[2011] UKFTT 183 (TC)

TC01052

Appeal number TC/2010/05715

INCOME TAX – Penalty for negligently delivering an incorrect tax return (Taxes Management Act 1970 s.95) – Whether omission from the tax return of relocation expenses paid by employer was negligent – Whether the penalty imposed was excessive – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	MR DAVID WALD		Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			TRIBUNAL: 	Dr Christopher Staker (Tribunal Judge)
					MR M M HOSSAIN (Tribunal Member)

Sitting in public in London on 1 March 2011

Mr R Summers and Mr A Summers for the Appellant

Mr Paul Maffia for the Respondents

DECISION

Introduction
1.	This is an appeal against a penalty determination dated 1 February 2010, imposing on the Appellant a penalty under s.95(1)(a) of the Taxes Management Act 1970 (the “TMA”) “for negligently delivering to an officer of HMRC an incorrect return under Section 8 of that Act” for the year 2006/07. 
The relevant legislation
2.	Section 95 of the TMA was repealed by the Finance Act 2007, in relation to relevant documents relating to tax periods commencing on or after 1 April 2008.  The provision continues to apply in relation to the Appellant’s 2006/07 tax return, which was submitted on 31 January 2008.  This provision relevantly states as follows:
(1)	Where a person fraudulently or negligently—
(a)	delivers any incorrect return of a kind mentioned in section 8 or 8A of this Act (or either of those sections as extended by section 12 of this Act), or
(b)	makes any incorrect return, statement or declaration in connection with any claim for any allowance, deduction or relief in respect of income tax or capital gains tax, or
(c)	submits to an inspector or the Board or any Commissioners any incorrect accounts in connection with the ascertainment of his liability to income tax or capital gains tax,
he shall be liable to a penalty not exceeding the amount of the difference specified in subsection (2) below.
(2)	The difference is that between—
(a)	the amount of income tax and capital gains tax payable for the relevant years of assessment by the said person (including any amount of income tax deducted at source and not repayable), and
(b)	the amount which would have been the amount so payable if the return, statement, declaration or accounts as made or submitted by him had been correct.
...
The hearing, evidence and arguments
3.	The Appellant did not attend the hearing in person, and was represented by Mr Robin Summers and Mr Alastair Summers.  HMRC were represented by Mr Maffia.
4.	The following matters are not in dispute.  The Appellant is a specialist consultant surgeon.  He is a citizen of the United States.  He commenced employment with Queen Mary University of London (QMUL) in May 2006.  During the 2006/07 tax year QMUL paid him £14,617 in settlement of relocation removal expenses.  The part of that payment in excess of £8,000 (that is, £6,617 of this amount) was taxable under the Income Tax (Earnings and Pensions) Act 2003, and should therefore have been declared in the Appellant’s 2006/07 tax return.  QMUL should have provided the Appellant with a form P11D advising him of the payment and of its tax treatment.  HMRC accept that the Appellant had not received a P11D from QMUL before he filed his 2006/07 tax return.  The Appellant’s 2006/07 tax return was prepared by a firm of accountants.  The taxable portion of the relocation expenses payment was not included in this tax return.  An enquiry was opened by HMRC into the Appellant’s 2006/07 tax return, leading to a closure notice being issued on 3 August 2009 advising the Appellant that £2,646.80 in tax was due to be paid, being the difference between the tax due as returned and as now amended by the closure notice.  On 1 February 2010 there was then issued the penalty notice against which the Appellant now appeals.
5.	Under s.95(2) of the TMA, the maximum penalty that could be imposed, in the event that the Appellant is liable to a penalty under s.95(1), is 100% of the difference between the tax due according to the tax return as submitted by the Appellant and the tax due according to the return as now amended by the closure notice, namely £2,646.80.  The penalty that was imposed by the penalty notice was 10% of that amount, £264.
6.	The evidence shows that the Appellant was advised of the opening of the enquiry into the return by a letter from HMRC dated 16 October 2008.  That letter stated that HMRC understood that the Appellant had received benefits from his employer that had not been included in the tax return, and requested the Appellant to provide a copy of his P11D.  The evidence indicates that the Appellant then sent a copy of his P11D to HMRC under cover of a letter dated 23 October 2008.  That letter apologised for not including this as part of the tax return, and explained that the P11D never reached the Appellant and that the Appellant was therefore unaware of it or that he had to send it to HMRC.  A subsequent letter from the Appellant to HMRC dated 30 October 2008 included a cheque for the outstanding amount of tax.
