[2011] UKFTT 135 (TC)

TC001009

Appeal number: TC/2010/07529

PAYE underpayment - HMRC error - elderly disabled unrepresented taxpayer - appeal against collection - Extra-statutory Concession A19 - penalty for late filing of self-assessment return - surcharges for late payment of tax - whether reasonable excuse - no - appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	ALAN GERMAN	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	ANNE REDSTON (TRIBUNAL CHAIR)

The Tribunal determined the appeal on 7 February 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 18 September 2010, HMRC’s Statement of Case submitted on 22 October 2010, the Appellant’s reply dated 23 November 2010 and his further letter dated 26 November 2010. 
© CROWN COPYRIGHT 2011
DECISION

1.	Mr German is an elderly, disabled unrepresented taxpayer who has been taxed via the PAYE system for many years. In the 2007-08 fiscal year he changed employers, and too little tax was deducted from his PAYE income. 
2.	In December 2008 HMRC issued him with a self-assessment return to collect the underpayment. The return was submitted late, and HMRC issued two penalty notices. After they received the return, they issued two surcharges. 
3.	Mr German’s Notice of Appeal states that:
“during the period of unpaid tax I was on PAYE so I believed I was paying the correct tax…I don’t see there was anything that would make me think I had not paid my tax correctly at that time.”
4.	In his letter of 21 April 2010 he says:
“I do not understand why I am paying for something which is not my mistake, in one lump sum. Also I do not have that kind of money, I am only just earning enough at present to pay my bills.”
5.	Mr German is thus appealing, not the quantum of the tax, but HMRC’s collection of the underpayment. He also appeals the penalty notices and surcharges. 
The facts 
Mr German 
6.	Mr German is in receipt of a private pension and I thus conclude he is elderly. He is also disabled: his Notice of Appeal gives as a reason for wanting a hearing in Plymouth that:
	“I live in Plymouth and am registered disabled and travelling long distances causes me discomfort.”
7.	Some tangential evidence of his disability is provided in the letter he wrote to the Tribunal service on 26 November. He asks for the hearing to be replaced by a decision on the papers, and says:
	“I believed when you said I can have an oral hearing I thought this was just a phone call not a full hearing. This was my mistake. I will put this down to me taking strong pain killers for the last few years. If I don’t write things down straight away I tend to forget.”
The cause of the underpayment
8.	It is not in dispute that tax was under-collected from Mr German in the 2007-08 fiscal year. However, HMRC did not provide the Tribunal with any evidence or explanation as to how the underpayment arose. 
9.	The Tribunal was given a copy of Mr German’s letter to HMRC of 21 April 2010, in which he said:
“…in the year 2007-08 my tax code was done wrong by HMRC when I changed companies part way through the tax year.”
10.	His letter to the Tribunal Service (undated but received by on 23 November 2010) said:
	“…the correct amount is £1,485 due to not paying the higher rate at 40% and that the information given to [my employer] was correct at this time.”
11.	His request to HMRC for a review of the decision, dated 19 July 2010, also says:
	“I did not know why my tax was not paid on the 40% as I am now informed that it should have been.”
12.	Mr German thus says that the error was that of HMRC, not the employer; that it related to his change of employment, and that it was caused by him having entered the 40% tax band. HMRC do not rebut these statements, and I thus accept them as facts.
13.	I note that Mr German has a personal pension as well as employment income, but have no information as to whether this contributed to the coding error. 
The warning and the assessments
14.	On 28 October 2008 HMRC sent Mr German a letter advising him of a PAYE underpayment for the 2007-08 fiscal year. This letter was not provided to the Tribunal. HMRC say it told Mr German that the underpayment exceeded £2,000 and so could not be collected via his coding notice. In the letter he was asked if he wanted to make a voluntary payment. In his appeal papers, Mr German denies receipt of this letter. 
15.	HMRC say that their records show that on 5 November 2008, Mr German called to discuss the letter. They further say that they advised him as to how the underpayment arose, and that if he did not agree the figure, he should write and explain why. I accept HMRC’s evidence that a call was made by Mr German to HMRC on 5 November 2008, and that he thus received the letter alerting him to an underpayment.
16.	No tax was paid and so, on 18 December 2008, HMRC say they issued Mr German with a self-assessment return for 2007-08, together with a further letter explaining the underpayment. The filing date for the return was 25 March 2009. Mr German says he did not receive this return. He said that some of his mail during 2008 may not have been delivered because “a local woman was found guilty having not posted mail and hid it outside where it was damaged.” On this matter I also accept HMRC’s evidence that they issued the self-assessment return in December, and sent it to Mr German. 
