[2011] UKFTT 683 (TC)
TC01525
Appeal number: TC/2011/04414
Penalty; late filing; fairness; s98A(2)(a) TMA 1970.
Common law fairness. Conscionable conduct. Jusilla v Finland. “Reasonable excuse” does not necessarily involve any exceptional circumstance. Honest and
genuine belief amounts to “reasonable excuse” - R v Unah The Times
2/8/11 Elias LJ, Wyn Williams J & Sir David Clarke.
Burden
of proof.
FIRST-TIER TRIBUNAL
TAX
BRIDGE
UTILITIES LIMITED Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
GERAINT JONES Q.C. (TRIBUNAL JUDGE)
The Tribunal determined the
appeal on 7 October 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 (undated) and HMRC’s
Statement of Case submitted on 28 July 2011.
© CROWN COPYRIGHT
2011
DECISION
1. By
its undated Notice of Appeal the appellant, Bridge Utilities Ltd, appeals
against a penalty totalling £800 in respect of its alleged late filing of P35
(end of year return) forms for the tax year ended 5 April 2010.
2. This
is an appeal in which the appellant has not admitted and does not admit that its
filing was late. It puts its case on the basis that the necessary filing took
place, electronically, on the 21 April 2010. The Grounds of Appeal say in terms
that "HMRC Gateway indicated it was accepted, but no e-mail response
was generated. Following a penalty notice. I spoke to Tracey Buchanan at 16:52
hours on 12 October 2010. She confirmed receipt of the 2009/2010 P35/P14
electronically and stated it was logged twice but had been heated by the
"IT Team” online services. She stated she would rectify the position and
discharge the penalty notice."
3. Before
I turn to the facts of this appeal and to my conclusions in respect of it, it
is appropriate that I set out the law as I now perceive it to be. In G.
Deacon & Sons v Commissioners of Inland Revenue 33TC 66 Mr Justice
Donovan dismissed a request for a case to be stated in respect of conclusions
drawn by General Commissioners, holding that from the primary facts adduced in
evidence, they were entitled to draw the inferences that they drew against the
then appellant, Mr Deacon.
4. In
Johnson v Scott (1987) STC 476 Mr Justice Walton expressly considered
where the onus of proof lay in a case where an appellant was challenging
amended assessments that had been upheld by the Commissioners. He observed that
counsel for the Crown had correctly accepted that where, as in that case,
neglect on the part of the taxpayer had to be established, the onus of
establishing such neglect lay with the Crown. He went on to hold that if a
finding of neglect is made, and justified on the evidence, that enabled the
Crown to make assessments for the purpose of making good any tax lost as a
result of such neglect. He went on to observe that if that stage was reached,
then the onus would pass to the taxpayer to adduce evidence to show that
the assessment is too large.
5. His
Lordship desisted from indicating whether the onus that then shifted to the
taxpayer was a legal burden or an evidential burden, but usually a reference to
a party then having a burden to adduce evidence, refers to an evidential rather
than a legal burden. It is also relevant to observe that in that case the
learned judge was considering section 50(6) of the Taxes Management Act 1970 in
its original, unamended, form. The learned judge also emphasised that where the
Crown's case was based upon inferences drawn from primary facts, such
inferences had to be "fair" inferences. One would not have expected
otherwise. The Court of Appeal upheld that judgment. It was a case in which the
taxpayer failed, by adducing acceptable or probative evidence, to discharge the
evidential burden upon him of showing that the inferences drawn by the Crown
were not fair or appropriate.
6. I
set out the foregoing because it is often stated, incorrectly, that once an
assessment is raised or a surcharge demanded, the burden of proving that it is
incorrect rests upon the taxpayer. That may be an approximation of the de
facto position in respect of an assessment (but not a surcharge or penalty)
but it fails to analyse the true legal position.
7. In
my judgment the true legal position now has to be considered bearing in mind
the amendments to section 50 of the Taxes Management Act 1970, the most recent
having come into effect on 1 April 2009, but more importantly having in mind
the decision of the European Court in the Jussila v Finland (2009) STC
29 where, in the context of default penalties and surcharges being
levied against a taxpayer, the Court determined that Article 6 of the European
Convention on Human Rights was applicable, as such penalties and surcharges,
despite being regarded by the Finnish authorities as civil penalties,
nonetheless amounted to criminal penalties despite them being levied without
the involvement of a criminal court. At paragraph 31 of its judgment the court
said that if the default or offence renders a person liable to a penalty which
by its nature and degree of severity belongs in the general criminal sphere,
article 6 ECHR is engaged. It went on to say that the relative lack of
seriousness of the penalty would not divest an offence of it inherently
criminal character. It specifically pointed out, at paragraph 36 in the
judgment, that a tax surcharge or penalty does not fall outside article 6 ECHR.
