[2011] UKFTT 647 (TC)
TC01489
Appeal
number: TC/2011/04024
Penalty;
late filing; fairness; s98A(2)(a) TMA 1970. Common law fairness. Conscionable
conduct. Conspicuous unfairness. Oxfam (per Mr. Justice Sales) explained.
FIRST-TIER TRIBUNAL
TAX
FORESIGHT
FINANCIAL SERVICES LIMITED Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
GERAINT JONES Q. C. (TRIBUNAL JUDGE)
The Tribunal determined the
appeal on 20 September 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 28 May 2011
and HMRC’s Statement of Case submitted on 4 July 2011.
© CROWN COPYRIGHT
2011
DECISION
The Background.
1. The
appellant, Foresight Financial Services Ltd, has appealed to this Tribunal
against penalties totalling £600 imposed upon it by HMRC in respect of its late
filing of the End of Year Return (P35) required to be filed by an employer, on
or before the 19 May in any fiscal year. That requirement arises under
regulation 73 of the Income Tax (PAYE) Regulations 2003 and paragraph 22 of
Schedule 4 of the Social Security (Contributions) Regulations 2001.
2. The
appellant puts its appeal on the basis that it had a "reasonable
excuse" for its tardiness in filing the P35 for the year ended 5 April
2010 and, in effect, on the basis that there has been conspicuous unfairness on
the part of HMRC in failing to send out the first Penalty Notice timeously.
The Law.
3. This
is a case involving penalties. The fact of default has been admitted by the
appellant and thus it need not be proved in this appeal by HMRC adducing
reliable evidence thereof.
4. So
far as end of year returns are concerned section 98A(2)(a) Taxes Management Act
1970 provides that any person who fails to make a return in accordance with the
relevant provisions “shall be liable to a penalty or penalties of the
relevant monthly amount for each month (or part of a month) during which the
failure continues ...........”.
5. So
far as the State and its several organs are concerned (HMRC being one such
organ), there is a common law duty of fairness or, to put it in another way, a
duty not to act in a manner that is conspicuously unfair towards any
citizen/person. In R v Secretary of State for the Home Department [2003] EWCA Civ 364 at paragraph 69, the Court of Appeal expounded the principle
as related to the decision making process under scrutiny in that appeal. In Secretary
of State for the Home Department v Thakur [2011] UKUT 151 the Upper
Tribunal, in paragraph 12 of its Decision, also recognised that principle,
again in the context of a decision making process.
6. HMRC
may well take the position that given the wording of section 98A(2)(a) Taxes
Management Act 1970, there can be no answer to its demand for penalties
regardless of the period of time that has elapsed prior to it sending out a First
Penalty Notice. It may argue that this Tribunal must proceed on the basis that
its jurisdiction is solely statutory and so it can do no more than strictly apply
the relevant revenue statutes. It may argue that in this Tribunal there is no
place for the application of any common law principles, however sound they
might be.
7. Thus
one of the first issues for consideration is whether sound common law
principles must be left outside the door of the Tribunal room, never to cross
its threshold.
8. A
convenient starting point is the decision of the House of Lords in CEC v J
H Corbitt (Numismatists) Ltd [1980] STC 231 where the House of Lords had to
determine whether, in relation to an appeal against an assessment which
depended upon a prior exercise of a discretion by the Commissioners, the
Tribunal had power under the then equivalent of section 83 Value Added Tax
Act 1994 (section 40 Finance Act 1972) to review the exercise of the
discretion. The House of Lords held that the form in which the discretion was
given precluded any such review and that if the Act had been intended to give
the Tribunal a supervisory jurisdiction, clear statutory words would have been
expected.
9. In
CEC v National Westminster Bank plc [2003] STC 1072 HMRC had relied
upon a defence of unjust enrichment against an appellant's claim for repayment
of VAT, but had not invoked that defence against a similar claim by one of the
appellant's commercial rivals. The taxpayer bank complained of unfair
treatment and Mr Justice Jacob had to determine whether the Tribunal had a
supervisory jurisdiction in respect of the conduct of HMRC. Following the
earlier decision of Mr Justice Moses in Marks and Spencer plc v CEC [1999] STC 205 he decided that the Tribunal had no jurisdiction to supervise the
conduct of HMRC and/or so to quash its decision.
10. It is currently
suggested that the decision of Mr Justice Sales in Oxfam v HMRC [2010] STC 686 leads to a different result because, in that case, the learned judge
decided that the First Tier Tribunal did have jurisdiction to deal with the
taxpayer’s case which was (in part) put on the basis that it had a legitimate
expectation that a given approach to its tax affairs would be applied by HMRC.
It is important to appreciate exactly what the learned judge did deal with and
rule upon in that case – as to which, see below.
11. It may be said
that some decisions of this Tribunal have followed the Oxfam decision
and others have declined to follow it.
