Taxpayer awarded costs over HMRC’s unreasonable conduct

A recent VAT case heard by the First-Tier Tribunal (Gekko & Company Ltd v HMRC (TC06029)) highlighted worrying aspects of HMRC’s handling of the case and even awarded costs against HMRC. The Tribunal clearly felt strongly about the case, with the decision stretching over 29 pages for a case involving an assessment to VAT of £69 and three assessments of penalties of £780, £8.85 and £10.35 respectively.

The decision begins by stating that it , “is a great deal longer than we would ordinarily write in a case involving such small amounts: this is because there are a number of disturbing features about the way the case has been conducted by the respondents (HMRC).”

The case involved a property developer company who HMRC claimed had made errors on their VAT returns, with the biggest one being an omission of £5,200 of output tax (which the Tribunal later found to actually be £4,880).

The penalty notices were found to be invalid because the original assessments had been withdrawn and new ones had not in fact been issued. The tribunal found that, even if they had been valid, the penalty of £780 should have been reduced to nil as the behaviour was careless but the disclosure was unprompted and that the other two penalties should be cancelled as there was no inaccuracy.

In deciding to award costs to the taxpayers, the Tribunal were particularly critical of HMRC. We enclose a passage from this below regarding HMRC’s change of opinion from an unprompted to prompted disclosure:

“We consider, having thought about this long and hard, that there are two possible explanations for this volte face. One is that there was incompetence on a grand scale. The other is that there was a deliberate decision to keep the dispute alive, when on the basis of the reviewing officer’s remarks it would have been discontinued, by seeking to revisit the “prompted” issue. The facts that have caused us not to dismiss this possibility include the minimal information about the change with no explanation and the hopelessly muddled response with its spurious justification that Miss Pearce sent when the appellant spotted the change. Of course we have had no evidence from those involved and do not intend in this decision to make any findings about the matter. But it is something we have to take into account in deciding whether HMRC’s conduct in this case was unreasonable.”

The Tribunal cancelled the VAT and penalties and awarded costs to the taxpayer.

Overall, this case seems to echo our recent experiences with HMRC and shows a worrying trend in decreasing quality of HMRC case handling and emphasis on winning at all costs, regardless of the merits of individual cases.

Bayliss – HMRC Seek Extra Penalties From Failed Avoidance Scheme

Another week and another case involving a failed tax avoidance scheme.

This time, perhaps more worryingly, HMRC were arguing that the return was submitted fraudulently or negligently by the taxpayer and therefore sought the extra penalties that would be due in such circumstances. This shows a new aspect of the targeting of anti-avoidance schemes and suggests users of schemes could expect the costs of failure to rise higher, whether in penalties or fees for defending them.

Ultimately, the taxpayer won in this case. Of particular interest was the fact that the Tribunal found that relying on the advice of a trusted accountant was helpful in suggesting that he had not acted negligently. It appears the courts confirm that obtaining suitable professional advice is worth paying for in the long run!

Mr Bayliss participated in a scheme marketed by Montpelier Tax Consultants (Montpelier). The scheme involved a Contract for Differences (CFD) and was sold as generating a £539,000 capital loss for Mr Baylis in 2006–07. It was agreed by all the parties that the scheme had failed and additional tax was due, however the taxpayer appealed against penalties raised by HMRC on the basis that ther return was submitted fraudulently or negligently.

The Tribunal determined that in accordance with established case law, in order to prove fraud HMRC had to prove that the appellant did not have an honest belief in the correctness of the return. The Tribunal was persuaded on the basis of the evidence and facts that Mr Bayliss did believe that his tax return was correct and so there was no fraudulent behaviour.

On the question of negligence, the Tribunal felt that the correct test was that set out in Blyth v Birmingham Waterworks Co (1856), that of ‘the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do’. They also considered the test in Anderson (decʼd) [2009], ‘to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done’.

HMRC used a number points to support their argument that Mr Baylis was negligent, including that:

  1. the transaction did not stand up to commercial scrutiny and the appellant failed to check the commercial reality;
  2. the appellant had not kept copies of the documentation, whereas a reasonable person would have done so;
  3. It was a complex financial transaction and the appellant should have obtained proper independent financial advice, but he relied on informal advice.

The Tribunal agreed with HMRC that some of the taxpayer’s behaviour could have been deemed to be careless, but on balance found that HMRC had not done enough to prove that the appellant was negligent in filing an incorrect return.

Interestingly, they felt that relying on his accountant was helpful in this respect, stating “We are persuaded that the appellant relied fully on Mr Mall, a chartered accountant on whom he had relied for a number of years, and on what he believed (based on Mr Mallʼs recommendation) to be Montpelierʼs expertise.”

The tribunal allowed the appeal on the basis that HMRC had not proven that Mr Bayliss acted fraudulently or negligently in submitting an incorrect return.

Special Circumstances – Penalty Reduced

A recent tribunal case (F Berrier v HMRC – TC03584) involved the use of a relatively little known aspect of the legislation, namely that HMRC have the power to reduce penalties, “if they think it right because of special circumstances” (FA 2007, Sch 24, para 11).  The more cynical might suggest that HMRC might never think it right to reduce a penalty, but a recent case showed that the courts may have the power to apply such reductions as well.

Background and Facts

The taxpayer began working for a securities broker in 2009 and received a sum of £25,000 in addition to his starting salary.  He claimed to believe this was a “golden hello”, but his employers were treating it as a “forgivable loan”, as noted in his employment statement.

The loan was subsequently written off in February 2011, and it included on his P11D as a taxable benefit for the 2010/11 tax year.  He was also provided with a note telling him to include the amount in his tax return for the year.

