[2011] UKFTT 415 (TC)

TC01268

Appeal number: TC/2011/01167

Income tax - underpayment of PAYE over four years - self-assessment returns issued - surcharges for late payment of tax - whether reasonable excuse throughout the period of default - what is the period of default - whether reasonable to believe that tax was being correctly deducted - yes- whether taxpayer reasonably believed HMRC had agreed a time to pay arrangement - yes - surcharges set aside and appeal allowed. 

FIRST-TIER TRIBUNAL

TAX 

	JOHN BRADY                                        	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	ANNE REDSTON (PRESIDING MEMBER)									

The Tribunal determined the appeal on 2 June 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 5 February 2011, HMRC’s Statement of Case submitted on 22 March 2011 and the Appellant’s Reply dated 15 April 2011.

© CROWN COPYRIGHT 2011
DECISION

1.	This is Mr Brady’s appeal against surcharges for late payment of his income tax for the three tax years 2006-07, 2007-08 and 2008-09, and against interest on the late paid tax and the surcharges. 
2.	The Tribunal allowed his appeal against the surcharges and the interest thereon thus falls away. No appeal is possible against the interest on the tax, as Mr Brady did not dispute that the tax itself was rightly due.
The law 
3.	The legislation dealing with payment dates and surcharges is contained within the Taxes Management Act 1970 (TMA). 
Notifying chargeability to tax
4.	At TMA s 7 the statute deals with the requirement of taxpayers to notify HMRC that they are chargeable to income tax. It reads:
(1)	Every person who—
(a)	is chargeable to income tax or capital gains tax for any year of assessment, and
(b)	has not received a notice under section 8 of this Act requiring a return for that year of his total income and chargeable gains,
shall, subject to subsection (3) below, within six months from the end of that year, give notice to an officer of the Board that he is so chargeable.
5.	The same section then excludes certain situations from the requirement to notify chargeability, which include the following:
(3)	A person shall not be required to give notice under subsection (1) above in respect of a year of assessment if for that year his total income consists of income from sources falling within subsection (4) to (7) below and he has no chargeable gains.
(4)	A source of income falls within this subsection in relation to a year of assessment if—
(a)	all payments of, or on account of, income from it during that year, and
(b)	all income from it for that year which does not consist of payments,
have or has been taken into account in the making of deductions or repayments of tax under PAYE regulations.
(5)	A source of income falls within this subsection in relation to any person and any year of assessment if all income from it for that year has been or will be taken into account—
(a)	in determining that person's liability to tax, or
(b)	in the making of deductions or repayments of tax under PAYE regulations.