17.	On 14 April 2009 HMRC issued the first penalty notice. On 22 April Mr German contacted HMRC and said he had not received the return. A duplicate return was issued on 23 April 2009. The filing date remained 25 March, and so had already passed by the date the replacement return was issued. 
18.	On 19 May 2009, Mr German called HMRC to ask when the return should be filed, and he was told it was already late: it should have been filed on 25 March. On or around 29 September HMRC issued a second penalty notice. 
19.	On 31 December Mr German contacted HMRC and made an appointment to attend the local office. This meeting took place on 5 January 2010 and Mr German was given advice on completing the return. 
20.	The return was finally received on 5 March 2010. It did not include a self-calculation of the tax liability. The return was processed by HMRC on 19 March 2010, and showed an underpayment of £1,485. A surcharge notice levying both the first and second surcharges was issued on or around 1 April 2010, totalling £148.50. As at 22 October 2010, the date of HMRC’s Statement of Case, the tax of £1,485 remained unpaid.
21.	Mr German called HMRC on 15 April 2010 in relation to the £1,485, and then wrote a letter dated 21 April 2010, which reads as follows:
 “I phoned HMRC on the 15th April at 15.15 hours about a bill of £1,485 that I received that day. 
Having spoke to the lady I was told that if I wanted to appeal against any of the bill, I would have to make an appointment with my local HMRC office to fill in the forms. I had the appointment today and was informed there was no form for appeal. I should write instead. My local office I am using is HMRC Newton Abbot Devon. 
I did not understand the problem with my tax as I have been on PAYE for the past 12 years plus. 
I was informed a few weeks ago that in the year 2007-08 my tax code was done wrong by HMRC when I changed companies part way through the tax year. Please find attached paperwork of the tax code sent to [my employer] from yourselves. 
I was informed by [my employer] I had gone on higher rate tax due to my earnings. 
I do not understand why I am paying for something which is not my mistake, in one lump sum. Also I do not have that kind of money, I am only just earning enough at present to pay my bills. I have also been charged surcharges for outstanding taxes from 2006 to 2009, when I only received a bill for the £1,485 a couple of weeks ago. 
Also I have been told to explain that I received duplicate self-assessment for the last four years in the summer of 2009 having had a letter in April 2009 saying I owed unpaid taxes. 
I was told I will get the 4 self assessments and if I could fill them in when I can as I am on PAYE any outstanding taxes will be collected by PAYE anyway. 
I filled my self-assessment in HMRC office Newton Abbot on the 5.1.2010 all I had left to fill in was my details of my private pension which again I did at HMRC Newton Abbot. 
Also in my phone call on 15 April this year I was told I would hear from Time to Pay about my outstanding tax so I could arrange to pay a small amount a week of my tax. 
I have not heard from any one to date, but again told only I should talk to Time to Pay at HMRC not the lady herself. 
I would like to know what to do next as I do not understand what has been going on with my tax so far.” 
22.	Mr German makes reference here to four self-assessments. The others are not before this Tribunal and I am thus unable to consider any relevance they might have to the weighing of the evidence in this case. 
23.	The Tribunal was also provided with Mr German’s PAYE coding notice for the current tax year, issued on 21 March 2010. It says:
“you need a tax code so the Jobcentre Plus can check your tax position when you come off Jobseeker’s allowance…we turn £6,475 into tax code 647L to send to [your employer] …we tell [your employer] what your tax code is but we do not tell them how it is worked out.”
24.	I take judicial notice of the fact that Jobseeker’s allowance (“JSA”) is paid as a top-up to wages when an individual is working for less than 16 hours a week. As at 5 April 2010 Mr German was therefore on low earnings topped up by the JSA.
25.	For completeness I cover one further point. Mr German’s letter received on 23 November attaches several payslips. In that letter and the subsequent one dated 26 November, he has tried to understand his payslips to see if 40% tax was, in fact, deducted. He comes to the conclusion that it was so deducted because he takes a figure entitled “deductions” to be his PAYE tax. While the payslips are very difficult to understand, the total PAYE is clearly set out at the bottom of the sheet, and amounts to around 20% of the year to date taxable pay. What exactly is included in the opaque “deductions” figure is unclear - it may include PAYE - but the payslips do not provide evidence that 40% tax was taken by the employer but not paid over, as Mr German suggests may be the case. 
The legislation
26.	Employment income is chargeable to income tax under Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) Part 2. Most UK pension income is charged to tax under ITEPA s 571, s 578 or s 589B. 
