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Tribunal slams HMRC's PAYE late penalty regime

18th Aug 2011
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HMRC’s habit of waiting several months before sending out penalty notices for late PAYE returns was roundly criticised last month by a tribunal judge in the case of HMD Response International v HMRC .

“We are in no doubt that such a body does not act fairly when it deliberately desists from sending a penalty notice, for four months or more, knowing that the effect will be to impose a minimum penalty of £500 upon somebody whose sin may amount to no more than oversight or forgetfulness,” commented Geraint Jones QC in a judgement striking down HMRC’s £500 penalty claim against the charity.

The decision represents another defeat for HMRC’s stance on “reasonable excuse”, with the tribunal ruling that the condition could apply to a person who genuinely and honestly believed that a successful online filing had taken place. In the judge’s interpretation, an appellant should not have to prove some exceptional circumstance to qualify for the concession. “HMRC has quite wrongly sought to elevate to something more onerous than the test specified by Parliament,” the HMD Response ruling noted.

HMD Response International is a small charity that relies on its accountant John Williams to handle its annual employers PAYE end of year return. HMRC claimed not to have received a return for 2010 by 19 May, but the first HMD and its agent heard about it was via a penalty notice for £400 on 27 September - too late to meet the deadline for another £100 increment on the penalty.

Williams wrote to HMRC on 8 October seeking a review of the penalties, but was eventually informed by letter on 30 March 2011 that HMRC would uphold the fines.

What happened in the interim brought a particularly stinging rebuke from the tribunal. On 21 February 2011, while the case was still under review HMD received a letter from HMRC claiming the charity had been ignoring “our efforts to resolve the matter of your outstanding liability.” 

The ruling noted that the judges had seen no evidence of HMRC’s efforts to resolve the situation and said that the “high-handed” threat to send bailiffs to seize goods from the charity was not justified. “It smacks more of the conduct of a disreputable debt collector than of responsible conduct by an organ of the state. It might have been better if HMRC had concentrated its efforts on dealing with the outstanding review, rather than taking almost six months to deal with it,” the judges noted.

Paragraph 31 of the judgement explained: “HMRC is a manifestation of the state. It is no function of the state to use the penalty system as a cash generating scheme. The penalty system has a legitimate aim, which is to ensure that appropriate filings take place in good time and to discourage default. Given that that is the legitimate aim, it is inexplicable why HMRC deliberately delays sending out a penalty notice for four months, with the effect that a penalty for five months becomes payable… In our judgement it would be a very simple matter for HMRC to set its computer settings so that a default or penalty notice is sent out soon after 19 May in any year, instead of some four months later. That fair approach might generate less penalty cash for the State, but it would be fair and conscionable as between the taxpayer and the State (acting by HMRC).”

The judges held that as an arm of the state HMRC had a common law duty of fairness and cited the precedents set out in R v SS Home Department [2003] EWCA Civ 364 (paragraph 69), and SS Home Department v Thakur [2011] UKUT 151 (paragraph 12).

Their stance on reasonable excuse was also worthy of note. To qualify for a reasonable excuse reprieve, HMRC required the appellant to demonstrate during its review of the case that there had been some exceptional event that prevented HMD from sending its return on time. “As a matter of law, that is not the correct test and is totally misleading,” the ruling noted. “Parliament has said that an appellant must demonstrate that it has a ‘reasonable excuse’. Those are ordinary English words in everyday use. They must be given their ordinary and natural meaning.

“If Parliament had intended to say that an appellant must prove some exceptional circumstance, it could and should have said so. It did not choose to say so.”

HMRC did not prove the alleged default in the case presented to the tribunal, and even if it had done so, the appellant established a reasonable excuse because its agent honestly and genuinely believed that the filing had taken place on the 16 May 2010.

Williams, who represented HMD at the tribunal, produced a contemporaneous note to the effect that he filed the return, but admitted to the judges that he could not be sure whether the submission had been successful or not. “He did not try to overplay his hand. In our judgement, he was a candid and honest witness. He said that he genuinely and honestly believed that the filing had successfully taken place,” the judges wrote.

Even if there had been no reasonable excuse, the tribunal would have reduced the penalty to £100 because HMRC deliberately held off sending out a penalty notice until September 2010. In the circumstances of this case, however, the judges allowed the appeal in full and set aside the entire £500 penalty.

HMRC confirmed that it had not appealed against the HMD Response decision, but made it clear that it held a different view than the tribunal judge's. HMRC pointed out that of the very small proportion of disputes that go forward to tribunals each year, it typically wins in 7 out of 10 cases. Given the extra hassles that immediate penalty notices might cause companies and their agents during May-June, the department is also unlikely to heed the recommendation to reprogram its penalty issuing system. Reasonable excuse and PAYE penalty issues are unlikely to go away in the next few months - which could be one reason why HMRC is so keen on Real Time Information, which would do away with the year-end filing ritual.

