Tax penalties, escalators and carried dogs
The tax tribunal decided the penalty legislation was akin to a notice saying “dogs must be carried” on the escalator. This doesn’t mean that every passenger needs to carry a dog.
Duncan Hansard (2019 UKUT 0391) was over 12 months late submitting his tax returns for 2010/11 and 2011/12 and received flat rate penalties of £300 plus tax geared penalties under FA 2009 Sch 55. He appealed to the first tier tribunal (FTT) which threw out some of the penalties and upheld others. HMRC appealed against some of the FTT’s decisions.
Where a tax return is not submitted within six months of the due filing date, a penalty is due under FA 2009 Sch 55 para 5, while paragraph 6 requires a further penalty if the return has still not been submitted after 12 months. In both cases the penalty is the greater of:
(a) 5% of any liability to tax which would have been shown in the return in question, and
This is straightforward if the “liability to tax which would have been shown” is currently known, but what if HMRC has not got the information needed to calculate the 5%?
The legislation says that HMRC should “determine the amount… to the best of HMRC’s information and belief”. Once the return is eventually submitted, and the amount of tax liability becomes known, HMRC must “re-assess” the penalty to match the new information.
The FTT noted that, in cases where the return was still outstanding, the HMRC computer automatically assessed the minimum amount of £300. In the FTT’s view, this was “not sufficient to meet the requirements”. What was needed was “a belief of an officer formed from information that officer has received or acquired”. For that reason, the FTT had cancelled the £300 penalties.
Was the FTT correct to reject an automatic £300 penalty issued without some sort of comparative calculation of a tax-geared alternative?
Counsel for Hansard suggested that the “determination” was mandatory as a whole, meaning that HMRC must evaluate each and every case to its best belief as an integral part of the process.
However, HMRC suggested that the mandatory nature of the legislation should be seen in a more granular fashion. HMRC must issue a penalty, and then if it makes a determination, that determination must be to its best belief.
The upper tribunal (UT) favoured the second view. Using a splendid analogy, it pointed out that a sign on the escalator saying “dogs must be carried” does not oblige all passengers to equip themselves with dogs in order to use the escalator.
The fact that – regardless of what penalty is initially charged – the penalty is to be re-assessed once the return is submitted shows that the process as a whole is iterative. The correct amount of penalty will emerge over time.
The correct penalty can never to be less than £300, so it is both reasonable and practical for HMRC to charge this minimum figure at the outset. It can be confident that, by the end of the full process, any additional penalty can and will be assessed.
The UT concluded that the FTT had erred in law by cancelling the £300 penalties for the reason it did.
Replacement or supplementary?
When Hansard’s return was finally submitted, HMRC was obliged to “re-assess” the penalties in line with FA 2009, Sch 55 para 24(2)(b).
In fact, HMRC issued a supplementary penalty notice – one charging the difference between the actual penalty due (based on 5% of the tax) and the £300 already charged. The FTT struck this out, ruling that, in order to re-assess the penalty, HMRC was obliged to issue a replacement notice, charging the full amount of penalty due.
By contrast, the UT viewed HMRC’s approach as “eminently sensible”, and in no way barred by the law. There is no statutory definition of “re-assessed”, and that activity can reasonably be carried out by either the issue of a replacement penalty notice (and the cancellation of the initial one) or the issue of a supplementary notice.
The FTT had erred in law by cancelling the supplementary penalty notices. However, this did not matter because of the miss-address issue.
Badly addressed penalties
The supplementary penalty notices had been sent simply to “Lot 2” (which appears to have been the first line of Hansard’s address). The FTT cancelled them “as not being validly served”.
The UT wondered how – if these notices had been so inadequately addressed that they could not be delivered – Hansard had been in a position to appeal against them! But that was not what they needed to examine.
There are three parts to the process:
- Someone becomes liable to a penalty
- HMRC makes an assessment of the penalty, and
- HMRC gives notice of that assessment.
It is clear that Hansard was liable to a penalty, and that HMRC did make an assessment of that penalty. It is also 99.999% certain that HMRC failed to give valid notice of the assessment.
The FTT, on determining as a question of fact that the penalties were not properly served, had the authority to strike down the notices. While they were validly issued, they were not validly notified to the taxpayer, and so were not payable.
The £300 penalties were reinstated. The fact that there wasn’t an alternative method available to calculate the 5% of tax liability at the time of issue, did not require HMRC to do any additional research to find one. Since Hansard was never going to be charged less than £300, there was nothing unfair about it.
When a late return finally arrives, HMRC are justified in collecting any increased amount of penalty by issuing a supplementary assessment. There is no requirement to cancel the initial notice and issue a replacement.
Even if someone is liable to a penalty, and HMRC validly assesses that penalty, it still needs to get the third step (giving valid notice) right. If it does not, the penalty will not be payable.