Tribunal: No evidence trail means no penalty
Andy Keates discusses another case in which the first tier tax tribunal (FTT) refused to uphold penalties charged by HMRC, primarily due to the lack of a solid evidence trail.
This has become a strong theme in recent FTT judgments, especially those of Judge Richard Thomas, who appears to have set himself the task of holding HMRC officers to the same high level of compliance which HMRC routinely expects of taxpayers.
Mrs Leverington (TC06709) was a partner in Collectable Times, alongside Mr AJ Fryer. The two entered into partnership on 1 September 2014.
HMRC issued a notice to file a partnership tax return for the 2015/16 tax year on 6 April 2016. As the partnership return was not filed on time, a number of penalties were issued to Leverington under FA 2009 Sch 55.
In its statement of case, HMRC confirmed that:
- it had not created a self assessment record for the other partner, Fryer;
- it had not issued any penalties to Fryer; and
- it did not intend to do so.
The representative partner
HMRC claimed that the filing notice was issued to Leverington because she was “the representative partner”. This term is defined (FA 2009, Sch 55 para 25) as “a person who has been required by a notice served under or for the purposes of section 12AA(2) or (3) of TMA 1970 to deliver any return”.
The problem is the two subsections mentioned in that definition offer two different routes for delivering a notice to file:
- section 12AA(2): a notice to “the partners” requiring “such person as is identified in accordance with rules given with the notice” to file a return; or
- section 12AA(3): a notice to “any partner” – which may be one partner, some of the partners or even all of the partners.
HMRC confirmed that the notice was sent to the business address of the partners, rather than to Leverington’s home address. The judge felt justified in concluding that it would, therefore, have been a “partners” notice under section 12 AA(2) as opposed to a “partner” notice under section 12AA(3).
The type of notice, as shown on HMRC’s return summary, was “notice to file” as opposed to “full return”. It is clear then that no actual paper return was sent to Leverington, but rather a letter telling the partnership to make a return.
Not the right letter
HMRC could not produce a copy of the letter sent to the Collectable Times partnership.
It did manage to produce a specimen 2015/16 notice to file. Unfortunately, this was in the format used for personal tax returns issued under TMA 1970 section 8 and of the type used when issuing a notice at a time other than 6 April. As Judge Thomas pointed out, “there was a standard letter, but it was not this one”.
From the evidence presented the judge did not know "what rules are given with the notice that identify who the s12AA(2) person is, or indeed if any are. For all I know from the bundle the rules in the relevant notice to file might show that the first named person on HMRC’s records is the s12AA(2) partner and that is Mr Fryer”.
He said, in conclusion, it was “impossible to tell from the evidence in the bundle whether the appellant was the s12AA(2) partner or the representative partner, so I cannot tell whether the notice to file was properly issued to the right person.” The penalties were cancelled.
This is yet another instance where HMRC has thrown away a perfectly good penalty by failing either to keep adequate records of what had taken place or to provide adequate evidence to a tribunal (remember Judge Geraint Jones’ dictum in Loial that “adequate evidence is a necessity; not a luxury”).
Why did this happen?
There are a number of troubling questions for both sides arising from this case.
1. Since HMRC’s records showed Fryer as the first-named partner, why did it treat Leverington as the designated partner? This could be because Leverington already had a UTR number and was registered for self assessment, but Fryer was not. So picking Leverington as the representative partner was the lazier course of action for HMRC.
2. Since FA 2009 Sch 55 para 25 specifies that a late filing penalty for a partnership return “is payable by every relevant partner”, why didn’t HMRC assess penalties on Fryer as the legislation required?
3. Regardless of how and to whom the notice to file was issued, both partners should have been aware that there was a requirement to file a partnership tax return, especially as notices of penalty kept coming through the door. Leverington had, it transpires, suffered a close family bereavement around the filing date, but this does not explain Fryer’s inactivity.
4. Fryer’s failure to do anything about the partnership tax return may have been because HMRC had been sending everything to Leverington. However, HMRC could, and should, have been pursuing both partners for this default.
Finally, why, when preparing statements of case for a tribunal, does HMRC persist in cutting corners? Trying to get away with “here is a sample of a letter which we sometimes send to a different type of person on a different occasion, so trust us that we sent the right letter this time” simply will not do.