12. In my judgement
the Oxfam decision cannot be properly understood whilst there is a
misunderstanding of the differing principles involved. There has, so far, been
a failure to advert to the fundamental difference between :
(1)
the First Tier Tribunal exercising a supervisory jurisdiction by
way of judicial review, and
(2)
the First Tier Tribunal applying sound principles of common law;
which has nothing to do with exercising a supervisory jurisdiction by way of
judicial review.
13. When I have
regard to section 15 of the Tribunals Courts and Enforcement Act 2007 it
is notable that the Upper Tribunal has been given a Judicial Review power
because that section specifically provides that it may grant relief of the kind
that ordinarily comes within Judicial Review powers. No such power is given to
the First Tier Tribunal. Nor, in my judgement, has the First Tier Tribunal ever
claimed to exercise or purported to exercise such powers; any more than Mr
Justice Sales said that it has any such powers.
14. What, in my
judgement, Mr Justice Sales decided in the Oxfam case was that sound
principles of the common law are not to be left languishing outside the Tribunal
room door when an appeal is heard in the First Tier Tribunal. He decided that
they are a welcome participant at the appeal proceedings and, in appropriate
circumstances, must be applied. There is plainly a stark distinction between
the Tribunal, on the one hand, applying sound common law principles, which
amounts to the application of substantive common law to the appeal proceedings and,
on the other hand, seeking to exercise a supervisory power by way of Judicial
Review. Once that distinction is drawn and kept in mind, it seems to me that
the authorities are readily understood and reconciled.
15. If support for
that proposition is needed it is to be found in the line of cases Wandsworth
London Borough Council v Winder [1985] 1 AC 461, followed in Clark v
University of Lincolnshire and Humberside [2000] 3 All ER 752 as applied
and explained in Rhondda Cynon Taff Borough Council v Watkins [2003] 1 WLR 1864. In the latter decision the Court of Appeal decided that in
private law proceedings relating to the possession of land, the defendant was
not and could not be precluded from relying upon what the claimant characterised
as a public law defence, absent a clear provision appearing in a statute, court
rules or authority to preclude him from so doing. There was no such clear
statutory provision, no court rules precluding such reliance and no authority
precluding such reliance. Indeed, the earlier authorities supported the
ability of the defendant to rely upon something that amounted to a public law
defence in private law proceedings for the possession of land.
16. That line of
authority indicates, in my judgement, the application of sound common law
principles by way of a defence to a claim, notwithstanding that the pleaded
defence would independently found the basis for relief in Judicial Review
proceedings.
17. Moreover, if we
look at paragraphs 61 – 71 of the judgment of Mr. Justice Sales in Oxfam v
HMRC [2009] EWHC 3078 (Ch) it seems clear to me, and is implicit in what he
said, that he was recognising that common law principles are to be taken into
account by the Tribunal. He was not saying, and nowhere did he say, that the
First Tier Tribunal could exercise a judicial review function. One could not
reasonably think that such a learned judge would have failed to have had in
mind the clear distinction between applying common law principles (on the one
hand) and exercising judicial review powers (on the other hand). The fact that
he did not advert to the Winder line of authorities (see above) does not
detract from that point.
18. The statutory
penalty regime under the 1970 Act was not and is not intended by Parliament to
be a revenue raising device. The obvious intention of Parliament was to
implement a penalty regime so as to encourage compliance and, in cases where
compliance does not take place, to levy a proportionate penalty. It cannot
have been within the contemplation of Parliament that where HMRC was/is given
the power to levy a penalty of £100 (on a small employer) if there has been a
default of one month in filing a P35, that HMRC should desist from timeously sending
out a Penalty Notice. That must be so, given HMRC’s duty to collect the penalty
once it has accrued due. It cannot have been the intention of Parliament, or within
its contemplation, that HMRC would desist from sending out a Penalty Notice for
many months (with the effect that unless the defaulter suddenly awoke to its
default and remedied it, further monthly penalties would inevitably accrue). Such
a failure on the part of HMRC (by engaging in wholly unnecessary delay) would
be and is a failure to implement the penalty regime stipulated by Parliament,
as Parliament intended it to be implemented. It is unthinkable that Parliament would
intend a manifestly unjust situation to arise as a result of HMRC being
dilatory in sending out a First (or subsequent) Penalty Notice.
19. HMRC may argue (as
it did in its Review decision in this case) that it is not under a statutory
obligation to issue any reminder to an employer to file a P35. That is correct.
Nonetheless, as and when a First (or subsequent) Penalty Notice is sent it
inevitably has the effect of being a de facto reminder. That is
something that HMRC will inevitably realise; as any such realisation is
dictated by common sense.