The first tier tribunal decision does not set a legal precedent, but is further evidence that following the Jusilla v Finland European Court of Justice ruling in June, tribunal judges are taking a harder stance on the legal basis HMRC’s penalty regime. Further commentary on this topic is available on our Reasonable Excuse Scorecard.

If you are aware of similar appeals or tribunal rulings - successful or not - on reasonable excuse, please let the rest of the community know by commenting below.

Replies (9)

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
18th Aug 2011 10:41

Not an isolated case

In a comment on 5 August, AccountingWEB member pamms1708 notified us about a similar tribunal ruling on the PAYE penalty regime in the case of HOK Ltd v HMRC [2011] UKFTT 433 (TC01286). Geraint Jones QC was once again the main judge, and set out very similar conclusions to the HMD Response case.

The company argued that it thought it did not need to file the appropriate returns because its only employee had ceased employment part way through the year. It acknowledged that it was wrong and that HMRC was entitled to levy a penalty. However, the company argued that, if HMRC had notified it of its default, it would have been remedied it a far earlier time, thus avoiding ongoing penalties.

During the Tribunal HMRC stated that it was running a "structured programme to enable penalties to be issued regularly throughout the year, rather than waiting for the late return to be submitted and then issue a final penalty. These penalties, although aimed at encouraging compliance and having the effect of reminding are not designed to be reminders for the outstanding return...

"HMRC deliberately waits until four months have gone by and does not issue the first interim penalty notice until, as in this case, September of the year of default.

"There can be no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months so that, in effect, a minimum penalty of £500 will be levied unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing."

The ruling set out a near-identical paragraph explaining that it would be a simple matter for HMRC to program its computers to send out P35 penalty notices in May rather than September.

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David Ross
By davidross
19th Aug 2011 11:09

In my view a greater scandal is the cumulating penalties for late CIS Returns, but I guess that as they are provided for in the Law, it would be harder to attack them.

This said, they were probably established by Statutory Instrument (which is the dodgy practice whereby Civil Servants write laws for MPs to rubber stamp)

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By vinced
19th Aug 2011 11:12

Tribunal slams HMRC's Late Penalty regime

I have a client who files his P11d & regularly forgets to do it on time and only responds when the penalty of 4*100 comes in several months later. The first time he was late I appealed the penalty on the basis that, had he been told after 1 month he would have paid the £100 penalty and asked for this to be accepted. The reply from HMRC was that there was a problem with their computers and that the problem would be sorted out next year and that they would rescind all of the penalty. As he has been late a few times since, I just play the "you haven't updated your computers yet" card and the penalty goes away.


Vince Doyle

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By jonspe
19th Aug 2011 12:11

I am quite certain that some smart alec in HMRC has come up with the idea of turning penalties into a profit centre.

I don't know about the PAYE regime but I do know that we had more than one Corporation Tax returned several weeks after submission. Penalty notices (and threatening letters) followed shortly thereafter. In the end, all the penalties were appealed successfully but what a complete waste of time and money from everybody's standpoint.

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By david reed
19th Aug 2011 12:37

PAYE penalties

I was so pleased to see the comments abou these wretched DMU letters saying "you have chosen to ignore our reasonable efforts ....blah blah blah"

I hit the roof recently when one of these landed on my desk as I had no less than seven letters to HMRC on the case unanswered

I told HMRC I intended to take legal proceedings on the grounds the statement was libellous

Of course the staff at DMU pretended not to have received much of the correspondence that was relevant

In the end HMRC paid all my time costs and the problem was resolved, but what a waste of effort

I find the only way to get a response from DMU in a reasonable time frame is to phrase correspondence entirely in CAPITAL LETTERS !! 





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By kim walsh
19th Aug 2011 17:20

Appeals and penalties

I run a very small practice and in my experience HMRC's standard argument is that they haven't received the correspondance in time or at all.

I regularly have many unanswered letters and complaints outstanding. It is frustrating beyond belief.

Do we send every letter recorded delivery?

Their argument that they haven't received it or don't know about it falls down quite quickly after they locate the relevant telephone calls chasing a response unless they try the ' it wasn't recorded and I can't know what was said' excuse or even 'I've listened to it and don't agree' without allowing you to review the same conversation, when you know what you said, and have supplied two or three further copies - all getting lost! 

I recently asked an HMRC representative if that meant they believed I was lying! They do seem to have little respect for agents nowadays.

Agents and clients are on a tight budget and cannot afford to write off this wasted time, and spend further time forcing HMRC to pay.

We have had to prove several times with HMRC own generated submission confirmations that the documents were submitted, before we would be believed.

Repayments seem to go through many more departments and checks than ever before - some taking EIGHT MONTHS or more to get to a client.

