[2010] UKFTT 612 (TC)

TC00853

Appeal number: TC8/2010/3724

Income tax – surcharge under s 59C(2) TMA- reasonable excuse- power of tribunal to consider the exercise of the power given to HMRC to mitigate in ss(11)

FIRST-TIER TRIBUNAL

TAX 

	A DIVORCEE 	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	CHARLES HELLIER (TRIBUNAL JUDGE)						SUSAN LOUSADA			

Sitting in private in Sutton on 25 October 2010

The Appellant in person

Mr A Coates for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction
1.	On 2 September 2010 Judge Kempster directed that this appeal be heard in private. This decision is in consequence anonymised in accordance with Rule 32(6) of the tribunal’s rules.
2.	Between early 2008 and late 2009 Appellant’s family broke up. There were disagreements about the children which culminated in proceedings under the Children Act 1989, and formal divorce proceedings which gave rise to a later ancillary relief hearings. The Appellant lost the right to reside in the former matrimonial home and still awaits its sale. We shall deal with the detail later but it was clear to us that the events of this period were very upsetting for the Appellant and caused him great grief. Even more than a year later the Appellant was clearly affected.
3.	The Appellant filed his tax return for the year to 5 April 2008 on 4 September 2008 – in good time. The tax liability for the year was £20,939.69, and there was no dispute that this was payable by two instalments on account with a balancing payment of £12,481.24 which was due to be paid on 31 January 2009. No issue arose over the payments on account but the balancing payment was not paid on 31 January 2009.
4.	HMRC assessed a surcharge of £624.06 under section 59C(2) Taxes Management Act 1970 (“TMA”) in April 2009, and a further surcharge under section 59C(3) in August 2009. The Appellant appealed.
5.	Before us Mr Coates said that having considered the detailed information provided by the Appellant, HMRC were withdrawing the second of these surcharges. The appeal therefore relates only to the first surcharge – that imposed in April 2009. That means that events after that date are relevant to the appeal only in so far as they shed light on circumstances prevailing before that time.
6.	The Appellant is a practising solicitor. His assessable income in the relevant period came mainly from the pursuit of this profession. He presented his case before us with as much detached professionalism as the circumstances he related permitted.
The Relevant Law
7.	Section 59C TMA provides:
“(1) this section applies in relation to any income tax…which has become payable by any person in accordance with section 55 or 59Bof this Act [the tax in question became payable in accordance with section 59B of the Act].
(2) Where any of the tax remains unpaid on the day following the expiry of 28 days from the due date, the taxpayer shall be liable to a surcharge equal to 5 per cent of the unpaid tax.
(3)Where any of the tax remains unpaid on the day following the expiry of 6 months from the due date, the taxpayer shall be liable to a further surcharge equal to 5 per cent of the unpaid tax…
…(5) An officer of the Board may impose a surcharge under subsection (2) or (3) above…
…(7) an appeal may be brought against the imposition of a surcharge under subsection (2) or (3) above within the period of 30 days…
(8) Subject to subsection (9) below, the provisions of this Act relation to appeals shall have effect in relation to an appeal under subsection (7) above as they have effect in relation to an appeal against an assessment to tax.
(9) On an appeal under subsection (7) above that is notified to the tribunal, section 50(6) to (8) of this Act [which permit the tribunal to increase or reduce the assessment according to the evidence before it] shall not apply but the tribunal may-
(a) if it appears that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax, set aside the imposition of the surcharge; or
(b)if it does not so appear, confirm the imposition of the surcharge.
 (10) Inability to pay the tax shall not be regarded as a reasonable excuse for the purposes of subsection (9) above.
(11) The Board may in their discretion-
(a) mitigate any surcharge under subsection (2) or (3) above, or
(b) stay or compound any proceedings for the recovery of such a surcharge
       and may also, after judgement further mitigate or entirely remit the surcharge.”

