[2011] UKFTT 336 (TC)

TC01196

Appeal number:  TC/2010/00051

INCOME TAX - PAYE - surcharge for late payment - scope of Regulation 204(5) appeals - whether reasonable excuse applicable - no - whether disproportionate - no - appeal dismissed

FIRST-TIER TRIBUNAL

TAX 
	
E S G SECURITY LTD 
Appellant

-and-

THE COMMISSIONERS FOR HER MAJESTY’S 
REVENUE AND CUSTOMS
Respondents
 		         
	Tribunal: Paulene Gandhi (Tribunal Judge)
                 Julian Stafford  (Tribunal Member)	

The Tribunal determined the appeal on 4th October 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 26 November 2009, HMRC’s Statement of Case submitted on 17 February 2010 and the Further Statement of Case submitted on 12 May 2010 and the Appellant’s Reply dated 26 February 2010 and 29 June 2010.

CROWN COPYRIGHT 2011

DECISION

1.  This is an appeal against a surcharge of £2,519.06 issued on 30 April 2009 for late payment of PAYE on 4 occasions covering the 2007-08 and 2008-09 tax years.  The surcharge relates to four Default Notices which were issued on 30 July 2007, 28 September 2007, 30 June 2008, and 26 February 2009.  

2.   The appellant, E S G Security Ltd (“the company”), requested full written findings of fact and reasons for the decision by letter of 13 December 2010.  

3.    This decision sets out our findings of fact and reasons.

The evidence

4.    We were provided with documentation by HMRC and the company.  We have considered all the documentary evidence before us with the following being the most pertinent to our decision:

•	Appeal to HMRC dated 11 May 2009 
•	HMRC’s response to the appeal against the Surcharge Notice dated 3 September 2009
•	Request for a review dated 7 September 2009
•	Review dated 23 November 2009 
•	Appeal to the tribunal dated 26 November 2009
•	HMRC’s Statement of Case dated 17 February 2010
•	Appellant’s Reply dated 26 February 2010
•	Further Statement of Case submitted on 12 May 2010
•	Appellant’s Reply dated 29 June 2010

The law 

5.  From 2004/2005 the Income Tax (Employment) (Amendment) Regulations 2003 (“the Regulations”) required large employers to pay PAYE in full and on time by an approved electronic method.  The Regulations have subsequently been repealed but were in force for the tax years we are considering.
 