8. This
is a case involving penalties. The European Court has recognised that in
certain circumstances a reversal of the burden of proof may be compatible with
Article 6 ECHR, but did not go on to deal with the issue of whether a reversal
of the burden of proof is compatible in a case involving penalties or
surcharges. This is important because a penalty or surcharge can only be levied
if there has been a relevant default. If it is for HMRC to prove that a penalty
or surcharge is justified, then it follows that it must first prove the
relevant default, which is the trigger for any such penalty or surcharge to be
levied.
9. In
my judgement there can be no good reason for there to be a reverse burden of
proof in a surcharge or penalty case. A surcharge or penalty is normally levied
where a specified default has taken place. The default might be the failure to
file a document or category of documents or it may be a failure to pay a sum of
money. In such circumstances there is no good reason why the normal position
should not prevail, that is, that the person alleging the default should bear the
onus of proving the allegation made. In such a case HMRC would have to prove
facts within its own knowledge; not facts peculiarly within the knowledge of
the taxpayer.
10. It is for HMRC
to prove that a penalty is due. That involves HMRC proving, on the balance of
probabilities, that the required end of year filing did not take place by 19
May 2010. HMRC has produced a Statement of Case but has not filed any evidence
for the purpose of this appeal. Given the nature of the proceedings, in which
HMRC bears the onus of proving that the filing did not take place on time, its
failure to file evidence in support of that factual proposition, in judicial
proceedings, inevitably means that it has failed to discharge the onus of proof
upon it and that this appeal must succeed. In my judgment, even if the
Statement of Case was to be taken as evidence HMRC has produced insufficient
evidence to prove the alleged default and to rebut the clear account given by
the appellant.
11. The first
Penalty Notice in the sum of £400 was issued by HMRC on 27 September 2010, more
than four months from the alleged default date (19 May 2011). A Final Penalty
Notice was issued on the 24 January 2011 in the sum of £400, the initial
Penalty Notice having been in the sum of £400.
12. HMRC has put forward
no explanation whatsoever for its failure to send out a First Penalty Notice
within a reasonable time of the alleged default being known about on the 20 May
2010.
13. I am entitled to
take judicial notice (based upon experience of sitting in a specialist
Tribunal) of the fact that where a taxpayer defaults in sending in a VAT return
on time, or defaults in paying the amount of VAT due on time, a Default Notice
or Surcharge Notice (whichever is appropriate) is usually sent out within 14 –
21 days. I can and do take judicial notice of that fact. In a VAT default case
the penalty (if applicable) does not increase with the passage of time, by
contrast to the penalty regime for failing to file an end of year return by the
19 May. Thus in a VAT case HMRC has no interest in delaying sending out the
Penalty Notice (where applicable), as the penalty does not increase as time
goes by. It may be otherwise in P35 default situations.
14. In contrast, the
experience of this Tribunal is that in respect of penalties for the late filing
of end of year returns, HMRC delays sending out the First Penalty Notice for 4
months or thereabouts. It gives no explanation for and has provided no
justification for such tardiness. I have no doubt that Penalty Notices are
computer-generated and that HMRC could, if it so wished, set its computer
system to generate a Penalty Notice soon after 19 May in each year just as
easily as it now sets its computer system to generate such Penalty Notices
almost four months post default. In VAT default cases HMRC receives no greater
monetary sum if it delays demanding the penalty and so it chooses to send them
out promptly. The converse is true in a case involving the late filing of end
of year returns, where the penalty increases month on month.
15. The question
would thus arise in the mind of any fair-minded objective observer as to
whether this is something done deliberately by HMRC so as to increase the
penalty monies received in respect of P35 cases, given that additional
penalties accrue whilst the default continues. In many cases the continuing
default may represent no more than the sin of oversight or forgetfulness which,
had a timeous First Penalty Notice been issued, would, in many cases, be
remedied forthwith.
16. In my judgment
there was conspicuous unfairness by HMRC in failing to send out a First Penalty
Notice until more than four months post default. That is a serious but
inevitable charge to be laid at the door of HMRC in this kind of penalty case.
The appellant was not given a timeous de facto reminder of its default
during an entire period of four during which, had an appropriately timed First
Penalty Notice been sent to it, it could have remedied the alleged default
(subject to what it was told by Miss Buchanan). There can be no doubt
that it was the duty of HMRC to act promptly in sending out the First Penalty
Notice. I find as a fact that it did not do so. I find that the duty upon HMRC
to act promptly requires it to send out a First Penalty Notice not more than 14
days after the 19 May in each year.
