[2011] UKFTT 105 (TC)

TC00981

Appeal reference: TC/2010/02164

CORPORATION TAX – late filing of return – tax related penalty – reasonable excuse – no – appeal dismissed

FIRST- TIER TRIBUNAL

TAX

ASI PROPERTIES LTD			Appellant

- and -

                     THE COMMISSIONERS FOR HER MAJESTY’S     Respondents
REVENUE AND CUSTOMS

TRIBUNAL JUDGE: JENNIFER TRIGGER

The Tribunal determined the appeal on 15 July 2010 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 01 March 2010,  HMRC’s Statement of Case submitted on 09 April 2010 and the Appellant’s Reply dated 05 May 2010.

© CROWN COPYRIGHT 2011

DECISION

1.	This is an appeal by ASI Properties Ltd (“the Appellant”) against the imposition of a tax related penalty imposed for the late filing of the Corporation Tax Return (“the Return”) for the accounting period ending (“the APE”) 31 July 2006, in the sum of £82,940.

2.	The company was incorporated on 31 January 1996.  The Return for the APE 31 July 2006 was due no later than 31 July 2007 but was not delivered until 25 March 2009.  The period of default was 603 days.  In accordance with the legislation, which I will come to later, the return was late and accordingly triggered lateness penalties.

3.	Flat rate penalties amounting to £200 were imposed as the Return was delivered more than three months after the filing date of 31 July 2007.  The Appellant did not appeal these flat rate penalties.

4.	The Commissioners of Her Majesty’s Revenue and Customs (“the Commissioners”) issued, on 10 March 2008 a revenue determination, estimating the corporation tax charge at £16,150.  As £15,000 had been paid by the Appellant in May 2007 a 10% tax related penalty of £115 was issued at the same time as this determination.  A second tax-related penalty of £115 was issued on 4 August 2008.

5.	When the return was received on 25 March 2009 the charge of £430,850.09 replaced the original estimated amount.  As the corporation tax liability of the Appellant was higher than the Commissioners’ determination the tax related penalty was revised.

6.	An additional penalty was issued on 15 April 2009 in the sum of £82,940.  The amount was 20% of the unpaid tax as the Return was delivered more than two years after the end of the period for which the Return was required.  The penalty notices were sent to the Appellant’s registered office.

7.	On 22 October 2009 the Commissioners wrote to the Appellant giving their view of the appeal and offering a review.  The Commissioners commented that despite the fact that they had sent to the Appellant notice to file and pay slip dated 21 August 2006, return and payment reminders of 3 July 2007 and 3 April 2008, the Return was not filed until 25 March 2009.  Then a payment of £15,000 was made on 25 May 2007 but further smaller payments were not received until December 2008.  Even a revenue determination estimating the Appellant’s profit, which was sent on 10 March 2008 did not prompt the submission of the Return or payment of corporation tax.

8.	The Appellant requested an extension of time in which to request to review, on 18 November 2009 and subsequent to that on 19 November 2009 the Commissioners provided the Appellant with a breakdown of the tax-related penalties.  On 20 November 2009 the Commissioners granted the Appellant additional time in which to request the review.  Subsequently a review was undertaken and the original decision of the Commissioners upheld.  Notice of this was given to the Appellant on 27 January 2010.

9.	The Appellant appealed to the Tribunals Service on 1 March 2010.  Although the appeal was made outside the 30-day statutory period the Commissioners raised no objection and the issue of lateness was not raised before me.

10.	The basis on which the Appellant appealed was contained in three documents before me.  On 5 August 2009 the Appellant appealed against the penalty on the grounds that:

“,...we were unaware about the fact that we would be penalised to this extent for the late payment.  Our company is already struggling to pay the corporation tax liability as a result of turmoil in the property market and economic recession.  In such circumstances, we will be unable to pay such a huge penalty charge of £82,940.”

11.	In the request for a review on 12 December 2009 the Appellant further stated:

“…The Accountant Mrs. Julie Devlin left the property at short notice in December 2006.  She promised to return in April 2007 and finalise the accounts for ASI Properties Ltd but never returned.  We tried to contact her but she left the UK to settle with her daughter in New Zealand.  She was the only person looking after the rent collection, expenses and bank reconciliation for ASI and it was very hard to finalise the accounts without her.  We asked Mr. Sarad Shah to finalise the accounts for the year ended 31 July 2006.  He started working on it but the progress was very slow as all the ASI records were maintained manually and Mr. Shah had other commitments with his permanent employer.  The accounts were not finalised until December 2007 when Mr. Sarad Shah informed us that he was unable to work on ASI accounts.

