A case where the taxpayer successfully appealed against tax penalties issued electronically could have serious implications for MTD, unless the law is changed very quickly.
Hannah Armstrong (TC06606) was charged penalties totalling £1300 under FA 2009 Schedule 55 for late submission of her 2015/16 tax return.
She had ceased self employment in January 2016 on becoming an employee, and didn’t realise she needed to notify HMRC of a nil liability. She had been unaware that there were important electronic messages in her secure mailbox set up by HMRC, and said she was only informed when the penalties reached £1200. She made a late appeal against the penalties, which was referred to the first-tier tribunal (FTT).
In the judge’s opinion, Armstrong’s delay in appealing was serious and significant, but “not at the upper end of such delays”. The taxpayer’s explanation for the delay was plausible – it was also a reason for the appeal itself, so there would be prejudice in refusing to hear the appeal merely because of the delay.
The use of electronic communications by HMRC to serve statutory notices is governed by the Income and Corporation Taxes (Electronic Communications) Regulations (SI 2003/282), in particular by Regulation 5.
This allows statutory notices to be sent to a secure inbox. As long as some conditions are satisfied, they will be treated as if they had been validly delivered by post. Those conditions are:
The taxpayer has consented to receive the information via the self assessment online service;
HMRC has sent an email to their last known email address (or a text to their contact number) informing them that information has been delivered to their secure inbox; and
The despatch of that email has been recorded by HMRC, and that record shows that the email was not “bounced”.
Reading the T&Cs
It was clear that Armstrong had signed up to the SA online service, but to what exactly had she agreed to in the terms and conditions? Neither side had produced any documentary evidence of what the terms and conditions said at the time she signed up, but the judge examined the T&Cs in force at the time of the hearing.
“In my view,” commented the judge, someone “would realise from reading those terms and conditions that they would get a notice to file a return sent to their secure mailbox, replacing the paper notices to file, that they would get reminders that returns and payments of tax are becoming due and that they would get statements of their tax position from time to time, that is things that they have been getting hitherto, and if they are experienced filers of returns, things they may already know well.”
What they would not necessarily realise was that notices charging penalties would be sent to their secure inbox, or that the emails pointing out that this had been done would be quite so “bland and uninformative”. In fact, all those emails said was: “you have a new message from HMRC about Self Assessment”, giving no indication whatsoever that they referred to anything so important and urgent as a statutory penalty.
His conclusion was that – if consent is taken to mean informed consent – Armstrong had not consented to receive penalty notices electronically (but she had consented to receive notices to file tax returns).
The judge, therefore, found that the issue of penalty notices to Armstrong’s inbox was not valid.
No evidence trail
In case the judge was proven wrong on this, he looked at the question of whether either a notice to file a 2015/16 tax return or a penalty notice had been properly issued. Remember, a penalty for late filing can only be upheld if HMRC can show that the notice to file had itself been valid.
HMRC was able to provide sufficient evidence that the filing notice had been sent to the secure inbox, but it failed to show that this was the case for the penalty notices.
HMRC did produce a screenshot of a “view/cancel penalties record” screen (in the name of Mrs H C Vanson – presumably Armstrong’s marital title), but all this does is to show that a penalty was raised, not that notice was given (or how it was given).
We have seen a trend in recent FTT cases of judges holding HMRC’s feet to the fire on keeping and producing a satisfactory evidence trail. As a result, the judge in this case ruled that – regardless of the consent issue – the penalties should be cancelled.
It does seem that the execution of paperless self assessment is something of a dog’s breakfast. The fact that there are holes in HMRC’s terms and conditions broad enough for an inquisitive judge to poke around in, should be a cause for alarm at HMRC board level.
While FTT judgments are not binding on anyone (even future FTT tribunal panels), the logic pursued here – if agreed by higher courts – could be persuasive enough to undermine whole chunks of the MTD framework. I am not aware whether HMRC intends to appeal this decision; in my opinion it would be a misplaced effort to do so.
It would be better by far to address the inadequacies in the current legislation to make it fit for an electronic future. This may involve a more radical reworking of the Taxes Management Act (rather than merely adding some deeming provisions in a statutory instrument). That was what it took to bring in self assessment; one can only assume that HMRC sees MTD as being equally important.
It is surely not beyond the wit of man to design an electronic tax compliance system that actually works!