Andy Keates examines a string of FTT cases where HMRC failed to produce adequate evidence to convince the tax tribunal that a penalty was validly issued.
When it comes to tax penalties, the first responsibility is upon HMRC: it must prove (to the usual civil standard – the balance of probabilities) that the penalty was validly issued.
The taxpayer does not have to have raised this point specifically in his appeal: the tribunal must consider the validity of the penalty before proceeding further (see Halfaoui TC06292 at para 27).
If – and only if – this is done, the burden shifts to the taxpayer, who needs to show that he or she has either a “reasonable excuse” or “special circumstances” which would enable the penalty to be overturned.
In four recent cases, tribunal judges have pointed out that – if the penalties had been valid – the taxpayers would have had no reasonable excuse not to pay them. However, HMRC failed to prove to the satisfaction of the judges that those penalties were validly issued, and so the taxpayers won their appeals.
Penalties do not exist in isolation: for one to be due, certain things need to have happened in a set order. For example, for “daily” penalties (FA 2009, Sch 55 para 4) to arise in respect of a late self assessment tax return, all of the following five steps must be taken:
- HMRC issued a valid notice under TMA 1970, s 8 to file a return;
- the taxpayer failed to file the return by the due date;
- the taxpayer’s delay must have extended for at least three months;
- HMRC decided to charge a penalty (ie this is not automatic); and
- HMRC gave the taxpayer a written notice specifying the day from which the penalties will run.
If the taxpayer (or the tax tribunal) accepts that all of these steps happened, the penalty is valid and enforceable. Otherwise, HMRC needs to produce evidence to show that each step actually happened.
Unforced errors by HMRC
1. Copy of notice not retained
In Halfaoui (TC06292), HMRC failed to show that a notice specifying the date from which penalties would run had been sent to the taxpayer.
HMRC was able to produce a number of templates or stock letters which they said “would have been” sent to the taxpayer. Unfortunately, the judge was in no mood to accept “would haves”. The examples provided related to a different tax year, and counsel for HMRC could not say for certain that the wording would have been the same for the correct tax year.
2. Notice was incorrect
In Patel (TC06315), the taxpayer was charged daily penalties in respect of a late partnership return. HMRC had assigned two different UTRs to the him and, despite much correspondence, had failed to deactivate the incorrect one. The only notice of daily penalties issued to him was sent to the wrong UTR and failed to identify correctly which tax return was late (it merely said “your return”).
Overall, HMRC did not do enough in either case to convince the judge that they had issued a notice which specified the date from which daily penalties would run.
In both the Halfaoui and Patel cases, HMRC produced a generic “witness statement” by Martin Delnon, manager of the SA Live Services Team, which purported to supply evidence of the system which was followed. Both judges refused to admit this for several reasons, including:
- The evidence was self-contradictory in parts and contained at least one blatant error of fact;
- It referred to attachments and appendices which were not produced in support;
- It had not been disclosed to the taxpayer prior to the hearing, despite a clear direction from the tribunal requiring this.
3. No supporting documents
In Hinchliffe (TC06427), the judge was astonished that HMRC’s Statement of Case was not accompanied by any documents to substantiate their position on what had or had not happened.
“HMRC have got nowhere near satisfying their evidential burden that firstly a valid notice to file has been served... pursuant to Section 8 TMA 1970, nor that valid notification has been given... under paragraph 4 of Schedule 55 Finance Act 2009. The unsubstantiated assertions to that effect in the Statement of Case are not evidence. No evidence has been adduced by HMRC to establish service of notices to file or service of penalty notices.”
4. Case notes too sparse
In Loial (TC06391), HMRC attempted to persuade the judge that notices to file had been sent to the taxpayer’s last known address by drawing inferences from the sparse and ambiguous notes in the “Return Summary”. The judge was wholly unsympathetic: “it is not for us to have to speculate about these matters. It is for [HMRC] to prove their case if they can”.
While HMRC has great powers with which to pursue its public duty to collect tax, it also has a responsibility to exercise those powers with proper care and attention. HMRC is quick to criticise taxpayers who fall short of their obligations through carelessness, but it should be reminded that an obligation to take due care applies to both sides.
In the words of Judge Geraint Jones QC (in Loial): “whatever form the admissible evidence takes, adequate evidence is a necessity; not a luxury”.