Finally, we asked Mr. Asfak Girash to finalise the accounts for ASI.  He managed to prepare the draft accounts by the end of May 2008.  Although the draft accounts were finalised, there was an issues of Rollover Relief on the purchase of one property.  Initially we thought that ASI will be able to claim Rollover Relief on the purchase of … as the company made capital gains on the sale of its property located in...

Mr. Imtiaz Ali Mohamed, the Director and shareholder, was corresponding with the tax consultant regarding the rules pertaining to Rollover Relief.  The issues related to the Rollover Relief were not resolved in a timely manner as Mr. Imtiaz Ali Mohamed and Mrs. Farnaz Ali Mohamed (16.66% shares) were going through the divorce.  Their divorce proceedings started in January 2008 and the Director was unable to allocate time to ASI operations.

Consequently both the production and the finalisation of the accounts was delayed.  Mr. Imtiaz Ali Mohamed resigned as the Director in February 2009 and it was left to Mr. Salim Ali Mohamed to finalise the matters and file the accounts…”

12.	In the submission to the Tribunals Service on 1 March 2010, the Appellant reiterated the grounds of the appeal, further stating:

“The HMRC Review Officer has looked at all the reasons individually.  We believe that the reasons, if they are looked collectively, stated in our letter dated 12 December 2009 form reasonable grounds against the penalty charge.

The Accountant Mrs. Julie Devlin was looking after ASI accounts for more than eight years and we had no reason to believe that she will not return in April 2007 to finalise the accounts.  Therefore, we waited for her until April 2007 and when she did not return we had no choice but to ask Mr. Sarad Shah to finalise the accounts.  It is never easy with the accounts of the property companies, particularly when the records are maintained manually.  Mrs. Julie Devlin was familiar with the rental income for each property, mortgages for different properties, expenses and all the other records, whereas the new Accountant has to allocate all these transactions to appropriate ledgers.  We could have finalised the accounts well before the deadline had we compromised on the accuracy of the financial statement.  We wanted the financial statements to be accurate and give true and fair view.

We repeatedly asked Mr. Shah to finalise the accounts quickly but he was unable to do so and in December 2007 he notified us that he will be unable to finalise ASI accounts due to the complex nature of accounts and his commitments elsewhere.

Finally we asked Mr. Asfak Girash to finalise the accounts.  We have attached a letter from Mr. Asfak Girash which explains the complex nature of the accounts and the work he undertook to finalise the accounts.

The issue of Rollover Relief… was significant to the financial statements.  The amount of profit and Rollover Relief formed a substantial part of the profits; any discrepancies may have resulted in inaccurate financial statements… At this point we decided to consult another tax expert, and the Director Mr. Imtiaz Ali Mohamed was given the responsibility to liaise with him.

It was unfortunate that during this period Mr. Imtiaz Ali Mohamed was going through a divorce and was unable to clarify the situation on the Rollover Relief.  Consequently the finalisation of the accounts was delayed…”

13.	The law governing the imposition of a tax-related penalty for the late filing of a corporation tax return is governed by schedule 18 of the Finance Act 1998, Part I and II.  I had regard in particular to the following paragraphs insofar as they were relevant:

Paragraph 2 – Duty to give notice of chargeability
Paragraph 3- Requirement to deliver a Company Tax Return
Paragraph 14 – Filing date
Paragraph 17(2), which provides for flat rate penalties of £100 and £200 where a return is delivered within three months and then at any time after three months, respectively.
Paragraph 17(3), which provides for flat rate penalties to be increased to £500 and £1,000 respectively for a third successive late return.
Paragraph 18(2), which provides for tax-related penalties of 10% if a return is delivered more than 18 months after, but within two years from, the end of the accounting period, and 20% if a return is later than two years.

14.	The main issue between the parties which I had to decide was whether the Appellant had reasonable excuse for delivering the Return after the due date of 31 July 2007.  It was the Appellant’s contention that the sudden departure of the Accountant Mrs. Devlin, the divorce proceedings of the Director and shareholder and the Rollover Relief should not be considered individually but, on the contrary, should be regarded collectively and that when regarded collectively they constituted reasonable excuse.