6.      The Regulations in so far as relevant to this appeal are the following:
 
68 (1) This regulation applies to determine how much an employer must pay or can recover for a tax period.
(2) If A exceeds B, the employer must pay the excess to the Inland Revenue.
(3) But if B exceeds A, the employer may recover the excess either—
(a) by deducting it from the amount which the employer is liable to pay under paragraph 
(2) for a later tax period in the tax year, or
(b) from the Board of Inland Revenue.
(4) In this Regulation-
A is-
(a) the total amount of tax which the employer was liable to deduct from relevant payments made by the employer in the tax period, plus
(b) the total amount of tax for which the employer was liable to account in respect of notional payments made [or treated by virtue of a retrospective tax provision as made,] by the employer in that period under regulation 62(5) (notional payments);
B is the total amount which the employer was liable to repay in the tax period.
69 (1) An employer must pay amounts due under regulation 68(2)-
(a) within 17 days after the end of the tax period, where payment is made by an approved method of electronic communications
(b) within 14 days after the end of the tax period, in any other case.
191 (1) “Large employer” means an employer treated as paying PAYE income to 250 or more employees at the specified date.
 (3) An employer is treated as paying PAYE income to an employee at the specified date if the employer—
(a) is required at that date by these Regulations...to prepare or maintain a deductions working sheet in respect of the employee, and
(b) has not sent to the Inland Revenue Part 1 of Form P45 in respect of that employee.
199 (1) A large employer to whom an e-payment notice in respect of a tax year has been issued must use an approved method of electronic communications to make specified payments.
(2) “Specified payments”, in this Chapter, means payments of tax under regulation 68 (periodic payments to and recoveries from the Revenue) in respect of tax months in the tax year to which the e-payment notice relates.
(3) The Board of Inland Revenue may give specific or general directions—
(a) suspending, for any period during which the use of an approved method of electronic communications for the making of specified payments is impossible or impractical, any requirement imposed by these Regulations relating to the use of such methods,
(b) substituting alternative requirements for the suspended ones, and
(c) making any provision that is necessary in consequence of the imposition of the substituted requirements.
201(1) This regulation applies if an employer is required to make a specified payment by an approved method of electronic communications in accordance with regulation 199.
(2) The employer is in default if the specified payment is not received in full by the Inland Revenue (whether by an approved method of electronic communications or otherwise) on or before the date by which that payment is required in accordance with regulation 69 (due date for payments of tax).
(3) But the employer is not in default if—
(a) the employer had a reasonable excuse for failing to make the specified payment in a manner which secures that it is received in full by the Inland Revenue on or before the applicable due date, and
(b) the specified payment is received in full by the Inland Revenue without unreasonable delay after the excuse ceased.
(4) Inability to pay is not a reasonable excuse for the purposes of paragraph (3)(a).
(5) A payment is not treated as received in full by the Inland Revenue on or before the date by which that payment is required in accordance with regulation 69 unless it is made in a manner which secures (in a case where the payment is made otherwise than in cash) that, on or before that date, all transactions can be completed which need to be completed before the whole amount of the payment becomes available to the Inland Revenue.
202 (1) The Inland Revenue must issue a default notice to any person who appears to be in default under regulation 201 in respect of a specified payment.
(2) A person may appeal against a default notice by giving notice to the Inland Revenue within 30 days of the issue of the default notice.
(3) The grounds of appeal are-
(a) that the person is not in default, or
(b) that the person is not a large employer, subject to paragraph (5).
(4) If the appeal is successful the default notice must be withdrawn.
(5) Paragraph (3)(b) does not apply if, following an appeal under regulation 200, the e-payment notice was not withdrawn.
(6) Regulation 217 (appeals: supplementary provisions) applies to appeals under this regulation.
203(1) An employer in default in respect of any specified payment to whom—
(a) a default notice under regulation 202, and
(b) a surcharge notice under regulation 204,
have been issued, is liable to a surcharge.
(2) The surcharge is the sum of the surcharges, calculated in accordance with paragraph (3), in respect of each default relating to the tax year in which were made the relevant payments to which the specified payment referred to in paragraph (1) relates.
(3) The surcharge in respect of each default is the specified percentage of (A − B).
(4) In paragraph (3)-
(a) A is the total amount of tax due for the tax year in which the relevant payments to which the specified payment relates were made;
(b) B is the total of the amounts deducted from A under-
(i) rule 1 of regulation 7(2) of the Working Tax Credit (Payment by Employers) Regulations 2002(1);
(ii) regulations 4, 5 and 6 of the Statutory Maternity Pay (Compensation of Employers) and Miscellaneous Amendment Regulations 1994(2),
(iii) regulations 3 and 5 of the Statutory Paternity Pay and Statutory Adoption Pay (Administration) Regulations 2002(3), and
(iv) regulation 44B of the Income Tax (Sub-contractors in the Construction Industry) Regulations 1993(4);
(c) the specified percentage is determined by reference to the number of the default during a surcharge period in accordance with Table 8.
Table 8
Specified percentage for each default in a surcharge period
Default No (within a surcharge period)  Specified percentage
1st                                                               0%
2nd                                                              0%
3rd                                                               0.17%
4th                                                               0.17%
5th                                                               0.17%
6th                                                               0.33%
7th                                                               0.33%
8th                                                               0.33%
9th                                                              0.58%
10th                                                            0.58%
11th                                                            0.58%
12th and subsequent defaults                    0.83%
(5) A surcharge period is a period which-
(a) begins on the day following the date by which payment is required in accordance with regulation 69 for the first specified payment in respect of which the employer is in default, and
(b) ends at the end of a tax year in relation to which the employer has not been in default in respect of any specified payment.
(6) A surcharge payable under this regulation is payable 30 days after the issue of the surcharge notice.
(7) Section 102 of TMA (5) (mitigation of penalties) applies to a surcharge payable under this regulation as if it were a penalty.
204 (1) The Inland Revenue must issue a surcharge notice to an employer who has been in default on three or more occasions during a surcharge period and consequently will be liable to a surcharge under regulation 203.
(2) The surcharge notice must show the total surcharge liability for the tax year.
(3) The surcharge notice must be issued within 6 years of—
(a) the end of the tax year, or
(b) if earlier, the date on which the employer delivered a return in accordance with regulation 73 (annual return of relevant payments liable to deduction of tax (Forms P35 and P14)).
(4) An employer may appeal against a surcharge notice by giving notice to the Inland Revenue within 30 days of the issue of the surcharge notice.
(5) The grounds of appeal are-
(a) that the number of defaults stated in the notice is incorrect, or
(b) that the amount of the surcharge is incorrect.
(6) But paragraph (5)(a) does not apply in respect of a disputed default which has already been the subject of an appeal under regulation 202, following which the default notice was not withdrawn.
(7) Parts 4, 5 and 6 of TMA (assessment, appeals, collection and recovery) apply to the surcharge notice as if it were an assessment and the amount of the surcharge was tax charged by the assessment, subject to paragraphs (4), (5) and (8).
(8) On an appeal section 50(6) to (8) of TMA (procedure) do not apply, but the Commissioners may-
(a) if it appears to them that no surcharge has been incurred, set the surcharge notice aside,
(b) if the amount of the total surcharge liability appears to them to be correct, confirm the surcharge notice, or
(c) if the amount of the total surcharge liability appears to them to be incorrect, increase or reduce it to the correct amount.
(9) Regulation 217(3) (appeals: supplementary provisions) applies to appeals under this regulation
The Facts 