Issuing returns and calculating the tax
6.	For tax years 2007-08 onwards, TMA s 9(1) requires that once a self-assessment (“SA”) return has been issued to a taxpayer, he has an obligation not only to fill in the return, but to calculate the tax due. However, TMA s 9(2) states that the obligation to calculate the tax does not apply if the taxpayer:
	makes and delivers his return for a year of assessment:
(a) on or before 31 October next following the year, or
(b) where notice under s 8 or 8A of this Act is given after 31 August, within the period of two months beginning with the day on which the notice is given. 
7.	For the year 2006-07, the dates in the above section were 30 September and 31 July respectively. 
Paying tax and the imposition of surcharges
8.	Under self-assessment, the normal due date for payment of any amount not already settled (eg via PAYE or payments on account) is 31 January after the end of the tax year in question (TMA s 59B(4)).
9.	However, where a person notifies his chargeability under TMA s 7, but HMRC failed to issue him with an SA return until after the 31 October following the end of the tax year in question, the due date is extended to three months after the day on which the SA return was issued (TMA s 59B(3). 
10.	If this exception does not apply (the statute says “in any other case”) the normal due date of 31 January applies (TMA s 59B(4)). 
11.	Where any tax remains unpaid on the day following the expiry of 28 days from the due date, the taxpayer is liable to a surcharge equal to 5% of the unpaid tax (TMA s 59C(2)). A further surcharge, also of 5%, is due if the tax remains unpaid six months after the due date (TMA s 59C(3)).
Appeals and reasonable excuse
12.	If the taxpayer appeals the imposition of the surcharge, the Tribunal has power to set it aside if it finds that the taxpayer had a reasonable excuse for the late payment; alternatively, it may confirm the surcharge (TMA s 59C(9)). It has no power to reduce the amount. 
13.	There is no definition in the legislation of a “reasonable excuse” which “is a matter to be considered in the light of all the circumstances of the particular case” (Rowland v HMRC [2006] STC (SCD) 536 at [18]). 
14.	It has recently been held by this Tribunal that “an excuse is likely to be reasonable where the taxpayer acts in the same way as someone who seriously intends to honour their tax liabilities and obligations would act.” B&J Shopfitting Services v R&C Commrs [2010] UKFTT 78 (TC).
Interest
15.	The statutory provisions relating to interest on overdue income tax are at TMA s 86:
Interest on overdue income tax and capital gains tax
 (1)	The following, namely—
(a)	any amount on account of income tax which becomes due and payable in accordance with section 59A(2) of this Act, and
(b)	any income tax or capital gains tax which becomes due and payable in accordance with section 55 or 59B of this Act,
shall carry interest at the rate applicable under section 178 of the Finance Act 1989 from the relevant date until payment.
16.	Interest is due on surcharges (TMA s 59C(6). 
17.	There is no provision for an appeal to be made against interest - if income tax is due, then interest follows automatically by statute, and the same is true of interest on surcharges.
The date when a document is deemed served
18.	The Interpretation Act 1978, s 7 is as follows:
Where an Act authorises or requires any document to be served by post (whether the expression "serve" or the expression "give" or "send" or any other expression is used) then, unless the contrary intention appears, the service is deemed to be effected by properly addressing, pre-paying and posting a letter containing the document and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post.
The facts
19.	Mr Brady joined his current employer in 2006 and provided a P45. No subsequent coding notices were issued to the employer and it is unclear on the evidence provided whether this was the fault of HMRC or the employer or both. 
20.	Although Mr Brady’s earnings exceeded £100,000 gross for each of the three years in question, the PAYE code operated by his employer only deducted basic rate tax from his earnings. 
21.	The mistake was discovered in January 2010, when Mr Brady asked his HR department for a P60 for mortgage purposes. The HR department staff notified Mr Brady that it appeared an error had been made in his PAYE coding notice. 
22.	Mr Brady quickly informed HMRC of the error. His tax code was changed, and SA return forms were issued for the three year period. The return forms for 2006-07 and 2007-08 were both dated 9 February 2010; that for 2008-09 was dated 11 February 2010. 
23.	HMRC do not make any submissions or provide any evidence as to the date the returns were actually despatched and the deeming provisions of the Interpretation Act are thus not in point. 
24.	Mr Brady says they were received by him “in staggered fashion” during March 2010 and I accept this evidence. The Notices were thus delivered during March 2010. 
25.	Mr Brady then contacted his employer and his bank to obtain the information necessary to complete the forms. 
26.	There is a dispute between the parties as to when the completed returns were delivered to HMRC. Mr Brady’s evidence is that they were sent back on 14 April, and he has produced a signed and dated copy of one of the returns to support his case. He further adds that “my wife gave birth to my first child in early April 2010, which added to the stress of completing the forms as quickly as possible.” HMRC say that they did not receive the forms until 21 June, but do not produce any evidence to support their contention. 
27.	I find as a fact that Mr Brady sent the forms to HMRC on 14 April 2010 and thus that they were deemed (under s7 of the Interpretation Act set out above) to be received by HMRC within the normal course of post, so on 15 April 2010 if sent by first class post, or by 19 April 2010 if sent by second class post.
28.	The returns showed that apart from Mr Brady’s employment, his only other source of taxable income was bank interest. For 2006-07 the interest was £17, for 2007-08 it was £16 and for 2008-09 it was £362. Basic rate tax had already been deducted from this interest at 20%, so the tax underpaid on this interest was £3.40 for 2006-07, £3.20 for 2007-08 and £72.40 for 2008-09.
29.	HMRC say that the returns were processed on 25 June, and do not put forward any evidence as to date on which the Calculation Notices were despatched to Mr Brady. They are dated 26 June, but Mr Brady says that they “actually arrived throughout July in a staggered fashion”. On the basis of this evidence, I find that they were processed on 25 or 26 June, and received by Mr Brady during July. 
30.	The tax found to be due is not in dispute and is as set out below:
Tax year	Tax due 	
2006-07	£11,473	
2007-08	£13,502	
2008-09	£15,322	

31.	Mr Brady’s return did not contain a self-calculation of the tax due, and thus he did not know what tax he had to pay at the time he sent in his returns. 

