[2011] UKFTT 837 (TC)
TC01673
Appeal number: TC/2011/04692
Penalty;
late filing; fairness; s98A(2)(a) TMA 1970. Conscionable conduct. Jusilla v Finland. Reasonable excuse. Honest and genuine belief amounts to “reasonable excuse”.
Burden of proof.
FIRST-TIER TRIBUNAL
TAX
GAVIN
ALEXANDER PARTNERSHIP Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
GERAINT JO0NES Q. C. (TRIBUNAL JUDGE)
The Tribunal determined the
appeal on 09 November 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 June 2011, HMRC’s
Statement of Case submitted on 08 September 2011 and the Appellant’s Reply
dated 30 September 2011.
© CROWN COPYRIGHT
2011
DECISION
1. By
its Notice of Appeal the Gavin Alexander Partnership appeals against a penalty
of £400 imposed upon it by the respondent on the basis that, as an employer, it
failed to file its P35 end of year return by 19 May 2010. The Penalty Notice
was dated 27 September 2010, more than four months after the alleged date of
default.
2. Section
98A(2)(a) Taxes Management Act 1970 provides that any person who fails to make
a return in accordance with the relevant provisions “shall be liable to a
penalty or penalties of the relevant monthly amount for each month (or part of
a month) during which the failure continues ...........”.
3. It
is very clear from the Notice of Appeal that the alleged default is not admitted.
In those circumstances it is for the respondent to prove the alleged default. In
Jussila v Finland (2009) STC 29, 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,
because 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.
4. 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.
5. 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.
6. 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. In my judgment it has produced no, or insufficient,
evidence to that effect and, for that reason alone, this appeal must succeed.
My reasons for that conclusion are set out below.
7. The
appellant's case is that the necessary P35 was sent electronically to the
respondent on 10 May 2010, by an agent acting on its behalf, Mrs Percival. The
respondent’s response to that assertion is best found in its letter of 12 April
2011 where it says “I am sorry but records show your agent did not file
successfully in the live mode after the test was completed. The test box must
not have been un-ticked whenever the return was submitted. A user has to
actually select the option to do a test. The e-mail received from the HMRC
Gateway is an automated message which confirms that the return is in the
correct format. [That assertion is misleading]. As the e-mail suggests,
it is up to each employer to check to ensure that the live return has been
done, rather than a test return.” The same letter included a document
headed "Summary Search Results" which demonstrates that on 10 May
2010 the appellant's agent was on line attempting to file the return. Against
that entry the word “Test” appears.
8. The
agent to whom I have referred was Mrs Percival. She had written to the
respondent on the 25 February 2011 pointing out that this was the very first
time that she had undertaken online submissions and she says that when she
filed online she received an e-mail confirmation receipt headed
"Successful Receipt of Online Submission". A copy of that receipt
has been made available to me. It is correct to say that it says in the body of
the receipt "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."
9. It
is extraordinary that the respondent chooses to send such a misleading or
ambiguous receipt. On the one hand, it starts with the words, typed in bold:”Successful
Receipt of Online Submission for reference ........” only in the second
paragraph, does it add the rider about a test submission. The respondent now
argues that its “Receipt” is not in fact a receipt.
10. In circumstances
where the respondent caused an electronic Receipt, as detailed above, to be
sent to the appellant, the respondent fails to satisfy me, on the balance of probabilities,
that no successful submission was made prior to the 19 May 2010.
11. Even if I had
been satisfied that the P35 had not been filed by the 19 May 2010, this appeal
would still succeed.
12. The second basis
upon which this appeal must succeed is that I accept the inherent contention of
Mrs Percival that she honestly believed that the necessary P35 filing had taken
place on 10 May 2010.
13. Where a person
honestly believes that she has done a certain act but, in fact, has not done
so, that may amount to a reasonable excuse for not thereafter doing that
certain act (by a certain time), at least until such time as the person ceases
to hold that honest belief. In R v Unah The Times 2/8/11 the Court of
Appeal (Criminal Division) Elias LJ, Wyn Williams J & Sir David Clarke
decided, albeit in a rather different context, that a genuine or honestly held
belief can amount to a reasonable excuse not doing something that a person is
required to do. That, in my judgment, is no more than common sense.
14. For there to be a
"reasonable excuse" an appellant has to demonstrate two things. The
first is that there is an excuse. If there is an excuse the Tribunal then has
to be satisfied that, when viewed objectively, the excuse can properly be
characterised as reasonable.
15. I am in no doubt
that Mrs Percival genuinely and honestly believed that she had made a
successful submission. When it was claimed that she had not done so, she immediately
made a further submission which the respondent accepts it received. I accept
and find that Mrs Percival honestly believed that the P35 had been filed
timeously. In my judgement that amounts to a reasonable excuse for the entire
period of alleged default.
16. Even if I had
not determined that this appeal must succeed on the foregoing two bases, the
penalty would have been reduced to £100. That is because HMRC has put forward
no explanation whatsoever for its failure to send out a First Penalty Notice
within a reasonable time of the default being known about on the 20 May 2010.
17. 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, and usually is otherwise in P35 default situations.
18. 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.
19. 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.
20. In this case the
First Penalty Notice was issued on the 27 September 2010.
21. In my judgement
it was conspicuously unfair of HMRC to fail to send out a First Penalty Notice
until almost 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 a period
exceeding four months during which, had an appropriately timed First Penalty
Notice been sent, the appellant could, and as I find, would have avoided all
but the first monthly penalty of £100 accruing. 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 as a fact 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.
22. 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.
23. The respondent
may say that it is under no obligation to send out any reminder notices in
respect of end of year returns. That is undoubtedly correct. However, that is
to confuse and misunderstand its obligations. The obligation cast upon the
respondent, by Parliament, is to charge and collect in penalties that fall due.
A proper discharge of that duty requires, in my judgement, that when a penalty
falls due on 20 May of any year, if an end of year return has not been filed,
the respondent should then seek to collect in that penalty without undue delay.
If, without undue delay, the respondent sent a Penalty Notice, regardless of
the fact that it is under no obligation to serve a reminder notice, the First
Penalty Notice would act as a de facto reminder. Thus, if the respondent
discharged its duty, as Parliament intended it to do, the respondent would not
be issuing a reminder but would be issuing a different kind of document which, in
fact, would have the same effect as the service of a reminder notice. In my
judgement, there can be no justification or reasonable excuse for the
respondent failing to send such a First Penalty Notice within 14 – 21 days of
the penalty being incurred (as of the 20 May in any year). Its failure to do so
means that it is not undertaking its responsibilities as provided by
Parliament.
24. A fair minded
objective observer would readily identify conspicuous unfairness in the failure
to send a timeous First Penalty Notice 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.
25. In my judgement
the only fair and just outcome to this appeal, if this was the only basis on
which it fell to be allowed, would be that as a result of the conspicuous
unfairness referred to above, which meant that the appellant had no prompt
de facto reminder that the (alleged) default needed to be remedied, the
penalty relating to the period of conspicuous unfairness, which I find on the
facts of this case to be the entire period save for the first month, should be
disallowed so as to negate the effect of that identified conspicuous
unfairness.
26. 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.
The appeal is allowed in full.
No penalty is due and payable.
TRIBUNAL JUDGE
RELEASE DATE: 19 December 2011