20. HMRC may pose the
question : How can it be conspicuously unfair for it to desist from issuing a First
Penalty Notice for four months or thereabouts in circumstances where it is
under no statutory obligation to issue any form of reminder. The answer is
straightforward. The answer is that it is plain from the statute that it was/is
the intention of Parliament that HMRC will timeously enforce the penalty regime
and thus it is an inevitable finding that it was/is the intention of Parliament
and within its contemplation that HMRC will act timeously in so doing. HMRC
has not argued, nor could it sensibly argue, that once it issues a First
Penalty Notice, that notice does not act as a de facto reminder,
especially to those whose only sin might be forgetfulness or oversight.
21. As explained
above the general proposition that the common law has no part to play in any
proceedings before a statutory Tribunal is, in my judgement, wrong. This
Tribunal applies common law principles in just about every case that it hears
and determines. For example, there is a common law duty to conduct proceedings
in a fair and open manner applying, amongst others, the principle audi
alterem partem. There is a common law duty upon a judge to recuse himself
if it would be inappropriate for him to sit on a particular case because it
might give rise to a perception of partiality. The fact that those are
procedural matters is not, in my judgement, a basis for differentiating between
applications of the common law in respect of those procedural issues and the
application of the common law’s other well established important substantive principles
such as the duty of a public body to act fairly or, perhaps I should say, its
duty not to act in a manner that is conspicuously unfair. That is a duty that
arises at common law. Similarly, it should be remembered that the Tribunal
applies statutory provisions other than those found in revenue specific
statutes. For example, the Tribunal has to apply section 2 European
Communities Act 1972, which requires Courts and Tribunals to give effect to
rights, powers, liabilities, obligations and restrictions from time to time
created or arising by or under the Treaties (as defined).
22. Further, in
deciding appeals it is often necessary to decide whether, for example, a
contract exists, which necessarily turns upon an application of common law
principles.
23. It is for HMRC
to prove that a penalty is due. In this case that requirement is satisfied
because the appellant, by its letter of 29 November 2010, admits its delay and
the author of the letter, the appellant's Director, Mr Owen, says “I would
be grateful if you would accept this letter as an appeal against these
penalties as I was unaware that the form had not been filed and this was due to
an oversight. The form was prepared on the 20 April 2010 and the forms P60
given to the relevant employees following the payment of the PAYE and NI for
the quarter. However, I was unaware that the relevant forms had not been filed
over the Internet until the first penalty notice was received in September
2010, which came as a complete shock as I believed the forms had been
submitted.” He does not explain the basis upon which he held any such
belief.
The Facts.
24. As set out
above, the default until the 21 October 2010 is admitted.
25. The first
Penalty Notice was issued by HMRC on 7 September 2010, just twelve days short
of four months from the default date (19 May 2011). Even then, assuming that
the First Penalty Notice was received within due course of post, within two
days or so of posting, the P35 was not filed online until 21 October 2010. A
Final Penalty Notice was issued on the 1 November 2010 in the sum of £200, the
initial Penalty Notice having been in the sum of £400.
26. HMRC has put
forward no explanation whatsoever for its failure to send out a First Penalty
Notice within a reasonable time of the default being known about on the 20 May
2010.
27. I am entitled to
take judicial notice (based upon experience of sitting in a specialist
Tribunal) of the fact that where a taxpayer defaults in sending in a VAT return
on time, or defaults in paying the amount of VAT due on time, a Default Notice
or Surcharge Notice (whichever is appropriate) is usually sent out within 14 –
21 days. I can and do take judicial notice of that fact. In a VAT default case
the penalty (if applicable) does not increase with the passage of time, by
contrast to the penalty regime for failing to file an end of year return by the
19 May. Thus in a VAT case HMRC has no interest in delaying sending out the Penalty
Notice (where applicable), as the penalty does not increase as time goes by. It
may be otherwise in P35 default situations.
28. In contrast, the
experience of this Tribunal is that in respect of penalties for the late filing
of end of year returns, HMRC delays sending out the First Penalty Notice for 4
months or thereabouts. It gives no explanation for and has provided no
justification for such tardiness. I have no doubt that Penalty Notices are
computer-generated and that HMRC could, if it so wished, set its computer system
to generate a Penalty Notice soon after 19 May in each year just as easily as
it now sets its computer system to generate such Penalty Notices almost four
months post default. In VAT default cases HMRC receives no greater monetary
sum if it delays demanding the penalty and so it chooses to send them out
promptly. The converse is true in a case involving the late filing of end of
year returns, where the penalty increases month on month.
29. The question would
thus arise in the mind of any fair-minded objective observer as to whether this
is something done deliberately by HMRC so as to increase the penalty monies
received in respect of P35 cases, given that additional penalties accrue whilst
the default continues. In many cases the continuing default may represent no
more than the sin of oversight or forgetfulness which, had a timeous First
Penalty Notice been issued, would, in many cases, be remedied forthwith.
