[2011] UKFTT 278 (TC)

TC01140

Appeal number: TC/2011/00525

Income tax -- penalty -- section 98A (2) (a) Taxes Management Act 1970 whether employers annual return Form P 35 filed online or test submission -- whether reasonable excuse -- whether prompt notification of time-based penalty

FIRST-TIER TRIBUNAL

TAX 

	LAW COSTING LTD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: GUY BRANNAN (TRIBUNAL JUDGE)							NICOLAS DEE		

The Tribunal determined the appeal on 15 April, 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 17 January, 2011, HMRC’s Statement of Case submitted on 3 February, 2011 and the Appellant’s Reply dated 28 February, 2011.

© CROWN COPYRIGHT 2011
DECISION

1.	This is an appeal against a penalty charged under section 98 A (2) (a) Taxes Management Act 1970 ("TMA") in respect of the alleged late submission of Form P 35 in respect of the year ended 5 April, 2010.
2.	Section 98 A (2) (a) TMA provides that, as regards the first 12 months, a penalty can be levied of £100 for each 50 employees for every month or part thereof that the return was outstanding. The amount of the penalty was £400 covering the four month period from 20 May, 2010 to 19 September, 2010. The first penalty notification was issued on 27 September, 2010.
3.	The filing date for the submission of Form P 35 was 19 May, 2010.
4.	According to HMRC's records, the Form P 35 for the year ended 5 April, 2010 was filed online on 2 November, 2010.
5.	The Appellant's practice manager, Stacey Branscombe, appealed against the penalty. She stated that she had sent the return online on 9April 2010 and she attached a "Successful Receipt of Online Submission." This Receipt stated in the Subject Heading "Successful Receipt of Online Submission for Reference 428/LZ04649". The text of the e-mail read as follows:
"Thank you for sending the PAYE End of Year submission online.
These submission for reference 428/LZ04649 was successfully received on 09-04-2010. If this was a test transmission, remember you still need to send your actual Employer Annual Return using the live transmission in order for it  to be processed.
PAYE End of Year Online is just one of the many online services we offer that can save you time and paperwork....
This is an automatically generated e-mail. Please do not reply as the e-mail address is not monitored for received mail."
6.	In a statement dated 8 November, 2010, Ms Branscombe said:
"I can confirm that on 31 March, 2010, I finalised the monthly payroll and prepared all documentation ready to file the P 35 online. As I could not file the P 35 online until 5 April, I sent a test submission (e-mail confirmation attached).
On 9 April, 2010 I sent to the P 35 online, this is sent as a live submission (e-mail confirmation attached).
As I had received a confirmation e-mail I was surprised to receive a letter from HMRC dated 27 September, 2010 stating that the P 35 had not been received.
I think the fact that I had sent a test submission on 31 March, 2010, shows that I know the difference between a live submission and a test submission -- I would not go back into the software to send a further test submission a week later.
I have contacted our software provider and have asked them if they can check if our software as any faults on it, from what they can see it doesn't. However I have had a new computer since then so they could only check back to a certain point.
If I had been informed sooner that the P 35 had not been received correctly it would have been dealt with straightaway. We had received no indication of any problems prior to the fine being sent to us four months later (27 September, 2010)."
7.	We note that the e-mail confirmation of 31 March referred to above was, to all intents and purposes, identical to the one received on 9 April. In other words, the e-mail confirmation received in respect of the undisputed test submission was the same as the confirmation received in respect of the submission which the Appellant maintains was a "live" submission.
8.	According to HMRC's records both the 31 March, 2010 and the 9 April, 2010 submissions were "test" submissions.
9.	HMRC consulted their colleagues in Online Services asking whether it was possible for HMRC's computer system to have accepted a live submission as a test submission. On 3 February 2011 James Matthews of  HMRC’s Online Services replied:
"Simply put, no. There are only two ways for a return to show as a Test: either the incoming XML contains the Test flag set to 1 or CEPT manually intervene in ERSS /ChRIS and change it (the latter is rare and is fully auditable and didn't occur in the customer's case).
The HMRC online acknowledgements do differentiate between Live and Test -- the customer is referring to the confirmation e-mails, rather than the responses to their software. The response to their software is immediate and unequivocal. It states that these submission failed as it was a Test would have been successful if sent in Live.
This online response to their software is legal receipt, the e-mail is just a courtesy to assist customers.
If they wish to complain that they didn't know they were submitting Tests prior to submission this should be addressed to their software provider.
Incidentally, I can confirm that the response to the second Test submission was also received by their software.