32.	The Calculation Notices give the due date for payment as the 31 January following the end of each tax year. So the Tax Calculation for 2006-07 says:
	“The tax due under self-assessment for 2006-07 is £11,472.99, which was due by 31 January 2008…a due date has already passed.”
33.	Mr Brady called HMRC on a number of occasions which he has documented. He told the HMRC employees to whom he spoke that it was difficult for him to find so much money at short notice. He made a payment of £10,000 on 20 July. 
34.	On 11 August HMRC issued first surcharge of 5% of the liability in relation to the 2006-07 and 2007-08 tax years, on the basis that these liabilities “were due to be paid on or before 16 May 2010 in accordance with s59B(3) TMA” and that the first surcharge trigger date was thus 28 days later, on 13 June 2010. 
35.	On the same day, HMRC issued first and second surcharges (totalling 10% of the liability) in relation to the 2008-09 tax payment, on the basis that this liability “was due to be paid on or before 31 January 2010 in accordance with s 59B(4) TMA” and thus the first surcharge trigger date was 28 February 2010, and the second trigger date was 31 July 2010. 
36.	Mr Brady tried through various sources to find the remainder of the tax owing. Finally using mortgage funding, he settled the balance on 10 September. 
37.	For completeness I note that on 8 June 2010 HMRC issued a late filing penalty but this was cancelled on 6 August 2010. 
Mr Brady’s submissions
38.	Mr Brady submits that he had always relied on his employer to deduct the correct tax and has never had occasion to look on the HMRC website for information. He contacted HMRC as soon as the issue was identified. He says “my priority was to notify HMRC immediately”. 
39.	He then completed his SA returns and paid the tax “as quickly as I reasonably could”, and as he had to contact his bank and his employer’s payroll department “the time taken to receive this information was not in my control.” 
40.	He also says that the payment dates for the tax were never made clear to him: specifically:
(1)	 the dates on the Calculation Notices had already passed, so were impossible for him to meet; 
(2)	for 2006-07 and 2007-08, the surcharges are in any event calculated from a different date (namely 16 May 2010) from the dates given on the Calculation Notices; 
(3)	in his reply to the HMRC Statement of Case he further says that “the specific date of 16 May 2010 to complete the self assessment forms…was never detailed in any correspondence to me by HMRC” and was communicated to him for the first time in that Statement of Case;
(4)	he also asks why the first two years have a 16 May 2010 due date which is later than the 31 January 2010 due date for the third year, and says he is “confused”. 
41.	Mr Brady also says he “agreed with the agent on the phone that he needed several more weeks to find another vehicle to pay the outstanding capital” and that “I was under the impression therefore that I had made an arrangement with HMRC to stagger my payment over three months. No agent challenged me with the fact that these arrangements were not sufficient.” He was under the impression that he had agreed with HMRC that it would be acceptable for him to pay the amounts over the agreed timescale. 
HMRC’s submissions
42.	HMRC say that given Mr Brady’s level of income and the information he would have received as a matter of course from his employer, he should have been aware that his tax was under-deducted. As a result he should have notified chargeability so that the excess could have been collected. 
43.	They also say that “ignorance of the law is not a reasonable excuse for late payment of a tax liability”. Finally, they submit that the surcharges are properly due on the late paid tax, and that Mr Brady has no reasonable excuse for late payment. 
44.	They make no submissions in relation to the fact that Mr Brady did not calculate the tax due, and they do not explain why they consider that a due date of 31 January 2010 applies to the 2008-09 return under TMA s 59(4), but that a due date of 16 May 2010 applies for the earlier years under TMA s 59(3). 
45.	They also did not provide any information to the Tribunal about Mr Brady’s conversations with their various call centre staff, other than to say that “a formal time to pay arrangement was not in existence prior to 10 September 2010.”
Decision
46.	Mr Brady’s evidence gives the overwhelming impression of an honest man seeking to do his best and pay the tax which he unexpectedly found to be due. I find as a fact that that he had always relied on his employer to deduct the correct tax from his earnings before receipt and that as a result he was unaware of the shortfall in his income tax until January 2010. 
47.	When he became aware of the error he immediately contacted HMRC and completed the self-assessment returns. In order to do so he had to obtain information relating to years beginning in April 2006, some four years previously, and as he says, had to obtain this from the bank and his employer at a time when his wife was about to give birth to their first child. 
48.	The returns did not include a self-calculation of the tax due. Mr Brady’s evidence (which I have accepted) is that the returns were not actually served on him until March, and the completed forms were received by HMRC on 15 April 2010 or 19 April 2010 - in other words, within the two month deadline set by TMA s 9(2)(b). As a result, no self-calculations were necessary - and this would of course explain why no submissions were made by HMRC on this point.
49.	HMRC did not process the returns for some two months, and when Mr Brady was informed of the amount due, he contacted HMRC and believed that he had negotiated a time to pay agreement. 
