John Flood highlights the recent penalty co-decisionof Morgan v HMRC and Donaldson v HMRC  UKFTT 317 which has important implications for taxpayers fighting daily penalties raised under schedule 55 of the Finance Act 2009.
On 22 May 2013 the decision in this case turned on schedule 55 of the Finance Act 2009.
Schedule 55 imposes penalties for failure to render a return. If a deadline is not met then a fixed penalty of £100 becomes due. If the default continues for a further three months after the initial penalty date HMRC can impose a daily penalty of £10 and if it gives notice of this the penalty can be for up to 90 days from the date given in the notice. Other penalties arise for further defaults but are not discussed further.
Here Morgan accepted a fixed penalty of £100 but fought the daily penalties totalling £870. Donaldson appealed a £100 penalty, daily penalties totalling £900 and a £300 penalty for continued default.
HMRC has to “decide” whether to impose daily penalties. Given penalties were generated by a computer how could it be said that there was any decision properly made?
The tribunal considered evidence that prior to the implementation of the FA 2009 it had been decided at a senior level, and as a general policy, to impose daily penalties where there’s a default, and accordingly the HMRC computers were programmed to deal with this. To do otherwise would have meant up to a million individual decisions - a completely impractical exercise. The tribunal, by the chairman's casting vote, therefore found that there had been a HMRC decision which met the requirements of schedule 55.
As the material decision was before the act commenced, the tribunal relied on s13 Interpretation Act 1978. This allows for the use of anticipatory powers where it will assist in the implementation of an act.
To impose daily penalties HMRC must give a date from when they apply [para 4 (1) c Sch 55].
Here HMRC relied on a SA tax return and reminder which stated, “If we still haven’t received your online tax return by 30 April (31 January if you’re filing a paper one) a £10 daily penalty will be charged every day it remains outstanding. Daily penalties can be charged for a maximum of 90 days, starting from 1 February for paper tax returns or 1 May for online tax returns.” Second, HMRC relied on wording contained in the assessment for £100 penalty which indicated that HMRC could impose daily penalties from 1 February or 1 May.
Importantly, the tribunal felt the statutory requirement was not met. The documents merely indicated, that HMRC could impose daily penalties. Even applying a purposive construction the terms of either document were not clear enough to impose a penalty from a particular date. The fact that two dates were mentioned was not the point; the vagueness of the documents was their downfall. Accordingly the appeal on the daily penalties was allowed.
Given the importance of this decision and the regularity with which HMRC uses the procedure, we can expect to see further challenges by taxpayers and perhaps an appeal to the upper tier tribunal by HMRC.
John Flood is a retired barrister and ex-employee of HMRC. He is a co-author with George Rowell (Exchange Chambers, Manchester) of the new book, Tax Penalties: A Practitioners Guide (Sweet & Maxwell Thomson Reuters).