15.	The Appellant maintained that it had no reason to believe that the Accountant, Mrs. Julie Devlin would not return to finalise the Appellant’s accounts in April 2007.  The Appellant suggested that the failure of Mrs. Devlin to return to finalise the accounts was an event beyond the control of the Appellant and that it amounted to an exceptional event.

16.	The Appellant further maintained that the fact that the Director and shareholder, Mr. Imtiaz Ali Mohamed was in the process of going through a divorce from Mrs. Farnaz Ali Mohamed at the time the Appellant was attempting to finalise its accounts and attend to the issue of Rollover Rrelief was another exceptional circumstance beyond the control of the Appellant.  Furthermore the Appellant stated that in normal circumstances Mr. Imtiaz Ali Mohamed would have resolved the Rollover Relief issue within a few days and the tax return would have been filed no later than June 2008.  If those circumstances had come to pass the Appellant believed that the Commissioners would have charged a 10% tax-geared penalty amounting to £41,585 for the Return having been filed between 18 and 24 months of the end of the accounting period.  The Appellant suggested that the 10% penalty in the sum of £41,585 should be waived, again on the grounds that the divorce of the Director and shareholder was beyond the control of the Appellant.

17.	The Appellant expressed the view that the Rollover Relief issue was significant to the accounts and the return, so significant that it was impossible to prepare the Return without the accurate figures for the Rollover Relief and that the Return could not have been filed using estimated figures.

18.	I found as a fact:

•	That the return for the APE 31 July 2006 was due no later than 31 July 2007 but was not delivered until 25 March 2009.
•	That the period of default was 603 days.
•	That flat rate penalties amount to £200 were correctly imposed by the Commissioners.
•	That the corporation tax charge was £430,850.09.
•	That the return was delivered more than two years after the due date.

19.	I do not accept that the various explanations put forward by the Appellant should be considered collectively to constitute reasonable excuse.  I have not been referred to any authorities which would justify such a decision.  Furthermore I do not consider that the Appellant has demonstrated a responsible attitude to the requirement placed upon it by the legislation to submit a return on time.  The Appellant has been incorporated since 31 January 1996.  The charge to corporation tax is substantial.  It is my view applying the test on the balance of probabilities that the Appellant would have been aware that its liability to a corporation tax charge would be well in excess of the estimated charge made by the Commissioners and issued on 10 March 2008.  Furthermore the Appellant admitted in correspondence of 5 August 2009 that it was already struggling to pay its corporation tax liability as a result of the turmoil in the property market and the economic recession.  It is not beyond the bounds of reasonable probability that the Appellant took the line of least resistance and decided to delay for as long as possible submitting the Return, hoping that it could overcome the downturn in the property market and the economic recession.  There is no reason shown to establish why the Appellant should received more favourable terms for the submission of a return than any other taxpayer.  The possible effect on future trade of an economic recession is not relevant.  This fact is a commercial consideration for the Appellant to address as a responsible trading enterprise.

20.	The Appellant has suggested that it has a reasonable excuse because it was ignorant of the law, not realising that it would be penalised to such an extent for failure to submit the Return.  In my judgment ignorance of the law cannot be deemed a reasonable excuse.  There is widespread information in the public domain about the payment of corporation tax, the filing of returns and the potential penalties.

21.	The fact that the Accountant Mrs. Julie Devlin left at short notice in December 2006 cannot, in my view, in these circumstances amount to reasonable excuse.  The Appellant was aware that Mrs. Devlin had left the United Kingdom to settle with her daughter in New Zealand.  The Appellant had had contact with Mrs. Devlin and she had left the company’s employment at short notice in December 2006.  I find it highly unlikely that there would have been no discussion or mention by Mrs. Devlin that she was intending to undertake such a major upheaval in her life as to leave the United Kingdom to live in New Zealand.  Any responsible employer would have questioned why Mrs. Devlin had left her employment at short notice and kept in regular and close contact with her so that she would be able to finalise the accounts expeditiously when she returned in April 2007.  It does not appear from the Appellant’s account that any of these actions took place.  The Appellant seems to have waited until April 2007 and suggests that it was taken by surprise when Mrs. Devlin did not return.  I consider it is reasonable to expect that the Appellant should have made contingency arrangements at the point where Mrs. Devlin left the Appellant’s employment to ensure that the Appellant met its tax obligations.  The responsibility rests firmly with the Appellant to ensure that the regulations are followed and returns filed by their due date.  The Appellant cannot wash its hands of this responsibility by engaging an accountant.  Again I reject the Appellant’s contention that the fact that the Accountant Mrs. Julie Devlin did not return as promised in April 2007 amounts to reasonable excuse.