8.	Section 188(2) TMA provides:
“…where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse ceased.”
Mitigation
9.	In his skeleton argument the Appellant complained that the Respondents had failed properly to exercise their discretion under subsection (11) to mitigate, or to consider the mitigation of, the surcharge.  We said that we would address the question as to whether the tribunal had jurisdiction to consider this argument in our decision.
10.	It seemed to us that the right to appeal given by subsection (7), which relates to the imposition of the surcharge, does not give the tribunal jurisdiction to consider the Board’s conduct in exercise of their powers under subsection (11), or to substitute its judgement for that of HMRC under that provision. That is because: (i) the “imposition” of the surcharge referred to in subsection (7) appears to refer to the action of the officer of the Board to impose a surcharge under subsection (2) or (3) – no mention is made there of the mitigation of charge under subsection (11), (ii) the removal in subsection (9) of the tribunal’s ability to increase or reduce the surcharge indicates that considerations relating to mitigation are not intended to be within the jurisdiction of the tribunal, and (iii) the remedies indicated in that section do not encompass, as they would have to if the tribunal were to have jurisdiction in relation to the manner of the exercise of the discretion to mitigate, the ability to require HMRC to take the decision again. 
11.	Further, the absence of jurisdiction for the tribunal to consider either the exercise of the power of mitigation or the amount thereof, is consistent with other appeal provisions of the Act: thus section 100B sets out what the tribunal may do in relation to penalties under other sections and differentiates between fixed penalties where the tribunal are limited to determining the “correct” penalties, and other penalties where the tribunal may decrease the penalty if it is found to be excessive and increase it if it is insufficient. The power of the Board to mitigate penalties comes later in the Act at section 102, and there is no provision for appeal to this tribunal in relation to the operation of that section.
12.	It therefore seems to us that the tribunal does not have jurisdiction to consider whether the Board properly exercised their powers under subsection (11). The Appellant’s remedy must instead be by way of judicial review in the High Court.  This is not a case where the provisions of the Act which give this tribunal its powers admit of a construction which permits the taxpayer to raise before it administrative law questions.
Reasonable excuse
13.	We note that section 59C permits exculpation only if throughout the period of default the taxpayer had a reasonable excuse. Thus, strictly read, if for example, the taxpayer had no excuse on 31 January but was run over by a bus on 1 February and was in a coma for a year thereafter, the tribunal could not set aside the surcharge under this provision. The Board might, however, be expected to exercise its mitigation powers in this situation.
14.	The Appellant submitted that whilst subsection (10) rules out an inability to pay as a reasonable excuse, it does not rule out the reasons for the inability.. He referred us to AZ v HMRC  2010 UKFTT 225 (TC) in which the tribunal adopted this construction. Mr Coates for HMRC did not dissent from this approach.
15.	In the VAT case C&E Comms v Steptoe 1992 STC 757 the Court of Appeal agreed that a similar construction should be applied to the provisions of the reasonable excuse defence to the VAT default surcharge in section 59 VAT Act. In Steptoe one of the reasons given by two members of the Court for so holding was the particular way in which the second limb of the relevant provision(which does not appear in the current provision) was phrased, but that was not the only reason given. Given that the point was not disputed by HMRC we proceed on the basis that a reason for an inability to pay may constitute a reasonable excuse for failure to pay. 
Our findings of Fact
16.	From the Appellant’s evidence we find the following.
17.	In late 2007 building work started on the matrimonial home. The works were expected to finish in April 2008. In January 2008 the Appellant’s wife and children moved out for the remainder of the duration of the works. By 15 February 2009 the Appellant had exhausted his savings in paying for the works. He had expected his wife to contribute to the works. She did not. The works then stopped. The house remained clad in scaffolding for the remainder of the period relevant to this appeal. 
18.	In March 2008 a dispute arose between the Appellant and his wife over the question of which school their eldest child should attend. 
19.	In April 2008 the Appellant’s wife gave notice to the Appellant that she was going to seek a divorce. 
20.	From early June 2008 the Appellant lost daily contact with his children. He had previously had substantial contact with them. This situation lasted until 1 July 2009 when an access order was made as part of the proceedings related to the divorce.
21.	In July 2008 proceedings under the Childrens Act 1989 were commenced to settle the question of the child’s schooling. An application was heard on 7 and 8 August 2008. The Appellant employed solicitors and counsel in the application.
22.	 By 20 August 2008 the Appellant had expended some £8,500 on the legal expenses of the Children Act application. Thereafter his legal costs related only to the divorce and ancillary proceedings. 
23.	When on 4 September 2008 the Appellant filed his tax return he become aware that a balancing payment of some £12K would become due on 31 January 2009.
24.	Divorce proceedings commenced in July 2008. The Appellant instructed solicitors and counsel. By 30 October 2008 he had been invoiced for £4,000 of fees. The first steps of the ancillary proceedings were underway at that time. These steps involved the commitment to pay the fees of solicitors and counsel. The fees for the [period to 31 December 2008 were some £6,000, making a total of £10,000 by 31 December 2009. 
25.	The Appellant told us that around the time he filed his return (September) he had put aside the money to pay the tax from his profits, but he had no other available funds. We accept this and also his evidence that his net income declined from a preceding high of some £45K for 2008 ( and an 8 year average of some £23K) to £15K in the year to April 2009. He therefore had no substantial further moneys coming in which to make payment of tax or fees.  Thus after having paid the Children Act proceedings fees, he had about £12K in hand. Given his relatively small income thereafter the payment of his other fees meant that, by 31 December 2008, he had only about £3K available. He did not have the funds to pay the tax due on 31 January 2009. 