I can also confirm from our tracking that their software was sent and picked up the success response on 2 November (there is a handshake" where the software confirms the receipt of the response). This response was picked up immediately. If it was not displayed to the customer, again, that's not our fault! They may not have had an e-mail, but that would depend if they entered a valid e-mail address in their software and, of course, it's only a courtesy e-mail."
10.	The reference to the ERSS Viewer (the acronym was not explained to us in the papers) is to an electronic record kept by HMRC of both test and live submissions made by the Appellant. A printout of the ERSS Viewer for the Appellant in respect of the relevant period was included in the papers. This shows that the submission on 31 March, 2010 and the submission on 9April 2010 were both test submissions.
11.	The ERSS Viewer records go back to 2005. We noted that in 2006 the Appellant made a "live" submission on 10 May, 2006. Almost ten minutes later the Appellant made another live submission which was recorded as a "Fail" - we understand this was because the return had already been filed 20 minutes earlier. The Appellant submitted the return in a live submission four days later on 14 May, 2006. Again, the record show that the submission failed, we understand, for the same reason.
12.	In 2008, according to the ERSS Viewer records, the Appellant made two test submissions, the first submission was made on 18 April, 2008 and the second submission was made on 21 April, 2008. The Appellant then made a live submission six minutes later on 21 April, 2008. Almost 50 minutes later on 21 April, 2008 the Appellant made another live submission which failed because, we understand, the return had already been submitted.
13.	In 2009 only one submission was made, on 23 April, 2009. This was a live submission. No test submissions were made.
14.	In HMRC's Statement of Case it is stated that the Appellant's submission on 9 April 2010 was a test return. It further states that "the person submitting the return would have got an immediate response advising that the test submission failed as it was a test but would have been successful if sent Live."
15.	In its Reply to HMRC's Statement of Case the Appellant drew attention to this statement. The Appellant stated that it did not receive any such "immediate response" or any response other than the pro-forma e-mail which failed to specify whether they test of a live submission was received. The Appellant asked HMRC to disclose the "immediate response" communication to which HMRC referred. 
16.	On 7 March, 2011, HMRC provided the following response to the Appellant:
"When a Test return (that would otherwise have passed) is filed, your software is provided with the '9001' response. This is interpreted by your software in whatever way the software provider has decided to do this. However, they will generally have just used the wording in the developers' support material "This submission would have been successfully processed if sent under non-test conditions" or at least used it as a base for whatever wording they actually display.
For a Live submission that passes validation, you would get the '9004' response. The wording on that response is "The EOY Return has been processed and passed full validation" but, again, how it's displayed to the customer can vary a bit depending on the software's design.
All this information is on the HMRC website under 'File your Employer Annual Return online: P 35 and P 14s."
17.	The Appellant maintains that it did file a live submission on 9 April, 2010. In particular, a test submission was made on 31 March, 2010 followed by a live submission on 9 April, 2010.
18.	In our view, on the balance of probabilities, it seems to us that the Appellant mistakenly made a test submission on 9 April, 2010. HMRC's ERSS computer records are clear. There is no doubt in our mind that this was a genuine and honest mistake made by the Appellant. We do not consider that the e-mail acknowledgement represented a confirmation that a live submission had been made. As noted above, the Appellant received exactly the same e-mail confirmation when it knowingly made a test submission on 31 March, 2010. Accordingly, we do not consider that there was a reasonable excuse for the Appellant's error within the meaning of section 118 (2) TMA.
19.	Accordingly, our decision as this appeal should be dismissed.
20.	The Appellant, drew attention to another aspect of the penalties imposed upon it which it considered was unfair. We have some sympathy for this submission. If the online return (Form P 35) is filed unsuccessfully, for whatever reason, the taxpayer may not be aware of the default until notified several months later by HMRC (in this case on 27 September, 2010) when a penalty notice is issued. Since the penalty is time-based (£100 per month) the notification is made at a time when a significant amount of penalties has already accrued. We have no jurisdiction to interfere (our jurisdiction is limited by section 100B TMA), but wish to record that the system does not seem to operate satisfactorily and the taxpayer should be notified at an earlier stage that Form P 35 has not been filed by the due date and that a first month penalty has been incurred. It may well be that a "9001" response is sent as explained in paragraph 17 above, but we think a more formal notification would be desirable.
21.	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.

GUY BRANNAN

TRIBUNAL JUDGE
RELEASE DATE: 28 APRIL 2011