17. In my judgement
the conduct of HMRC in desisting from sending out a timeous First Penalty
Notice gives rise to conspicuous unfairness which would be recognised as such
by any fair-minded objective observer. Such an objective observer would recognise
such conspicuous unfairness being caused by HMRC choosing not to notify the
appellant that it had incurred any penalty until well into September 2010. In
my judgement, it was/is not the intention of Parliament, or within its
contemplation based upon s98A Taxes Management Act 1970 (and its other
provisions), that HMRC would or should desist from acting timeously in issuing
a first (or other) Penalty Notice.
18. A fair minded
objective observer would readily identify conspicuous unfairness from the
following :
(1)
HMRC’s failure to comply with the obvious intention of Parliament that
where a penalty is incurred, that penalty should be promptly notified to and
collected from the transgressor.
(2)
The complete lack of any explanation for, or justification of, HMRC’s dilatoriness
in failing to send out a First Penalty Notice for four months or thereabouts.
(3)
The fact that HMRC notifies and collects penalties or surcharges for
failing to file a VAT return or failing to make a VAT payment, with expected
promptness. By contrast, it shows no such inclination to act with promptitude
in cases involving a penalty for failing to file end of year returns, which
just happen to incur increasing penalty sums as time goes by.
(4)
By failing to act promptly in notifying and collecting penalties due for
a failure to file an end of year return on time, HMRC is thereby failing to
give effect to the intention of Parliament that it should so act.
(5)
It is an overwhelming inference that if HMRC can set its computer system
to notify VAT penalties promptly, its computer system could also be persuaded
to notify late filing penalties in respect of end of year returns, with equal
promptness.
19. In this appeal
the appellant also demonstrates that is, in fact, there was any default, it has
a reasonable excuse respect. In my judgement given that the appellant says that
further to a discussion with Tracey Buchanan (of HMRC) it was told that the
position would be rectified and the penalty notice discharged, the entire
period of delay (as alleged by HMRC) is entirely properly explained and arose
from the fact that the appellant honestly believed that its filing had taken
place and that the allegation that it had not taken place arose by reason of
some kind of error on the part of HMRC (which Miss Buchanan acknowledged at the
telephone).
20. Thus the
appellant can also contend that it has a reasonable excuse for its default, if
indeed any default had been proved. An honest belief that something has been
done amounts to a reasonable excuse for not doing that thing again, at least
until the person holding that honest belief becomes aware that the belief is
not correct. In this case, even if HMRC had proved before this Tribunal that
the filing had not taken place, I would find as a fact that that the appellant
did honestly believe that its filing had properly taken place. For there to be
a "reasonable excuse" there are only two preconditions. They are:
(1)
that the appellant puts forward an excuse, and
(2)
when viewed objectively, that excuse is properly to be characterised as
reasonable.
21. The words
"reasonable excuse" are not defined by the definition section of the
Taxes Management Act 1970. They are words in ordinary and everyday use and
must be given their natural and ordinary meaning absent Parliament specifying
that they are to bear a statutorily ascribed meaning.
22. HMRC may contend
that as the penalty regime is a statutory regime, this Tribunal has no
jurisdiction to substitute a sum but only to uphold the penalty or set it aside
(in whole or in part) in respect of any period for which a reasonable excuse is
demonstrated. I recognise a further exception in law, which is that where HMRC,
through its conspicuous unfairness and failure to operate the penalty regime in
the manner that was and is intended by and in the contemplation of Parliament,
the common law principles that I have identified above are sufficient to
justify this Tribunal mitigating or setting aside part of the penalty, in
appropriate factual circumstances.
23. However, on the
basis that HMRC has failed to prove the alleged default, this appeal is allowed
in full.
24. If HMRC had
proved the alleged default, the appeal would have been allowed in full given
that, in my judgement, the appellant would have demonstrated a reasonable
excuse throughout the period of alleged delay, that is, an honest belief in the
fact that the filing had taken place and that, after receiving the First
Default Notice, HMRC by its Miss Buchanan, had acknowledged that the filing had
taken place and that the penalty notice would be set aside. The Court of Appeal
in R v Unah, The Times 2/8/11 (Elias LJ, Wyn Williams J & Sir David
Clarke) held that an honest or genuine belief can give rise to there being a
“reasonable excuse”, albeit in a different context.
25. 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.
Decision.
Appeal allowed. The £800 penalty is quashed.
TRIBUNAL JUDGE
RELEASE DATE: 27 OCTOBER 2011