HMRC's response that they win more than they lose is probably more because most people cannot afford to stand up to them, and most agents can't afford to carry the fee while they do.

Twice HMRC collection agents have bullied a client of mine into paying money he does not owe, merely covering our fees is no good to a soletrader already under extreme financial pressure.

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By b.clarke
22nd Aug 2011 11:17

Statements of account

I can add a new wrinkle to this. A client has a one-man company he traded through until September 2009. I was only appointed to do annual accounts and tax return - he did the PAYE. He was ill for a while and could not file returns, so he simply paid the estimated demands as and when they arrived. I didn't know this was happening.

I have tried to sort this out on the phone with HMRC, but it is not at all clear that the payments he made have been properly allocated to the right years, and transferred to other years as necessary, where there have been overpayments. It is clear from conversations with the PAYE office that there are now many adjustments / transfers on the account.

I have been asking for a statement of account (since February 2011 ...!). Only last month, after a demand from the DMU arrived, did they tell me that "we are no longer resourced to send out statements of account". The obvious question is why did no one tell me that sooner, and the subsidiary point is: how can that be an efficient use of resources? The person I spoke to seemed genuinely apologetic, and I was careful to stress I wasn't shouting at him personally. He suggested I write in with the details I know, and they will write back with additional transactions on the account. I did this, in the confident expectation that no proper response will come (does a proper response ever come from the DMU?), and I will have to escalate the matter with another complaint.

The lack of joined up thinking at HMRC is quite stunning. If the statements were available online, this would have been sorted out a long time ago.

In view of the recent crop of cases, the discussion over the penalties is going to be interesting.


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By ChrisL
25th Oct 2011 18:29

PAYE Penalties - the computer says no

Carol Beer in Little Britain comes to mind.

The legislation requires reasonable discretion above and beyond computer software. Keth Gordon's CIS GPS appeal case last year demonstrated that HMRC must exercise discretion if the legislation and lawful authorities say so.

Unfortunately, there is raft of PAYE related penalties in HMRC's kit bag - consider Sch 56 late payment penalties, PAYE specified payments and distraint. In the insolvency toolbax they have  NICs personal liability notices, PAYE transfer of debt... and PAYE security will be with us from 06/04/11.

Reasonable excuse is of particular interest and when will HMRC change its published guidance to staff?


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By Sue Oakley
26th Jan 2012 11:27

Alleged late submission of P35 for 2009/10

I can go further than any other case mentioned.  I have been doing this for almost two years with a file of paper nearly 2 inches thick!  As described before - took HMRC 5 months before informing us that we owed £500. I had got a print out of the P35 I had submitted on 10th May 2010 and had a confirmation on screen of its acceptance.  This was the first time I had done this so had NO REASONABLE EXCUSE to believe that anything was amiss. The first demand for money came in the form of a letter with no information on it.  Phone calls to HMRC told us that it was a fine for a late submission and then was followed by a paying in slip.  Letter to HMRC explaining the situation - written by my brother who is a partner in the company as I was on holiday. Another more detailed letter from me followed but HMRC failed to agree with anything we had said.  We had "NO REASONABLE EXCUSE THROUGHOUT THE PERIOD TO NOT FILE THE P35'  They didn't think that the fact that they had acknowledged receipt was good enough, especially as I hadn't printed the screen out at the time.  Anyway, to save the boredom - we appealed, which was declined, visited the Citizens Advice Bureau who told me to carry on.  Phone calls and visits to our MP (he wrote to the head of HMRC and it took three months for him to get a response which only told him to ask us to pay up!! First tier tribunal appeal - declined again. Asked First Tier Tribunal for permission to appeal to Upper Tribunal - declined.  We now have to go to London on 24th February to the Upper Tribunal for a substantive hearing.

The last decision notice from the Upper Tribunal didn't even mention the "no reasonable excuse" bit but made the statement " that while an attempt was made to submit the P35, no attempt was made until September to submit the P14's.  Doesn't anyone at HMRC know that a P35 is a summary of the P14's !!! When the submission in September 2010 was accepted, the only thing I had done was to go into the original information inputted in May, and click on the P35 SUMBIT button again!  There had been a glitch in the system which no one will admit to.  I did the 2010/11 submission this May in exactly the same way as last year - successfully, but still had to ring the Help-line as the screen would not allow me to change the Tax Codes of some employees.  I am retired and do the PAYE and VAT returns  for my brother's company.  The HMRC fine represents what I live on for ONE MONTH !  I am not and repeat not paying HMRC for something I have not done. I made one mistake in all this - NOT REQUESTING AN ORAL HEARING - because I thought the matter was so straight forward and could be dealt with by letter.  In commercial terms, this has cost me a fortune in time, effort, phone calls and postage, and now train fares to London.  Would it have paid me to employ some professional help??  and would I have had the opportunity to ask for some recompense.  I wonder ! 


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