Since 2009 taxpayers have had to pay a penalty for the late submission of a tax return, even if it shows no tax payable. This rule was questioned by the first tier tribunal in Scott Jagger (TC06774), and it came to a surprising conclusion.
Mr Jagger, a self-employed taxi driver, was over a year late filing his tax returns for 2010/11 and 2012/13, and was charged penalties under FA 2009, Sch 55 for each year as follows:
- A fixed penalty of £100 – paragraph 3;
- A three-month penalty of £900 – paragraph 4;
- A six-month penalty of £300 – paragraph 5; and
- A twelve-month penalty of £300 – paragraph 6.
Blame the postman
Jagger claimed that he had, in fact, submitted his returns on time by first class post, but since he had not used recorded delivery he could not prove this. He went on to say that the first he knew of any alleged late filing was when he received a letter from HMRC notifying him of the penalties, upon which he re-submitted his returns (which were, by then, late).
The first tier tribunal (FTT) noted that, in the absence of proof of postage or any other evidence supporting the claim, it could not accept that he had filed on time. The £100 fixed penalties would definitely have to stand.
Moves like Jagger
He had moved house several times: the evidence showed ten different addresses, all within the Barnsley area, between 2003 and 2013. Jagger suggested that HMRC did not keep up with his location, despite his having telephoned them and advised of his new addresses. The implication was that he had failed to receive various notifications from HMRC which might have eliminated or reduced the delay.
A table drawn up by the FTT showed that HMRC’s awareness of his current address generally only lagged behind his moves by two or three months.
The FTT did not consider it likely that all of the notices listed in HMRC’s records as having been issued to Jagger could have been lost in the post (even though, as it slyly noted, HMRC did not use recorded delivery either!).
In any event, HMRC was only required to issue notices to the most recent known address, which in each case they had done. Since no notices were returned as undelivered, the FTT was able to conclude that Jagger’s frequent relocations neither invalidated any of HMRC’s actions nor provided him with a reasonable excuse for late filing.
Liability to tax
Paragraph 17 (3) of Schedule 55, FA 2009 says: “where a person is liable for a penalty under more than one paragraph of this Schedule which is determined by reference to a liability to tax, the aggregate of the amounts of those penalties must not exceed [100%] of the liability to tax”.
It is obvious that the £100 fixed penalty (FA 2009, Sch 55, para 3) is not “determined by reference to a liability to tax”, so it won’t be affected. Similarly, the three-month penalty in Sch 55, para 4 is calculated by reference to days (£10 a day up to a maximum of 90 days), so it too is unaffected by the tax liability.
But what about the six-month and twelve-month penalties (FA 2009, Sch 55 paras 5 and 6)? The formula in both cases is:
“the greater of –
(a) 5% of any liability to tax which would have been shown in the return in question, and
Fool to cry
HMRC’s argument was that, for both years and for both penalties, the penalty was imposed by sub-paragraph (b) of FA 2009, Sch 55, para 5 or 6 as opposed to sub-paragraph (a) and is, therefore, a fixed statutory sum rather than one computed by reference to tax. Once it is clear that the tax-geared figure is below £300, the fixed penalty kicks in; therefore Sch 55 paragraph 17 does not apply.
In the view of HMRC, “by creating two possibilities of a penalty”, parliament clearly intended that there should be a minimum penalty under each of the two paragraphs regardless of the tax at stake, in order to encourage compliance.
Back to zero
The FTT was having none of this. The notion that it comes down to an alternative between issuing a penalty under FA 2009 Sch 55, para 5(2)(a) or issuing one under FA 2009 Sch 55, para 5(2)(b) makes no sense. The penalty is issued under Sch 55 para 5(1), and sub-paras (2)(a) and (2)(b) are merely the mechanism for computing that penalty. The same goes for Sch 55, para 6.
Part of the process of arriving at a £300 penalty is the act of calculating whether 5% of the tax is greater or less than that amount. This being the case, it is clear that the penalty has been determined by reference to tax. “It is… not possible to impose a £300 penalty without first having referred to the liability to tax”.
Given that both the six-monthly and twelve monthly penalties are calculated in this manner, Sch 55 paragraph 17 must apply. The aggregate penalties under paragraphs 5 and 6 must be limited to the tax at stake, which is nil.
The initial £100 and three-month £900 penalties were upheld since Jagger had shown no reasonable excuse for missing the deadlines. The six-month and twelve-month penalties were reduced to nil based on the fact that no tax was due for either year.
It’s all over now
HMRC’s arguments on the paragraph 17 point were weak and clearly misconceived. It did, however, raise one interesting point: if someone has already been charged a six-month penalty for a nil return, they would be better off continuing not to file until a twelve-month penalty was charged – since a liability of £300 would be reduced by paragraph 17 to one of nil.
While this does seem bizarre, and arguably a defect in the legislation, it seems to be precisely what the law requires.
If HMRC is upset by this, it is of course in their power to get it changed – just as they have on previous occasions when the absence of any tax due has stood in the way of charging a nice fat penalty.