[2011] UKFTT 133 (TC)

TC001007

Appeal number: TC/2010/8314

INCOME TAX – SURCHARGE FOR LATE PAYMENT OF TAX – Did the Appellant have a reasonable excuse – No – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	MICHAEL DAVIES	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	MICHAEL TILDESLEY OBE (TRIBUNAL JUDGE)									

The Tribunal determined the appeal on 11 February 2011 without a hearing under the provisions of Rule 26 of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (default paper cases) having first read the Notice of Appeal dated 25 October 2010,  HMRC’s Statement of Case submitted on 25 November 2010 and the Appellant’s Reply dated 29 December 2010.

© CROWN COPYRIGHT 2011
DECISION

1.	The Appellant appealed against the imposition of a surcharge dated 3 April 2010 in the amount of ₤6,709.15 for the late payment of the tax due for the year ending 5 April 2009.
2.	On 6 April 2009 HMRC issued the Appellant with a notice to file his 2008/09 tax return by 31 October 2009 for a paper return, and if online by 31 January 2010. The Appellant filed his return online on 29 January 2010 which contained a self calculation of the tax due.  The Appellant’s tax liability for the year was ₤204,751.44 of which ₤134,183.03 remained outstanding at the surcharge trigger date of 28 February 2010. The Appellant paid the balance of the tax due on 6 April 2010. The Appellant was therefore liable to pay a surcharge for the outstanding tax due as at 28 February 2010, which was fixed at five per cent of ₤134,183.03 which equated to ₤6,709.15.
3.	The Appellant pleaded that he had a reasonable excuse for the late payment of the outstanding tax. His taxable income for 2008/09 was abnormally high, which arose from two sources: advisory income from his partnership and a taxable gain on the sale of a business. On the strength of the income earned in 2008, the Appellant and his wife decided to move house. The purchase of which was to be funded by the proceeds of the sale of the business in the UK, and of the sale of a completed renewable energy project in the United States. The Appellant, however, encountered difficulties with the sale of the US project with the result that the Appellant took out legal proceedings in early 2009 to recover the sums owing. In January 2009 the Appellant and his wife completed the purchase of their new home, which had to be funded partly with a mortgage until the dispute in the United States was settled. The mortgage came with a reserve facility of a further ₤100,000. 
4.	The legal dispute continued throughout 2009, which meant that the Appellant was required to consider his options for meeting the expected high tax liability for the year ending 5 April 2009. The Appellant assumed that he would be able to draw on the ₤100,000 reserve facility and with this in mind he approached via his financial adviser the mortgagor in Autumn 2009  for permission to use the facility to discharge part of his expected tax liability. The mortgagor refused because of its policy not to allow mortgages to be used to discharge tax liabilities. The Appellant approached other lenders for the monies without success. The Appellant was hampered in his attempts to secure funding because he was unable to produce his accounts for his core business for the year ended April 2008. The preparation of these accounts was the responsibility of the Appellant’s business partner who had become disinterested in their enterprise and refusing to provide documents to their external accountants. The particular accounts were not ready until the end of January 2010. The Appellant and his business partner have decided to go their different ways.
5.	By early January 2010 the Appellant had exhausted all potential lenders on the mortgage front and was back at square one with his current mortgagor which was apparently reconsidering its position.  The Appellant’s current mortgager, however, indicated that it might take several weeks to secure the re-financing. In order to quicken matters, the Appellant decided to approach his mortgagor direct side-stepping his financial adviser who up to now had been handling the discussions with prospective lenders. The Appellant’s personal approach appeared to work with his mortgagor indicating that it would be prepared to make the advance. On 19 February 2010 the Appellant signed and returned a new mortgage application form. Despite the closeness to the surcharge trigger date  f 28 February 2010 the Appellant had a reasonable expectation that he would secure the advance in time to discharge the outstanding liability by the trigger date. Unfortunately this did not happen because his mortgager required additional information. Eventually the advance was made in April 2010 when the Appellant settled his debt with HMRC.
