Not fair

KEY POINTS

• No reminders for late PAYE returns.
• First-tier Tribunal hears penalty appeals.
• Penalty notice is effectively a reminder.
• Date notices issued.

Who has not used the phrase, ‘It’s not fair’? Most of the time, the response is, ‘Life’s not fair. Get over it’, but on occasion, unfairness is not only palpable, but also recoverable.

My colleague Richard Curtis tells me that for those of us whose lives are connected with tax (just about everybody in reality), the word ‘fair’ is banned during waking hours.

I, however, beg to differ in one instance: this is the timing of HMRC’s penalty notices for late filing of employers’ end-of-year returns (forms P35).

The deadline for submitting this annual return is 19 May and virtually all employers must now do this online. Most businesses meet this deadline and have coped with the change to online filing with relative ease. They had to, because it is compulsory.

However, a few have found the change difficult, even missing the deadline, which results in a late filing penalty.

Accepting that penalties are necessary to ensure that correct information is reported and tax collected, it is therefore incumbent on the issuer to ensure the penalties are imposed timeously and appropriately.

How much?

Anne Redston’s article End of the line covered the penalty regime for late payments of PAYE and National Insurance due each month or quarter.

This is a relatively new regime, having come into force on 6 April 2010. The penalties for late end-of-year returns are separate, but relatively straightforward: a penalty of £100 is charged for each 50 employees for each month or part month that the return is outstanding.

On their website, HMRC say:

‘If your return remains outstanding for more than four months, you’ll receive a penalty notice shortly after 19 September and again the following January and May, if necessary. These penalty notices will show the amount of penalty that’s building up because you haven’t filed your return on time.’

HMRC say they will not ‘necessarily send you a reminder to file these forms’, so in effect, the penalty notice serves that purpose. This is where fair-minded people fall out with the department and, in my opinion, where HMRC lose any moral high ground that they might have had.

If they do not want to send reminders and, by the way, this could surely be done by email – cheap and quick – they should issue the penalties at monthly intervals, thus giving late filers the chance to rectify the situation before the penalty builds up.

Taxation has drawn attention to this unfairness in a previous issue. See, for example, my article But I’ve already sent it!, which referred to penalties for late filed forms P11D, and the case report on Hok Ltd (TC1286).

However, it is increasingly taking centre stage in First-tier Tribunal decisions where employers appeal against late filing penalties.

The players

Now that tax appeals are heard by the First-tier Tribunal rather than being allocated to the General or Special Commissioners (or VAT tribunal) we have become aware of the number of late filing penalty appeals.

Under the previous arrangements these usually came before the General Commissioners. Initially, they appeared to be of little interest, but increasingly some tribunal judges have allowed such appeals, in part at least.

In particular, Geraint Jones QC and Anne Redston take a very robust approach to these penalties, as well as to what constitutes a reasonable excuse for late filing.

Walton Kiddiwinks Private Day Nursery (TC1326) is a recent example. In this case, the employer appealed against late filing penalties totalling £500 (the first penalty notice, which was for £400, was sent too late to enable the employer to avoid the next month’s penalty).

The employer’s excuse for late filing was that he genuinely believed the return had been filed online via the software program he used for PAYE. HMRC reviewed the penalty, but upheld it in full. Geraint Jones QC was the tribunal judge at the First-tier Tribunal hearing.

First, Mr Jones looked at the relevant law. He was concerned with the burden of proof and said ‘it is often, incorrectly, stated that once an assessment is raised or a surcharge demanded, the burden of proving that it is incorrect rests upon the taxpayer’.

He referred to the European Court of Justice decision in Jusilla v Finland (Case C-73053/01) [2009] STC 29 in which the court applied article 6 of the European Convention on Human Rights to penalties and surcharges to the effect that such penalties, etc were of a criminal rather than civil nature.

The result was that the person alleging the default had to prove that it had occurred.

Duty of fairness

The judge then considered the common law duty of fairness as it applied to the ‘state and its several organs (HMRC being one such organ)’.

He noted that the statutory provision in TMA 1970, s 98A(2)(a) provided that an employer which did not make a return in accordance with the relevant provisions would be ‘liable to a penalty’, the vital word here being ‘liable’.

He said the legislation did not state that a penalty must be levied, rather it ‘may apply and may be demanded’. In respect of the taxpayer concerned he went on to say:

‘Thus, in our judgment, the appellant is entitled to rely upon the common law duty of a public body to act fairly not just in its decision-making process but also in administering its statutory powers. We are in no doubt that such a body does not act fairly when it deliberately desists from sending a penalty notice, for four months or more, knowing that the likely effect will be to impose a minimum penalty of £500 upon somebody whose sin may be nothing more than oversight or forgetfulness.’ [My italics.]

Almost in passing, Mr Jones refers to HMRC’s assertion that the taxpayer has to prove it had a reasonable excuse for filing late, which was the basis of the department’s review of the appeal.