27.	By ITEPA s 683, employment and pension income are both within “PAYE income”. HMRC are required by ITEPA s 684 to make regulations with respect to the assessment, charge, collection and recovery of PAYE income. These are the Income Tax (PAYE) Regulations 2001 (“the Regulations”). All references to regulations in this Decision are to these Regulations. 
28.	Reg. 13 requires HMRC to determine the code the employer must use. If there is an underpayment by the employee as a result of the employer’s error, HMRC can recover the underpayment from the employer, unless either Condition A or Condition B of Reg. 72 is met. Condition A requires the employer to satisfy HMRC that he took reasonable care to comply with the Regulations, and that the error was made in good faith. Condition B applies where:
“the Inland Revenue are of the opinion that the employee has received relevant payments knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from those payments.”
29.	Where the underpayment arises because of HMRC error, no equivalent statutory provision prevents its collection from the employee, other than the normal assessment time limits set out at TMA s 34, which are not at issue in this case. 
30.	Under TMA s 1 HMRC are given responsibility for the collection and management of income tax. In R (on the application of Wilkinson) v IRC [2003] STC 1113 (“Wilkinson”) at  [29], HMRC accepted, before the Court of Appeal, that these powers include: 
	“wide managerial discretion to refrain from recovering taxes which are payable under a strict application of the relevant legislation.”
31.	In the House of Lords judgment in the same case, Lord Hoffman said at [21] that:
“This discretion enables the Commissioners to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time.”
32.	Extra-statutory Concessions (“ESCs”) are one example of HMRC’s exercise of this power. In ESC A19 HMRC have set out a number of situations in which underpayments of PAYE income will not be collected. It reads as follows:
“Arrears of income tax or capital gains tax may be given up if they result from the Inland Revenue's failure to make proper and timely use of information supplied by—
•	a taxpayer about his or her own income, gains or personal circumstances;
•	an employer, where the information affects a taxpayer's coding; or
•	the Department for Work & Pensions, about a taxpayer's State retirement, disability or widow's pension.
Tax will normally be given up only where the taxpayer—
•		could reasonably have believed that his or her tax affairs were in order; and
•	was notified of the arrears more than 12 months after the end of the tax year in which the Revenue received the information indicating that more tax was due…
In exceptional circumstances arrears of tax notified 12 months or less after the end of the relevant tax year may be given up if the Revenue—
•	failed more than once to make proper use of the facts they had been given about one source of income;
•	allowed the arrears to build up over two whole tax years in succession by failing to make proper and timely use of information they had been given.”
33.	Underpayments can only be collected via PAYE if the amount owed is less than £2,000, unless the employee otherwise consents (ITEPA s 684(3A)).
34.	A deeming provision relating to the delivery of returns sent by post is contained in the Interpretation Act 1978, s 7:
“Where an Act authorises or requires any document to be served by post (whether the expression "serve" or the expression "give" or "send" or any other expression is used) then, unless the contrary intention appears, the service is deemed to be effected by properly addressing, pre-paying and posting a letter containing the document and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post.”
35.	Penalties for submitting a late self-assessment return are charged under Taxes Management Act 1970 (“TMA”) s 93(2) and (4) and surcharges for late payment are levied under TMA s 59C(2). 
36.	The Tribunal can set aside a penalty or surcharge if it finds that the Appellant had a reasonable excuse for the default, and that this reasonable excuse subsisted throughout the period of the default. The relevant legislation is at TMA s 93(8) and s 59C(9) respectively. Inability to pay is specifically excluded from being a reasonable excuse for failing to pay a  surcharge (TMA s 59C(10).
Decision 
The lack of funds
37.	I deal first with lack of funds. Mr German says that he “does not have that kind of money” and has only just enough to pay the bills. Insufficiency of funds has been found to provide the basis for a reasonable excuse in Steptoe v C&E Commrs [1992] STC 757. However, that was in the context of a statutory provision permitting a taxpayer to rely on a defence of reasonable excuse for non-payment of a surcharge. There is no equivalent reasonable excuse defence for the payment of income tax which is rightly due, and it cannot thus eliminate the underpayment. 
38.	While penalties and surcharges can be susceptible to an insufficiency of funds reasonable excuse defence in accordance with the Steptoe principles, there is insufficient evidence before the Tribunal as to Mr German’s financial situation to allow the Tribunal to consider this argument. Lack of funds therefore does not excuse Mr German from the penalties or  surcharges.