7.     The due date for the company’s payment of PAYE is 22 July 2007, 22 September 2007, 22 June 2008, and 22 February 2009 instead of 19th of those months, because the company was allowed the extra three days allowed for electronic filing under Regulation 69(a) as set out above. 

8.    	There is no dispute between the parties that payment of PAYE was made one to two days late on four occasions.  We therefore make the following findings of fact.

9.     The following payments were received late by HMRC:

Year    		Month    	 	Days late 	Amount 
2007-08          	3			1		£52,514.23
2007-08		5 			2 		£64,233.68
2008-09 		2 			1		£79,914.68
2008-09                  10                                 1                     £57,388.50

10.   On 30 July 2007 a Default Notice was issued for the late month three payment for 2007-08.  On 28 September 2007 a Default Notice was issued for the late month five payment for 2007-08.  On 11 February 2008 a warning letter was issued to the director of the company advising that two Default Notices have already been issued and if the company incurs a further default they will be liable to a surcharge.  On 30 June 2008 a Default Notice was issued for the late month 2 payment for 2008-09.  On 26 February 2009 a Default Notice was issued for the late month 10 payment for 2008-09.  On 30 April 2009 a Surcharge Notice was issued to the company advising them that a surcharge of £2519.06 had arisen due to late payments of PAYE.

11.  The company contacted the Business Payment Support Line (BPSL) as they were considering asking for time to pay their PAYE payments. It is not known what date they contacted the BPSL but they decide not to ask for a payment arrangement to be set up.

12.     The company is a large employer i.e. with 250 employees or more.

13.    Accordingly we find that the company paid its PAYE late on each of the occasions set  out above.

The company’s submissions 

14.    In essence the company states the following:

a) They were suffering due to an economic downturn in business and contacted the BPSL for advice.  They were told that if an arrangement was entered into they could spread their repayment over a longer period of time without incurring a penalty.

c) Instead of entering into an arrangement with the BPSL they felt obliged to try to make their payments on time and it was only on two occasions they were late. They made every effort to pay without delay or by making a payment on account.  It is unjust to penalise them when thousands of companies are allowed several months to pay their PAYE and do not get fined or have to pay interest. 

e) The dates when they were one or two days late related to weekends where the date of payment fell on a weekend and thus the company paid on the next working day after the weekend.

f) The company is struggling but they did all they could to meet their obligations and were only one to two days late on two occasions in 2008-09 and it is unfair and harsh  to issue a surcharge in these circumstances.

HMRC’s submissions 

15.    HMRC states the following:

a) There are no valid grounds of appeal.  A valid appeal can only be accepted when documentary evidence can be provided to show payment was made in full and on time or the company are not a large employer (i.e. more than 250 employees).

b) Although the company contacted BPSL they did not enter into a time to pay arrangement and therefore should have made their payments in full and on time.

c) The legislation does not differentiate between a payment made one day late or several days late. All late payments are treated the same and incur the same payment default surcharge.

d) Although the company were late paying on two occasions during 2008-09, this in itself would not have given rise to a surcharge. They had also been late on two occasions in the previous year (2007-08). Surcharges only arise after the company has paid late on three occasions. If the company had not paid late during the 2007-08 period they would not have incurred the surcharge for 2008-09 as they would only have had two late payments.

