appealed (TC07389).
Issues before tribunal
In both cases, the first tier tribunal (FTT) had to consider whether the companies had a “reasonable excuse” for the late returns.
In the case of Advantage Business Finance, Judge Poon also had to consider:
Were the penalties issued validly?
Did the “capping” provisions of FA 2009, Sch 55 para 17(3) apply to reduce the penalties?
The test for “reasonable excuse” is an objective one: a taxpayer’s actions need to be measured against what “a responsible person conscious of and intending to comply with his obligations regarding tax” would have done.
However, the FTT needs also to imagine a person who has “the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time”.
This is where the two companies fell down. The director of Tysim; Chan Hua Eng, is a former barrister and member of the CIOT, who practiced corporate law in the UK and Malaysia for many years.
David and Nicola Brockhurst, the directors of Advantage, are respectively a solicitor and an accountant.
Neither judge thought it reasonable that individuals with such qualifications and experience would fail to make themselves aware of their tax responsibilities when undertaking substantial investments. Although the ATED did not exist when Tysim acquired its property, Judge Bowler felt that Chan ought to have checked “the regulatory position more frequently than once in three years”.
Neither company had a reasonable excuse.
The burden of proof lies with HMRC to show that all the necessary conditions have been met when issuing penalties. In the case of Advantage, HMRC did not satisfy Judge Poon that this had been done.
Daily penalties under FA 2009 Sch 55, para 4 can only be imposed if “HMRC gives notice to [the taxpayer] specifying the date from which the penalty is payable”. HMRC’s letter imposing the penalty was issued on 22 December 2017, while the period for which the daily penalties were computed ran from 1 August to 29 October 2016.
The purpose of daily penalties is to prompt the taxpayer into taking remedial action during the daily penalty period. In routine cases, the notice imposing the initial £100 penalty gives this warning – but in this case the initial penalty was not issued until October 2017, a year after the penalty period.
HMRC had not discharged the burden, so the £900 daily penalties were cancelled.
Advantage Ltd sought to rely on FA 2009, sch 55, para17(3), which imposes a cap when there is more than one tax-geared penalty charged by the schedule.
The big question is: with regard to the six-month penalty, is it a fixed penalty or a tax-geared one? The penalty is calculated as: 5% of the tax or £300, whichever is greater.
This came up in the cases of Jagger TC06774 and Jackson TC06329. In both cases, the FTT concluded that charging a £300 penalty still involves actually calculating 5% of the tax, so that the £300 minimum is not “fixed”, but “determined by reference to tax”.
Judge Poon chose to disagree with the previous FTT judges, and concluded that the £300 is still a “fixed” penalty, despite a tax computation being involved. Her reasoning was that it is not “solely” determined by reference to a tax liability (a fascinating – and, to my mind, unwarranted – insertion, although no doubt HMRC will seize upon it gleefully in future cases).
Notwithstanding the above, the penalty cap argument fails to assist the company: if we follow Judge Poon’s reasoning, there were no tax-geared penalties in the frame, whereas if we take the Jackson/Jagger line there was still only one. The daily penalties are not tax-geared, and in any event the judge had dismissed them.
These cases re-trod some familiar ground, which can be summarised as:
Professionally qualified and experienced taxpayers cannot argue that ignorance of the law is a reasonable excuse.
Penalties will be dismissed by the FTT if HMRC fails to carry out – and document – the steps prescribed by law.
The quagmire of whether a £300 penalty under FA 2009 Sch 55, para 5 is fixed or tax-geared needs to be decided one way or the other.