7.	At the outset of the hearing, the parties were informed that the Chair had certain connections to QMUL.  Representatives of both parties indicated that they had no objection to the Tribunal proceeding to hear the case.  
8.	The submissions on behalf of the Appellant included the following.  HMRC has lost perspective and has treated the Appellant shoddily. The Appellant is a US citizen and is required to file tax returns in both the US and the UK. He is keen to pursue this case because although the amount at stake is a small HMRC has treated him unreasonably and he does not want a blemish on his character. In his work, accusations of negligence are highly damaging, and he is concerned to clear his name. The Appellant was not negligent. It was a case of innocent error. Immediately upon being informed of the error, he acted with utmost urgency to rectify the error and pay the correct amount of tax with interest. It is not disputed that he did not receive his P11D in 2006/07. The Appellant’s expertise is in cardiac surgery, not tax affairs. It is unreasonable to expect him to know the rules of taxability of relocation expenses, when an HMRC official himself was unfamiliar with the rules. This was the only year in which the Appellant has had a P11D, and therefore could not have been expecting to receive one. He received his P60 and therefore could assume that he was receiving whatever documents he was meant to receive. It was not clear from the guidance notes accompanying the tax return that the Appellant would have been required to obtain a P11D or declare additional income. HMRC’s own enquiry manual indicates that a penalty will not be imposed in the case of a wholly innocent error which is remedied without unreasonable delay, and at page EM5810 states that an error may be innocent even if found out first by HMRC. Reference was made to an internal HMRC document that had been included in the HMRC bundle, showing that two HMRC officials had suggested to the compliance officer that this might be a case where a decision could be taken not to impose a penalty. The imposition of the penalty lacks common sense and perspective and is an inappropriate use of public resources.
9.	The submissions on behalf of HMRC included the following.  The guidance notes accompanying the tax return make it sufficiently clear that relocation packages expenses from the employer are part of the employee’s taxable income, and that the employer should give the employee details of the amounts to include in the tax return. The guidance notes also advise that the employer is required to send to HMRC details of the taxable expenses on a form P11D, a copy of which is to be given to the employee by 6 July 2007. By failing to include the amount in the tax return, an incorrect return was submitted, and this occurred through negligence. The definition of negligence is “the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do” (Blyth v The Company of Proprietors of the Birmingham Water Works (1856) 156 ER 1047. In the absence of any P11D, a reasonable man would have contacted his employer for duplicate details, or calculated the figure from his own records. To do neither and then not report the benefit was negligent. The payment made to the Appellant, £14,617, is a significant amount, and any reasonable man when making his return would have been mindful of the expenses reimbursed to him. A letter from the Appellant’s accountant dated 2 July 2010 contends that the Appellant was under the impression that the expenses reimbursed would be handled through PAYE procedures. A reasonable man would have recalled the relocation expenses reimbursed and alerted his accountant to them even if he thought they were already dealt with through PAYE. The remarks in King v Walden [2001] EWHC Ch 419 concerning giving the benefit of the doubt to the appellant, do not apply here.
The Tribunal’s views
10.	The Tribunal has considered all of the evidence and submissions before it as a whole.  Failure to mention a particular item of evidence or submission does not mean that the Tribunal has not considered it.
11.	At the hearing, the parties were unable to refer the Tribunal to relevant case law specifically on the meaning of the word “negligently” in section 95 of the TMA.  The Tribunal indicated to the parties at end of the hearing that it would undertake its own consideration of relevant case law. The Tribunal left open the possibility that it might if it considered it appropriate afford the parties a further opportunity to make submissions on relevant cases identified, but stated that the Tribunal was under no obligation to do so. The Tribunal considers that where parties have had a full hearing at which they could have presented submissions on relevant cases, but have not done so, the Tribunal is not obliged to afford the parties a further hearing before taking the relevant case law into account. Bearing in mind the overriding objective in rule 2 of the Tribunal’s Rules, the Tribunal has decided not to do so. The relevant cases are readily accessible, and could have been addressed by the parties at the hearing if they had so desired.