6.	The Appellant asserted that he took prudent measures to ensure that he would have available funds with which to meet his tax liabilities when due at the end of January 2010. The Appellant contended that it was reasonable for him to expect a   leading US utility firm to pay up under a binding contract, which would have provided the necessary funds for the tax bill. The ongoing dispute with the US utility firm meant that the Appellant had to look elsewhere for the necessary monies. According to the Appellant he took steps in good time to secure alternative funding but was thwarted by the actions of others who continuously delayed all his efforts. The Appellant did not keep HMRC informed of his potential difficulties because he had every expectation of raising the necessary funds in the timescale required. In those circumstances the Appellant considered it was not appropriate to involve HMRC. 
7.	The Tribunal has limited jurisdiction in penalty Appeals which reflects the purpose of the legislation of ensuring that tax payers pay their tax on time. The Tribunal has no power to mitigate the penalty. The Tribunal can either confirm the penalty or quash it if satisfied that the Appellant has a reasonable excuse for his failure.  If there is a reasonable excuse it must exist throughout the period of default. The Appellant has the obligation of satisfying the Tribunal on a balance of probabilities that he has a reasonable excuse for not paying the tax on time. 
8.	In considering a reasonable excuse the Tribunal examines the actions of the Appellant from the perspective of a prudent tax payer exercising reasonable foresight and due diligence and having proper regard for his responsibilities under the Tax Acts. 
9.	The Tribunal makes the following findings of fact relating to the reasons put forward by the Appellant:
(1)	The Appellant was fully aware of the timelines for the payment of tax. The Appellant knew that he had to make arrangements to pay the expected high tax bill. In his e mail of 28 September 2009 to his financial adviser the Appellant stated that he would need to increase the reserve account on his mortgage to cover his upcoming tax bill, albeit not until the end of January.     
(2)	The Appellant’s contract dispute with the US utility firm started in November 2008 with legal proceedings commencing in early 2009. The Appellant knew in mid 2009 that this dispute was not going to be quickly settled and that he would have to make alternative plans to fund his expected high tax bill.
(3)	The Appellant submitted a series of emails to corroborate his assertion that he was actively seeking funds to discharge his tax liability. Most of the e mails were dated towards the end of January 2010 which indicated to the Tribunal that the Appellant had left it late to prioritise the securing of funds. Also the Appellant appeared to be relying exclusively upon his financial adviser rather than taking personal responsibility for resolving the problem, which he did only after the date for payment (31 January 2010) had passed. The Appellant in his e mail dated 26 January 2010 acknowledged that had he realised there was no possibility of getting the mortgagor to move in a sane time period he would have focussed on alternatives much earlier.
(4)	The Appellant’s rationale for not contacting HMRC was unconvincing. The Appellant on his own account knew by 26 January that he would not secure funds by the 31 January 2010. In those circumstances the Tribunal does not understand why the Appellant did not get in touch with HMRC to explore potential options for paying the sum due.
10.	The Tribunal concludes on the facts found that the Appellant’s actions were not those of a prudent tax payer exercising reasonable foresight and due diligence and having proper regard for his responsibilities under the Tax Acts. A prudent tax payer having regard to the scale of the payment would have prioritised the problem earlier and explored a range of options to secure the necessary funding. A prudent tax payer would also have alerted HMRC about the funding difficulties well before 31 January 2010 with a view to making an arrangement if he was unable to meet in full the tax liability by the due date.  The Tribunal, therefore, finds that the Appellant did not have a reasonable excuse for not paying the outstanding tax by the surcharge trigger date of 28 February 2010.
11.	The Tribunal dismisses the Appeal, and confirms the penalty in the sum of ₤6,709.15.     
12.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

                                  MICHAEL TILDESLEY OBE 
TRIBUNAL JUDGE
RELEASE DATE: 22 FEBRUARY 2011