50.	The surcharges can be set aside if the Tribunal finds that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax. There are thus two questions: what is “the period of default”, and whether Mr Brady had an excuse throughout that period.
The period of default
51.	The Calculation Notices state that the tax was due on 31 January following the year in question, but HMRC say that for 2006-07 and 2007-08 the tax for those years should have been paid on 16 May 2010 (relying on TMA s 59B(3)). 
52.	But TMA s 59B(3) can only apply if Mr Brady had given notice of chargeability within six months from the end of the tax year in question - and he clearly did not give this notice within the required timescale. The statute is unequivocal - the 31 January date applies “in any other case”. 
53.	TMA s 7(4) says that there is no obligation to notify chargeability in relation to a source of income if “all payments…of income from it...have been taken into account…in the making of deductions or repayments of tax under the PAYE system”, and TMA s 7(5) is similar but appears to broaden the scope to “any person and any year of assessment”. 
54.	Perhaps HMRC take the view that Mr Brady had no obligation to notify chargeability for those years, because his employment income source was within TMA s 7(4) or (5) and the interest income was de minimis. If so, perhaps TMA s 59B(3) is being applied on a discretionary basis, using HMRC’s care and management powers in TMA s 1. In other words, it may be that HMRC operate a concession under which those who have underpaid tax because of a PAYE coding error are treated as if they had notified chargeability and are given a later date (in accordance with TMA s 59B(3)) for the payment of the overdue tax. But as no submissions were made on this, it is not possible to be certain.
55.	For 2008-09 HMRC say that the due date was 31 January 2010, relying on TMA s 59B(4). This is the same date as given on the Calculation Notice for that year. If TMA s 59(3) applied to the two earlier years, it is unclear why it did not also apply to the later year. Perhaps the different approach is caused by the higher level of interest income, which meant that Mr Brady should have notified chargeability under TMA s 7, and so did not have the benefit of the concessionary treatment which appears to have applied to the other years. But again, in the absence of submissions, it is not possible to be sure.
Reasonable excuse
56.	In deciding whether Mr Brady had a reasonable excuse I have thus considered the period from 31 January following the end of the each tax year, as this is the longer period and encompasses both possible interpretations of the “period of default”. 
57.	For the period before his discovery of the underpayment in January 2010, Mr Brady says that he was unaware he had a liability and that it was reasonable for him to rely on the PAYE system; HMRC say that he should have been aware of his underpayment, and that if he was not, ignorance of the law is not a reasonable excuse. 
58.	This is not, however, a case about ignorance of the law. Mr Brady was not ignorant of the law: he was ignorant of a fact, namely that an incorrect coding notice was being used. He had handed in his P45 when he started his employment, and believed that HMRC and his employer between them had ensured that the right amount of tax was deducted. This is a reasonable belief, and indeed the majority of taxpayers are excluded from self-assessment on the basis that the PAYE system will operate correctly. 
59.	I thus find that for the period before Mr Brady discovered the under-deduction, he had a reasonable excuse for late payment of tax on his employment income. I deal below with the interest income.
60.	For the period after his discovery in January 2010, Mr Brady genuinely believed that he had negotiated a delayed timescale for paying the tax, and this belief was based on documented conversations with HMRC staff. This constitutes a reasonable excuse for his late payment. 
61.	I also find that the whole history of Mr Brady’s actions when he discovered the underpayment is that of a taxpayer who acts “in the same way someone who seriously intends to honour their tax liabilities and obligations would act” - see B&J Shopfitting Services quoted earlier in this decision.
62.	Finally, I turn to the interest income. This is a separate source, and Mr Brady should have notified HMRC of his chargeability - at least in relation to 2008-09, accepting that the interest for the two earlier years was de minimis. He did not do this. 
63.	Had the surcharge only related to the interest income for 2008-09, it may not have been covered by the first of the two reasonable excuses set out above. Mr Brady would have to have shown he reasonably believed that the extra tax on his interest income was coded into his PAYE deductions. No evidence was given on this by either party, because the submissions did not distinguish the interest from the employment income. 
64.	In any event, the Tribunal does not have the power to reduce surcharges, but only to set them aside or confirm them. It is thus not possible to reduce the surcharge so that it covers only the late paid interest for 2008-09. 
65.	Mr Brady’s appeal against all the surcharges is thus allowed. The interest on these surcharges also falls away. 
66.	The interest on the tax due for the years in question by statute attaches to the tax itself, and there are no rights of appeal against the interest alone. Mr Brady does not dispute that the tax is rightly due, and the interest - which compensates HMRC for the time value of the money - is thus payable
67.	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.

Anne Redston

TRIBUNAL PRESIDING MEMBER
RELEASE DATE: 24 JUNE 2011