12.	There are two issues for the Tribunal to determine in this appeal.
13.	The first issue is whether the Appellant was “negligent”, within the meaning of section 95(1) of the TMA, in failing to include the amount of the relocation expenses in his tax return.  In the Tribunal’s determination of this issue, the burden of proof is on HMRC to establish that there was negligence.  The standard of proof is the civil standard of a balance of probabilities, not the criminal standard of beyond reasonable doubt: HMRC v Khawaja [2008] EWHC 1687 (Ch).
14.	Although the burden of proof is on HMRC, the Tribunal will consider the evidence in the case as a whole in determining whether that burden has been discharged.  The mere fact that the Appellant has failed to include in a return a payment that was within the Appellant’s knowledge can amount to prima facie evidence of negligence.  Such prima facie evidence, in the absence of any further evidence to show that there was a reason other than negligence, might be sufficient to support a conclusion that negligence has been proved:  see, for instance Salmon v General Comrs for Havering and IRC (1968) 45 TC 77, 81.
15.	The obligation to file a correct tax return is on the taxpayer, and the taxpayer cannot transfer that obligation.  If the Appellant relies on an accountant to prepare and file a tax return on his behalf, then the Appellant will be responsible if errors in the tax return are due to negligence by the accountant acting on his behalf (compare Smith v HMRC [2010] UKFTT 92 (TC) at [25]-[29] and [107]; Employee v HMRC [2008] STC (SCD) 688, SpC 673).  If there has been negligence on the part of an accountant, it may be that the taxpayer may have some recourse against the accountant.  However, that does not normally affect the liability of the taxpayer to a penalty for filing an incorrect return.
16.	If negligence is found to be proved, the second issue is the level of the penalty. In relation to this issue, the burden is on the Appellant to establish that the level of the penalty was excessive (for example Coll v HMRC [2009] UKFTT 61 (TC); Singh v HMRC [2008] STC (SCD) 1055 at [17]).  In considering this issue, the Tribunal must bear in mind the desirability that comparable penalties be imposed in comparable cases (compare Brodt v Wells General Commissioners and Inland Revenue Commissioners [1987] STC 207).
17.	It is not in dispute that in the relevant tax year, the Appellant received a payment of £14,617 in settlement of relocation removal expenses, and that this amount was not included in his tax return.  The Tribunal considers that the amount was of sufficient significance that it would not readily be overlooked or forgotten.  
18.	The guidance notes accompanying the tax return (page EN5, at page F5 of the documents bundle) include guidance on what to include in box 1.22 of the tax return.  It begins by stating “Enter in box 1.22 the total cash equivalents of any other benefits from your employer not already included elsewhere”.  There follows a series of sub-headings of different types of payments to be included in this box, including “relocation expenses”.  Under that sub-heading, it is stated:
When you move house any payments you receive from, or any goods or services provided to you by your employer are part of your taxable earnings.  However, if you move house for your job and meet certain conditions, the first £8,000 of any help you receive is exempt from tax.  ... [Y]our employer is required to tell us about the excess of any relocation expenses and benefits over the £8,000 limit.  Your employer should give you details of the amount to include in your entry in box 1.22.
19.	The Appellant says that what he was required to do was unclear from text on pages EN3 to EN4 of the guidance notes, relating to form P11D.  This states that the employer is required to send to HMRC a P11D giving details of all taxable benefits provided by reason of the employment and all taxable expenses paid, and to provide the employee with a copy of the P11D.  It states:  “But even though your employer has provided you with figures, you are responsible for what you enter on your Employment Pages”.  It further states that the P11D will not include items for which the employer has a “dispensation” or for which the employer makes a “PAYE settlement agreement”, and that the taxpayer is not required to tell HMRC about these amounts.  It then goes on to say:
If you are in any doubt about any dispensation or PAYE settlement agreement applying to you, your employer may be able to help.  You may also find that the details you get from your employer do not include some items that you think may need to be returned as benefits.  The reason for this is likely to be that the items are exempt from tax either by law, or by virtue of an extra-statutory concession.  If you have any doubt about any items ask the Orderline for Help Sheet IR207: Non-taxable payments or benefits for employees.
20.	The Tribunal accepts that the fact that the Appellant unfortunately did not receive his P11D may have made the task of completing the tax return more difficult or inconvenient.  However, the Tribunal is satisfied that the guidance notes make clear that the amount of relocation expenses in excess of £8,000 needs to be included in box 1.22.  The text in relation to the P11D indicates that regardless of what is stated in the P11D, the taxpayer remains responsible for the correctness of the return.  It further makes clear that if the taxpayer is in any doubt about any item in the P11D, appropriate help should be sought.  The Tribunal finds nothing in the guidance notes that would suggest that if a taxpayer has received £14,617 in relocation expenses but no P11D, the taxpayer is entitled to assume that the payment is not required to be declared to HMRC.
21.	The evidence before the Tribunal included a file note of a conversation between the Appellant’s accountant who prepared the tax return and an HMRC official, to the effect that the accountant “did ask him [the Appellant] for P11d and P60 when completing return, but he said he did not have P11d”.  It is not clear whether the Appellant told his accountant about the relocation expenses, or whether the accountant asked the Appellant questions directed to ascertaining whether he should have received a P11D, or whether he did receive any other taxable benefits in the tax year in question.  The Tribunal considers that even without having received a P11D, which was regrettable, a reasonable Appellant, especially when assisted by professional accountants, would have been in a position to include the relocation expenses in the tax return, and would have done so.  The Tribunal does not find it necessary to determine precisely whether the omission to include the relocation expenses in the tax return was due to an omission on the part of the Appellant personally or on the part of his accountants.  The Tribunal finds on a balance of probabilities that the failure to include the relocation expenses was due to negligence for which the Appellant was responsible, rather than a wholly innocent error.
22.	Having so found, the burden shifts to the Appellant to establish that the amount of the penalty imposed was excessive.  As has been noted, the penalty imposed, £264, was only 10% of the maximum penalty that could have been imposed.  
23.	Following the Appellant’s October 2008 letters to HMRC referred to above, there was a series of exchanges between HMRC and the Appellant’s representatives, reproduced in the bundle, extending to October 2010.  In this correspondence, the Appellant’s representatives set out the reasons why it was considered that no penalty should be imposed in this case.  The Appellant’s submissions in this respect at the hearing are set out above.  A letter from HMRC dated 28 May 2009 indicates that the penalty imposed was calculated on the basis that the Appellant received a 20% reduction of the maximum penalty for prompt disclosure after being challenged, 40% for cooperation and 30% for the limited seriousness.
24.	From the documents in the bundle, the Tribunal is satisfied that the penalty imposed was consistent with HMRC guidance.  It is noted that an internal HMRC document included at page C5 to C7 of the bundle suggests that two HMRC officials considered that this might be an appropriate case in which to impose no penalty, but that it would also be open to the compliance officer in accordance with the guidelines to do so.  The compliance officer ultimately decided to do so.
25.	The Tribunal has some sympathy for the Appellant.  It is accepted that he did not receive his P11D before filing his tax return, and two HMRC officials appear to have considered this to be a borderline case.  It is accepted that he did not deliberately omit to include the removal expenses in his tax return, that he engaged professional accountants to assist in preparing his returns, and that he promptly rectified the error and paid the outstanding tax with interest as soon as the error was drawn to his attention.  However, this is reflected in the fact that the penalty imposed is only 10% of the maximum that could have been imposed.  Having considered all of the circumstances and evidence as a whole, the Tribunal is not persuaded that the penalty imposed was excessive.
Conclusion
26.	For the reasons above, the Tribunal dismisses the appeal and confirms the imposition of the penalty.
27.	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.

Christopher Staker

TRIBUNAL JUDGE
RELEASE DATE: 17 MARCH 2011