30. In this case the
First Penalty Notice was issued on the 7 September 2010 but the appellant still
did not file its end of year return until the 21 October 2010. Thus it took it
a further six weeks to make the filing even after it had received a belated de
facto reminder.
31. Nonetheless the
fact remains that there was conspicuous unfairness by HMRC in failing to send
out a First Penalty Notice until almost four months post default. That is a
serious but inevitable charge to be laid at the door of HMRC in this kind of
penalty case. The appellant was not given a timeous de facto reminder
of its default during an entire period of three months and nineteen days during
which, had an appropriately timed First Penalty Notice been sent to it, it
could and, as I find, would have avoided some (but not all) of the additional
penalties accruing. There can be no doubt that it was the duty of HMRC
to act promptly in sending out the First Penalty Notice. I find as a fact that
it did not do so. I find as a fact that the duty upon HMRC to act promptly
requires it to send out a First Penalty Notice not more than 14 days after the
19 May in each year.
32. In my judgement
the conduct of HMRC in desisting from sending out a timeous First Penalty
Notice gives rise to conspicuous unfairness which would be recognised as such
by any fair-minded objective observer. Such an objective observer would
recognise such conspicuous unfairness being caused by HMRC choosing not to
notify the appellant that it had incurred any penalty until well into September
2010. In my judgement, it was/is not the intention of Parliament, or within
its contemplation based upon s98A Taxes Management Act 1970 (and its
other provisions), that HMRC would or should desist from acting timeously in
issuing a first (or other) Penalty Notice.
33. A fair minded
objective observer would readily identify conspicuous unfairness from the
following :
(1)
HMRC’s failure to comply with the obvious intention of Parliament that
where a penalty is incurred, that penalty should be promptly notified to and
collected from the transgressor.
(2)
The complete lack of any explanation for, or justification of, HMRC’s
dilatoriness in failing to send out a First Penalty Notice for four months or
thereabouts.
(3)
The fact that HMRC notifies and collects penalties or surcharges for
failing to file a VAT return or failing to make a VAT payment, with expected
promptness. By contrast, it shows no such inclination to act with promptitude
in cases involving a penalty for failing to file end of year returns, which
just happen to incur increasing penalty sums as time goes by.
(4)
By failing to act promptly in notifying and collecting penalties due for
a failure to file an end of year return on time, HMRC is thereby failing to
give effect to the intention of Parliament that it should so act.
(5)
It is an overwhelming inference that if HMRC can set its computer system
to notify VAT penalties promptly, its computer system could also be persuaded
to notify late filing penalties in respect of end of year returns, with equal
promptness.
34. In my judgement
the only fair and just outcome to this appeal is that as a result of the
conspicuous unfairness referred to above, which meant that the appellant had no
prompt de facto reminder that its default needed to be remedied,
the penalty relating to the period of conspicuous unfairness, which I find on
the facts of this case to be three months, should be disallowed so as to negate
the effect of that identified conspicuous unfairness.
35. The appellant
also contends that it has a reasonable excuse for its default. The letter from
Mr Owen, referred to above, does not contend that he reasonably and honestly
believed that the necessary end of year return had been filed on or before the
19 May 2010; instead, it says that the filing did not take place, as a result
of an oversight. He does not expand upon the nature or extent of that
oversight. For there to be a "reasonable excuse" there are only two
preconditions. They are:
(1)
that the appellant puts forward an excuse, and
(2)
when viewed objectively, that excuse is properly to be characterised as
reasonable.
36. The words
"reasonable excuse" are not defined by the definition section of the
Taxes Management Act 1970. They are words in ordinary and everyday use and
must be given their natural and ordinary meaning absent Parliament specifying
that they are to bear a statutorily ascribed meaning.
37. In my judgement
the internal failing of the administrative procedures within the appellant
company, which gave rise to the (unexplained) oversight, do not amount to an
excuse which, when viewed objectively, can properly be characterised as
reasonable.
38. HMRC may contend
that as the penalty regime is a statutory regime, this Tribunal has no
jurisdiction to substitute a sum but only to uphold the penalty or set it aside
(in whole or in part) in respect of any period for which a reasonable excuse is
demonstrated. I recognise a further exception in law, which is that where HMRC,
through its conspicuous unfairness and failure to operate the penalty regime in
the manner that was and is intended by and in the contemplation of Parliament,
the common law principles that I have identified above are sufficient to
justify this Tribunal mitigating or setting aside part of the penalty, in
appropriate factual circumstances.
39. Applying those
principles this appeal is allowed in part and the penalty reduced to £300.
40. 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.
Decision.
Appeal allowed in part.
The penalty is reduced to £300.
TRIBUNAL JUDGE
RELEASE DATE: 5 OCTOBER 2011
