Reasonable excuse cases continue to be found in favour of taxpayers, casting further doubt on HMRC’s internal policy regarding Reasonable Excuse (see our earlier post – ‘Death, disease or disaster’).

The trend continued in the P35 case of Eclipse Generic Ltd v HMRC.  The taxpayer claimed to have submitted their P35 online in April 2011 and stated they had received a confirmation from HMRC.

In August 2011, the taxpayer discovered that HMRC had not received this document and were levied with a late filing penalty on submitting the return in August.

The tribunal found that it was not possible for HMRC to accept a document twice, and as such it was a fact that the original return had not been received by HMRC.  However, they also found that due to system updates taking place at the time of the original submission it was possible there had been a fault, with the taxpayer incorrectly receiving an acknowledgment.

The tribunal were unable to quash the penalty on the grounds of fairness but stated that the circumstances meant that the taxpayer did have a reasonable excuse, and allowed their appeal.

It is interesting that the taxpayer had to take such a case to tribunal where it was found that the fault lay with HMRC’s system.  However, it does show the continued importance of challenging HMRC penalties and interpretation where a genuine excuse exists.

We recently wrote about Payroll Schemes and the Isle of Man Disclosure Facility with regard to agency workers and related workers, who may have entered into arrangements to try to reduce their tax burdens through payroll schemes in the Isle of Man.

As we mentioned, HMRC have been cracking down on these schemes for a number of years and have recently released a consultation document dealing with offshore employment intermediaries.

The proposals would mean that, in addition to the existing rules (which HMRC acknowledges already place responsibilities on UK businesses for PAYE and NICs), new rules would be created to try to counteract such avoidance.

The current proposals suggest that the tax would be met by the intermediary directly providing the services, or failing that from the end client.  Such proposals would mean that the worker would not have to suffer the liability themselves, however it remains to be seen if the proposals will remain as they are.  Lobbying from bigger businesses could see provisions more in line with IR35, which taxes the personal service company and therefore the worker, so clients should continue to monitor these developments.

Individuals concerned about their potential liabilities should consider coming forward under the Isle of Man Disclosure Facility if applicable, as this can provide big reductions on penalties, as well as providing peace of mind.  Please get in contact with us if you are concerned that you could be caught by the existing or proposed rules.

In the recent co-decision tribunal case of Morgan v HMRC and Donaldson v HMRC (TC 9096 & 8431) the procedure behind issuing £10 daily late filing penalties was challenged.

Background & Legislation

Schedule 55 of FA 2009 allows HMRC to levy penalties of £10 per day if a self-assessment tax return has not been filed within 3 months of the filing date.  Such can penalties can be issued for up to 90 days, meaning that the maximum daily penalties issued totals £900.

In order for the daily penalties to be valid the legislation requires that HMRC “decides” whether to impose the penalties and notifies the taxpayer of the decision.

The taxpayers in question argued that the SA returns and subsequent reminders issued did not satisfy the above conditions and therefore the penalties were not valid.

 The questions for the tribunal to address were:

– Did the fact that daily penalties were automatically issued by an HMRC computer constitute a decision?

– Did the SA return and/or reminders constitute a notice of the liability to the daily penalties?


The tribunal found that it had been decided at a senior level, and as a general policy, to impose daily penalties where there’s a default, and accordingly the HMRC computers were programmed to deal with this. To do otherwise would have meant up to a million individual decisions – a completely impractical exercise. The tribunal, by the chairman’s casting vote, therefore found that there had been a HMRC decision which met the requirements of schedule 55.

With regards to the notice of a penalty HMRC relied on the SA returns and reminders which stated:

 “If we still haven’t received your online tax return by 30 April (31 January if you’re filing a paper one) a £10 daily penalty will be charged every day it remains outstanding. Daily penalties can be charged for a maximum of 90 days, starting from 1 February for paper tax returns or 1 May for online tax returns.”

The tribunal found that the statutory requirement was not met as the documents were ambiguous.  This was because of the use of ‘will’ in the first sentenced followed by ‘can’ in the second.

The tribunal found that the text merely indicated that HMRC could impose daily penalties.  They felt that even applying a purposive construction the terms of either document were not clear enough to impose a penalty from a particular date.

The fact that two dates were mentioned was not the point; the vagueness of the documents was their downfall. Accordingly the appeal on the daily penalties was allowed.

Impact of The Case

Presumably HMRC will update the text of their SA returns and reminder notices accordingly to make sure a ‘notice’ is given.

However, given the decision it will be interesting to see whether other taxpayers challenge daily penalties previously issued and if HMRC will appeal the case.