Kye Burchmore explains why penalties issued for the late submission of quarterly returns by employment intermediaries have been ruled to be invalid.
The quarterly reporting requirements for employment intermediaries require the intermediary to send HMRC a list of payments it has made where PAYE has not been operated (ITEPA 2003 s71B). This law came into effect over three years ago, and during that period HMRC has automatically issued penalties for any late or incomplete returns under TMA 1970, s 98(1)(b).
The legislation requires that returns are submitted by the end of the tax month following the end of the tax quarter using an HMRC approved method of electronic communication. If the intermediary fails to comply with this, the penalty regime stipulates that an initial penalty can be levied which will not exceed £3,000, which can be followed by penalties of £600 per day if the failure continues. The amount of the penalty depends upon the number of offences in a 12-month period: the first offence attracts a penalty of £250, the second £500, and any further offences £1,000.
Expion Silverstone Ltd (TC06638) received penalty notifications amounting to £1,750 from HMRC for failing to file three quarterly returns and challenged those penalties at the first tier tribunal (FTT).
Where’s the proof?
Section 100(1) TMA 1970 says an officer of the Board [HMRC] authorised by the Board may make a determination imposing a penalty. The onus of proof is on HMRC to demonstrate that the penalties raised are just, and the use of the word “may” provides HMRC with discretion as to whether a penalty is imposed in the first place.
In Expion’s case the FTT held that the legislation is clear: at the point HMRC decides to issue a penalty, TMA 1970 specifies that the determination must be made by an officer of the board and that the authorised officer must be a real officer, not a computer, and not HMRC as a body. It was for HMRC to prove to the FTT that the determination was made by an officer of HMRC.
As part of the FTT directions leading up to the hearing, the FTT requested evidence from HMRC of:
- the name of the officer that issued the penalties;
- when the officer made the determinations; and
- what process was involved.
After requesting an extension in order to seek clarification from HMRC’s own policy team, HMRC’s response to the FTT request for this information was that it wasn’t possible to provide the detail required. HMRC did confirm:
- The penalties are automatically issued by HMRC’s computer system;
- HMRC cannot provide a named officer; and
- the process adopted in this case was in line with HMRC’s policy in respect of late filing of employment intermediary returns, so essentially means that all penalties will be raised in the same manner and this was not a one-off error.
As a result of HMRC’s confirmed position, the FTT held that HMRC’s policy is inconsistent with the law and that no valid determination of the penalties was made by an office of the Board. Hence the penalties imposed on Expion Silverstone Ltd were removed.
The implications of this case are that until HMRC updates its process of raising penalty determinations, all penalty notices will be invalid.
It is easy for taxpayers and agents to overlook this area, as many would assume that HMRC does know how to issue penalties correctly. Most people would also assume that the policy and default procedures followed by HMRC would be correct, especially given that this legislation has now been in place for more than three years.
Employment intermediaries should naturally try and submit their returns in a timely fashion, but where this has not been done, attention should be paid to the penalties issued.
What HMRC should do
HMRC essentially has three options. The first is to do nothing and if any taxpayers raise this issue, reissue the penalties with an officer of the board named as responsible. The second option would be to change their policy so that all penalties are determined by an HMRC officer, but this will be dependent on the volume of penalties and HMRC’s resources.
The last and least likely option would be for HMRC to seek a change in the law so that the process can be more automated, as Andy Keates suggested when examining failed penalties for late SA returns. This may be the best long-term solution, but it would also take the most time to implement, and a revision of TMA 1970 may not be too high on the government’s priority list at the moment.