22.	I was told that the Appellant had taken on a new accountant, Mr. Shah.  Mr. Shah was employed permanently by another company.  This did not in my view constitute an appropriate arrangement for the finalisation of the Appellant’s accounts and the submission of the Return.  In the event Mr. Shah found the task too complex and time-consuming and told the Appellant in December 2007 that he could not continue.  The failure by Mr. Shah could not, in my view, be deemed a reasonable excuse for the Appellant not having met its tax obligations.  The Appellant had a legal responsibility to complete the Return on time and this ad-hoc arrangement with Mr. Shah was, in my view, insufficient to constitute a reasonable excuse and absolve the Appellant from having to pay the penalty imposed.

23.	Whilst the matter of the rollover relief may have caused the Appellant concern, it did not, in my view, relieve the Appellant of the obligation to file the Return merely because it was unable too produce the final figures needed for the Return by the filing date.  I was helpfully referred to the case of Dunke v General Commissioners of Income tax for Havant and Commissioners of Inland Revenue (1) (1973-1978) 51 TC519, where it was held that the obligation imposed on the taxpayer is to make a return which is to the best of the taxpayer’s knowledge complete and accurate.  A taxpayer unable to provide final figures can satisfy the filing obligation by filing a return which includes figures that are estimated to the best of his or her knowledge.

24.	Any return which includes reasonable estimated or provisional figures will satisfy the Appellant’s filing obligation, ensuring that it would not become liable to the late filing penalty.  There is no evidence from the Appellant that it had made any attempt to contact the Commissioners before the statutory filing date to inform the Commissioners that it was experiencing any difficulties in completing the return, nor that the Appellant made any request for an extension of the filing date.  In my view, information relevant to the Return not being available by the filing date cannot amount to reasonable excuse.  By the time the accountant, Mr. Girash, had been appointed, the statutory filing date of 31 July 2007 had already passed.

25.	If the Appellant had filed the Return by May 2008 the tax geared penalty would have been 10% of the unpaid tax, however the Appellant chose not to contact the Commissioners for advice.  No information has been provided to show that the draft figures in May 2008 differ from the final figures on the Return presented in March 2009.

26.	In all the circumstances it was clear to me that the Appellant had taken no significant steps to address the problem that it faced.  There had been no communication between the Appellant and the Commissioners which might have alerted the Commissioners to the difficulties being faced by the Appellant.  And additional time might have been allowed for the submission of the Return.  Even though the Appellant must have had some indication of the charge to tax it made, it made no attempt to share with the Commissioners those figures, thus, by a dilatory lack of management an increased penalty was imposed.

27.	Turning to the final ground that I was asked to consider as reasonable excuse, namely that at the relevant time the director, Mr. Imtiaz Ali Mohammed, was involved in divorce proceedings which started in January 2008, which prevented him from being able to allocate time to the Appellant’s operations, I did not consider that this amounted to reasonable excuse.  I found it highly improbably that these divorce proceedings would have had such an impact on Mr. Imtiaz Ali Mohammed that he was unable to devote any attention to his responsibility as a director of the Appellant, and in particular to assist in the progress of the figures for completion of the Return for submission to the Commissioners.  As a director, Mr. Imtiaz Ali Mohammed would have been well aware of the Appellant’s responsibility to submit the Return.  He should have made adequate alternative arrangements to clarify the situation regarding the rollover relief if he truly had insufficient time, because of the divorce proceedings, to deal with this matter.  I did not consider the fact that Mr. Imtiaz Ali Mohammed had personal difficulties was a matter which could amount to reasonable excuse so as to absolve the Appellant from complying with its statutory responsibility, nor to assist the Appellant in avoiding the penalty charge imposed.

28.	In my judgment the Appellant has failed to demonstrate that there was a reasonable excuse for the late filing of the Return that existed throughout the whole period of default.  The completion and delivery of the Return was entirely within the control of the Appellant.  Nothing exceptional prevented the Appellant from fling the Return by the filing date.

29.	For the reasons given above the appeal was dismissed.

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.

JENNIFER TRIGGER
TRIBUNAL JUDGE
Release Date: 3 February 2011