26.	The Appellant recognised the possibility of this shortfall in October 2008 when the divorce proceedings were in full swing, and on 6 October 2008 he made enquiries of HMRC about paying his tax early. At this stage he appears to have been trying to decide whether to pay his tax bill or fund his legal costs. 
27.	By November 2008 the Appellant had realised that his commitment to his legal costs meant that he would not be able to pay his tax on time. He telephoned HMRC on 12 November to discuss whether he might be permitted to pay in instalments. He appears to have been told that the making of an agreement for the deferral of tax was permissible only once the due date had passed.
28.	The divorce and ancillary proceedings ground on in the first half of 2009. The Appellant’s legal expenses were large. He dealt with parts of some of the proceedings  (in particular parts of the custody proceedings ) in person, but still incurred a further £38K of legal costs in that period. We understood that these will be paid when the matrimonial home is eventually sold.
29.	The Court’s order in the ancillary proceedings action included provision for the completion of the building works on the matrimonial home, its sale and the division of the proceeds. In that division the Appellant will become entitled to some 40% of the net proceeds.
30.	The Appellant contacted HMRC on 23 April 2009, following the receipt of the first surcharge earlier that month. He was shunted around different offices. The remainder of the history of the Appellant’s correspondence with HMRC, and his eventual agreement with them that he might have time to pay, is irrelevant to the question which remains before us, namely whether in relation to the period of 28 days after the due date of 31 January 2009, the Appellant had a reasonable excuse for his failure to pay the tax.
31.	The period from September 2008 to 28 February 2009 fell within a period of great stress for the Appellant.
32.	The Appellant told us that he had not attempted to borrow the funds to pay his legal bills (or the tax) because (i) his earning were low and his request to borrow would not have been looked on favourably, (ii) he would have had to pay a high interest rate, (iii) he was not thinking wholly logically at the time, (iv) it would make a bad situation worse if he borrowed and (v) he was generally averse to borrowing – even his home had been purchased without borrowing. No doubt the divorce proceedings would have made it difficult to secure any borrowing on his house. 
Our Assessment
33.	The incurring of legal costs and their payment effectively deprived the Appellant of the means to pay the tax. Was it reasonable for the Appellant so to deprive himself of the means of paying the tax on 31 January 2009? If it was then, unless it would be reasonable to expect him to have borrowed the money, he has in our view a reasonable excuse for failing to pay the tax in the period 31January 2009 to 28 February 2009.
34.	The Appellant submits that he had no real choice in the autumn of 2008 other thanto commit to the payment of the fees. 
35.	The question of what it is reasonable to expect the Appellant to do must be determined by reference to his circumstances and the responsibilities imposed on him by the Taxes Acts. We can imagine circumstances where the mental state of a taxpayer is such that it is not reasonable to expect him to behave rationally; and circumstances where some quite exceptional pressing need might make it reasonable to use monies for a purpose other than paying tax. 
36.	It was clear to us that the divorce proceedings disturbed the usual balance of the Appellant’s mind. Clearly those matters weighed very heavily upon him. But he is a professional person and it was clear that he had carefully considered what course of action to pursue. In so doing he had given greater weight to the divorce proceedings than to the payment of the tax. This did not seem to us to be a case where the balance of the taxpayer’s mind had been so disturbed that irrational behaviour could constitute a reasonable excuse.
37.	Was the taxpayer’s decision to give greater weight to the divorce proceedings than the payment of tax a reasonable one?  It seems to us that the Appellant’s circumstances – his separation from his children and the stress of the divorce – are relevant in determining what weight it is reasonable to give to the securing of legal help in conducting the proceedings, as is the fact that his wife had instructed expensive lawyers. In that regard we can see that in some circumstances (for example where a party had no legal training and there was a concern that the children might be removed from the jurisdiction) a reasonable man might well give more weight to securing access to his children than to his statutory responsibility to pay his tax.  But it was not clear to us that the legal expenses had been primarily incurred in relation to the securing of access to his children or, given the Appellant’s profession, that in the circumstances it was reasonably necessary to incur such expense to that end, and we do not regard it as reasonable, in these circumstances, to give more weight to the determination of property rights on a divorce than to the payment of a extant liability.  As a result, on balance, we conclude that the Appellant’s decision was not a reasonable one. 
38.	Even if we were wrong about this, it seems to us that it would have been reasonable for the Appellant to have borrowed the money to pay his legal bills (or the tax). That he did not like borrowing is to our mind irrelevant. It might have been difficult or expensive to borrow: he may have had to come to different arrangement with his lawyers, but we believe that it is likely that he could have borrowed, and that it would have been reasonable for him to make the attempt to do so
39.	Thus in our view the reasons for the Appellant’s inability to pay the  tax did not afford a reasonable excuse. The lack of funds to pay the tax cannot afford such an excuse.
40.	Thus, whilst we had great sympathy for the Appellant, we were unable to conclude that he had a reasonable excuse for the failure to pay his tax in the period 31 January 2009 to 28 February 2009. 
Result
41.	We dismiss the appeal as it relates to the first (and remaining) surcharge.
42.	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.

CHARLES HELLIER

TRIBUNAL JUDGE
RELEASE DATE: 30 November 2010