The underpayment
39.	The error which caused the underpayment was not that of Mr German’s employer. Had it been, Reg. 72 would have prevented HMRC from requiring Mr German to make good the shortfall: Mr German clearly did not receive the income “knowing that the employer wilfully failed to deduct” the correct amount of tax.
40.	When, as here, the error is that of HMRC, there is no equivalent legislative provision protecting Mr German from recovery. 
41.	In some cases, the underpayment can be remitted, or “given up” by HMRC under ESC A19. Mr German meets the first condition of the ESC - he “reasonably believed his affairs to be in order”, but fails the second: he was notified of the need to make repayment in October 2008, within twelve months of the 2007-08 year end. ESC A19 would therefore only apply if HMRC had “failed more than once to make proper use of the facts they had been given about one source of income” and there is no indication that this is the case. As the concession appears not to apply, I have not considered whether this Tribunal has jurisdiction over its application.
42.	HMRC’s discretion under TMA s 1 is, however, not limited to ESC A19. I have therefore considered whether this Tribunal has jurisdiction to review HMRC’s failure or refusal to exercise that wider discretion in Mr German’s case - in particular, whether his situation is one of “hardship at the margins” as Lord Hoffman put it in Wilkinson, and thus where that discretion should have been exercised to remit this underpayment, given both Mr German’s personal circumstances and the fact that the shortfall was caused by HMRC’s own mistake. 
43.	The extent of the Tribunal’s jurisdiction over HMRC’s discretion is controversial and uncertain. Sales J in Oxfam v HMRC [2009] EWHC 3078 (Ch) at [68], albeit obiter, said: 
“…sometimes the Tribunal will have to apply public law concepts in order to determine cases before it. It happens regularly elsewhere in the legal system that courts or tribunals with jurisdiction defined in statute by general words have jurisdiction to decide issues of public law which may be relevant to determination of questions falling within their statutorily defined jurisdiction. No special language is required to achieve that effect. Where they are themselves independent and impartial courts or tribunals (as the Tribunal is) there is no presumption that public law issues are reserved to the High Court in the exercise of its judicial review jurisdiction.”
44.	There are other authorities which say that the Tribunal’s jurisdiction does not extend to such a review, including Customs and Excise Comrs v National Westminster Bank plc [2003] STC 1072.
45.	Even if the Tribunal has the wider jurisdiction set out by Sales J, what is at issue here is HMRC’s residual discretion, not their failure to apply their published practice. PAYE underpayments is an area where HMRC has well-established guidelines. Mr German does not fall within those guidelines. His legitimate expectations have therefore not been thwarted. It was legitimate expectations which was at issue in Oxfam, even though the dicta of Sales J arguably go wider than this.
46.	I thus find that there is no clear authority allowing the Tribunal to review HMRC’s residual discretion and therefore decline to do so. HMRC can still, of course, choose to exercise its wider discretion in favour of Mr German, but that is a matter for them. 
47.	Mr German’s appeal against the collection of his underpayment is thus dismissed.
The penalties and surcharges
48.	For Mr German to succeed in his appeal against the late filing penalties, he would have to show that he had a reasonable excuse which continued throughout the period of default. The first penalty was levied on 14 April 2009, after the first SA return was issued in December 2008. Mr German’s excuse is that the return was not received. 
49.	I have already found that the return was issued in December 2008. Under the Interpretation Act s 7 it is thus deemed to have been received when it would be delivered in the ordinary course of post. It is of course possible that it was not, in fact received. But even if that were the case, Mr German’s reasonable excuse ceased once he received the copy of the return in March 2009. The excuse thus does not subsist “throughout the period of the default”. 
50.	It is possible that Mr German’s disability, or the pain killers which lead him to be forgetful, might provide him with an alternative reasonable excuse. But Mr German did not put this forward to the Tribunal. I therefore cannot consider it, either in the context of this penalty or in relation to the later penalty or surcharges. On the basis of the evidence provided, I thus confirm the first penalty.
51.	The second penalty was levied on 29 September. By that date Mr German had had the replacement return for around five months, and has not provided an excuse for its late submission (other than insufficiency of funds, considered earlier in this Decision).
52.	The surcharges were triggered by the underpayment which was disclosed when the return was finally received and processed. This was almost a year after the second return had been received by Mr German. He complains that the surcharges were issued only “a couple of weeks” after he had been made aware of the extent of the underpayment. Had he completed the second return on receipt, and paid the tax as soon as the outstanding sum was established, he might then have had a reasonable excuse. But this isn’t what happened. I thus find that he has no reasonable excuse and the surcharges stand. 
Conclusion
53.	Although Mr German’s appeals are dismissed, I reach my decisions reluctantly. The Appellant is an elderly, unrepresented, disabled PAYE taxpayer who is clearly bewildered by his encounter with the tax system and shocked by his underpayment - which was caused by a HMRC coding error.
54.	In conclusion I note that Mr German’s letter of April 2010 states that he had tried to contact Time to Pay, and also that he was told his shortfall could be collected under PAYE. As with the exercise of discretion, I leave the resolution of these outstanding matters in the hands of HMRC. 
55.	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.

Anne Redston

TRIBUNAL CHAIR
RELEASE DATE: 23 February 2011

© CROWN COPYRIGHT 2011