HMRC said in their review that for the taxpayer to have a reasonable excuse, it had to show that there was an exceptional circumstance beyond its control which stopped it from submitting its return on time.

The judge said this was ‘not the correct test’ and was ‘totally misleading’. The words ‘reasonable excuse’ had to be given their ‘ordinary and natural meaning’.

Parliament specifically used those words, but HMRC had ‘quite wrongly sought to elevate’ the expression to a much more onerous test.

He concluded it was for HMRC to prove that a penalty was due. They had to prove that the return had not been filed by the deadline and ‘the need for such evidence is clear in a case where the appellant asserts that it… is sure that its P35 was filed timeously’.

However, the department could produce no evidence: ‘an assertion or allegation unsubstantiated by evidence’ was not ‘self proving’. The appeal failed for that reason alone. Mr Jones had not finished with the penalty aspect. He went on to say:

‘The penalty would have had to be reduced to £100 by reason of the manifest unfairness caused by HMRC choosing not to notify the appellant that it had incurred any penalty until well into September 2010.’

If the penalty notice had been issued sooner, it would have served as a reminder and the taxpayer could have filed the return. He said:

‘The effect of HMRC desisting from sending out a penalty liability notice very soon after 19 May of the relevant year, and choosing deliberately to delay that penalty notice until four months has gone by, is likely to result in the taxpayer facing a minimum penalty of £500.’

He understood that the responsibility to file the return lay with the taxpayer, but was not impressed with HMRC’s stance that they were not obliged to issue any reminders, saying:

‘Any fair-minded member of society would consider that to be unfair and falling very far below the standard of fair dealing and conscionable conduct to be expected of a manifestation of the state that is empowered to issue penalties as a means of ensuring compliance.’

Why delay?

There was no logical reason for the delay in sending penalty notices and HMRC’s computers could be set to issue penalties at any time after 19 May each year. He said the system should not be used ‘as a cash generating scheme’. Its purpose was, rather...

‘to ensure that appropriate filings take place in good time and to discourage default. Given that that is the legitimate aim, it is inexplicable why HMRC deliberately delays sending out a penalty notice for four months, with the effect that a penalty for five months becomes payable, that is, £500’.

He said that simply because HMRC were not obliged to remind a taxpayer of its obligation to file documents, did ‘not mean that good practice and conscionable conduct does not require it either (i) to send a reminder soon after 19 May in each year when it knows that a default has taken place or, more likely (ii) soon after 19 May each year to issue a £100 penalty notice which would levy the penalty then due and have the effect of acting as a reminder (whether or not intended to have that effect) before further monthly penalties are incurred’.

It will not come as a surprise to learn that the taxpayer’s appeal was allowed in full, or indeed that Mr Jones has reached similar conclusions in other cases, e.g. H M Response International (TC1322) and N A Dudley Electrical Contractors Ltd (TC1124).

In the interests of fairness, it should be pointed out that other tribunal judges are less concerned about the HMRC’s penalty timetable and doubtless the department derives some comfort from that.

Time to change

The deliberate delay in sending penalty notices until four months have passed is incomprehensible. Is this how we expect or want our tax office to behave?

Having written this article, I wonder if penalties are the right way to go at all. Why should someone have to pay a hefty penalty simply for misunderstanding the system or making an innocent mistake?

There is no argument against imposing penalties on taxpayers who deliberately fail to submit a return or who refuse to pay their tax, but HMRC still appear to have absolutely no idea of where tax fits into people’s lives.

Business people, particularly in the current economic climate, are concentrating on keeping their companies going. If they believe that they have completed a tax return, then why would they check again to make sure?

It is time that HMRC took note, and accepted that their method of issuing penalties is unfair. However, in the short term, this would seem unlikely.

When asked about it, an HMRC spokesperson said:

‘The vast majority of employers file their annual returns on time. The timetable for issuing penalties is designed to allow a reasonable period for a nil return to be sent in thus avoiding any penalties being issued to customers who did not need to operate PAYE in the year concerned but who did not let us know until after the deadline. It also gives time for us to make sure all returns in by the annual deadline have been processed.’

The argument that rushing out penalties any quicker than they do would create extra work for employers and HMRC is baffling.

It is tempting to ask ‘since when did HMRC worry about creating extra work for taxpayers?’ but that might be construed as unhelpful.

It is certainly likely that it would result in more penalties having to be quashed as nil returns are received, but sending the notices sooner would also serve as a reminder or indicator that a return had not been received, with the result that late returns would be made by, say June or July, instead of October.

Many of the appeals concerning penalties are from honest taxpayers who genuinely believe that the return was submitted in time.

These are not people who deliberately defraud HMRC and they do not deserve a penalty of £500 simply because HMRC cannot, or are unwilling to, organise their computer systems to generate penalty notices in June rather than September.

Life is not fair, but steps can be taken to make a situation fairer and this is one them.

Issue: 4329 / Categories: Comment & Analysis , Admin