Discussion

16.   The company states that there is a reasonable excuse for the late payment of their PAYE or alternatively that it is disproportionate to issue a surcharge for £2,519.06 when they were only one to two days late in paying their PAYE, particularly as payment fell on a weekend and they paid on the next working day.  

17.   	In our view reasonable excuse is not a matter that we can take into account in relation to an appeal against a surcharge under Regulation 204(5).  

18.   It is clear from the Regulations that reasonable excuse is specifically provided for in an appeal against any Default Notice issued (see Regulations 201 and 202).  In this case there is no evidence before the tribunal of any successful appeal against any of the Default Notices issued on the grounds that the default did not occur or that there was a reasonable excuse for the default. 

19.   	However where there is only an appeal against the surcharge issued the grounds of appeal are limited to either challenging the number of defaults stated in the Surcharge Notice or by challenging the amount of the surcharge (Regulation 204 (5)).  

20.  	Four Default Notices were issued by HMRC within the surcharge period.  The Regulations states that where there are three or more defaults during the surcharge period HMRC must issue a Surcharge Notice.  

21.   The company has not disputed the fact that they were late in paying their PAYE on four occasions in the tax years 2007-08 and 2008-09 albeit only one to two days late.  The company has also not disputed the actual amount of the surcharge of £2519.06.   

22.  It is clear from the above discussion that the grounds of appeal do not fall within Regulation 204(5)(a) or (b) of the Regulations.

23.  Further the tribunal finds that we have little evidence before us that the PAYE scheme/surcharge is disproportionate in the sense of, as Simon Brown LJ put it in International Transport Roth GmbH v Home Secretary [2003] QB 728, “not merely harsh but plainly unfair”.  The question in that case was whether fixed penalties imposed on hauliers whose vehicles were found to contain clandestine entrants to the UK, with limited opportunity for escape from the penalty, no possibility of mitigation and no right of access to an independent tribunal, were disproportionate. As recently confirmed in Enersys Holdings UK Limited v The Commissioners for Her Majesty’s Revenue and Customs MAN/09/0668 (a VAT case) there is no material difference between Community Law and Human Rights Convention concepts in this respect. 

24.   The PAYE scheme may at first sight seem harsh because the grounds of appeal against a surcharge are so narrow.  However before the Surcharge Notice was issued the company were in breach of the Regulations on at least three previous occasions.  A Default Notice was issued on each occasion the company was in default and the company had the opportunity to appeal against each of these Default Notices on the grounds that the default did not occur or that there was a reasonable excuse for the defaults.  Further after the second default occurred the company was issued with a warning letter which stated that if the company was in default again a surcharge would be issued.  

25.   The scheme is meant to encourage the timely payment of PAYE.  The company were given two chances to ‘get their house in order’ and ensure subsequent PAYE payments were made on time.  If subsequent payments had been made on time then the surcharge would not have been issued.  Further the company could have, but chose not to, set up a time to pay arrangement.  If they had set up such an arrangement but decided to make early repayments they could have done so.  It is also the company’s responsibility to ensure that HMRC receive cleared funds by the due date and where this falls on a weekend, to instigate payment in sufficient time so that payment is received the working day before the weekend.   For these reasons the fact that the payments were only late by one or two days in our view does not make either the scheme or the amount of the surcharge unfair.  

26.  	Further we have been provided with no evidence of the company’s financial circumstances, such as the company’s profit/turnover and the amount of the surcharge compared to the profit/turnover.  We have not been provided with a copy of the company’s bank statements to enable the Tribunal to ascertain how paying £2,519.06 would affect the company.  Further we note that the amount of the penalty is only 0.17% of the amount of the tax due.  There is simply no evidence before us that the surcharge or the PAYE scheme is “not merely harsh but plainly unfair”.  

Decision

27.     We confirm the surcharge and dismiss the appeal.
			
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.

TRIBUNAL JUDGE
RELEASE DATE: 20 MAY 2011