One completing his return, however, he did not include the loan. HMRC amended the return to include the £25,000 and levied a penalty for carelessness.

The taxpayer appealed the penalty, as he had referred to the sum in his 2009/10 return.

Tribunal Decision

The First-tier Tribunal agreed that the sum was a loan, and therefore the taxpayer was liable to income tax when the loan was written off under ITEPA 2003, s.62 and on the beneficial interest rate (i.e. 0%) under s.175. The charges were applicable to the 2010/11 tax year.

The tribunal found that the taxpayer should have shown this income on his 2010/11 return and agreed that the omission was careless.  He did not have reasonable excuse, as his claim that his wife had tidied away the P11D only made matters worse.  He should have gathered together the necessary documents before preparing his return.

However, as the taxpayer had referred to the loan on his 2009/10 return and therefore drawn HMRC’s attention to it, the tribunal felt that there were special circumstances under FA 2007, Sch 24 para 11 and that HMRC’s decision not to apply a reduction under this provision was incorrect.  The tribunal therefore applied a 25% reduction to the penalties.

The facts of this case were perhaps quite unusual, however it demonstrates the importance of pursuing all aspects of the legislation that could provide taxpayers with a reduction on penalties; seeking reductions due to special circumstances could well be another option where the a “reasonable excuse” cannot be applied to entirely wipe out a penalty.

Another Reasonable Excuse Appeal Allowed – Eclipse Generic Ltd v HMRC

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.

An Update on Reasonable Excuse: “Death, disease, disaster”?

We have commented on a number of court cases in the past dealing with the interpretation of “reasonable excuse” in the context of penalties.  It has been shown on a number of occasions that HMRC’s restrictive approach to the definition of reasonable excuse has gone further than the legislation ever intended, with no backing in case law.

Some examples of a reasonable excuse have included;

  • inability to pay (T James V HMRC (TC2527), Dudman Group Ltd v HMRC (TC1608))
  • failure of HMRC to provide online filing facilities (Paul & Annette Galbraith t/a Galbraith Ceramics (TC2639))
  • “special circumstances” which included redundancy (C Horne  v HMRC (TC2592))
  • HMRC communication failure (M Styles v HMRC (TC2599))

The cases where the inability to pay has successfully been claimed as a reasonable excuse is particularly interest bearing in mind the legislation specifies that lack of funds is not a reasonable excuse.  The tribunal appears to have taken the view that whilst lack of funds in itself is not a reasonable excuse, the circumstances that led to this can amount to a reasonable excuse.

With all this case law going against HMRC’s previous stance on reasonable excuse, have they changed their manuals and training of staff to reflect this?

Certainly, the tribunal decisions still filtering through from the courts suggest that HMRC have not changed their policy and we have seen further demonstration of this in recent discussions with HMRC.  A member of HMRC’s complaints department stated that as far as he was concerned, reasonable excuse meant, “death, disease or disaster” and refused to comment on recent tribunal decisions.

HMRC did, however, update their guidance, “SAM10090 –  Appeals, postponements and reviews: appeals: reasonable excuse” , on 13 March 2013.  The guidance is not as restrictive as the approach actually taken by HMRC in practice (“death, disease or disaster”), as they acknowledge that postal delays, loss of records, certain online filing issues and banking errors can constitute a reasonable excuse.

However, it still states that lack of online filing facility, shortage of funds and work pressures should never be accepted as reasonable excuses, despite the fact that cases have suggested that there are situations where these could count as a reasonable excuse.

For advisors and agents then, it is worth being aware of these developments and challenging penalties where a genuine excuse exists.   It is, however, disappointing that HMRC refuse to operate within the law and is particularly worrying where unrepresented taxpayers can be bullied into unfair penalties.   Perhaps, if the profession continues to appeal these penalties and win at tribunal, HMRC may be forced to finally change their ways.

Special Isn’t Necessarily Exceptional – White (TC02050)

Under the new penalty regime, which covers the majority of taxes, there are minimum and maximum penalty levels prescribed under the legislation based upon the behaviour and quality of disclosure made by a taxpayer.

However many are unaware that HMRC have the discretion to reduce a penalty below the minimum percentage if the failure (resulting in a penalty) arises as a result of ‘special circumstances’.

HMRC guidance states that this means the circumstances have to be  “exceptional”. However a recent tax tribunal found that if this definition was used the results would be too restrictive.  The judge said  that special circumstances were more akin to “something out of the ordinary, something unknown” and therefore they did not necessarily have to be exceptional.

The effect of this  was that HMRC had not correctly considered whether “special circumstances” applied.  Upon considering the facts the tribunal found that ‘special circumstances’ did in fact apply and therefore the original penalty was reduced by 60%.

It will be interesting to see whether HMRC use their power of discretion to reduce a penalty more widely in light of this case.

Penalty Discharged

On 27 September 2010 a charity organisation was issued with a £400 late filing penalty in reference to its PAYE P35 for 2009/10 which was due on the 19 May 2010.

However the penalty charge was issued when the return was 5 months late and the taxpayer was not notified at any time before.

The taxpayer’s accountant requested a review of the penalty as he believed he had filed the P35 online on 16 May 2010.

The tribunal stated that it was not legally correct to state that, once an assessment or charge had been raised by HMRC, the onus is on the taxpayer to prove it is incorrect.

Consequently, it was for HMRC to prove – on the balance of probabilities – that the P35 had not been filed by 19 May 2010 and a penalty was due.

The tribunal went on to state that TMA 1970 s118 did not define reasonable excuse in a way that required exceptional circumstances and it should therefore be given its ordinary meaning.

The accountant honestly believed he had submitted the return on time.  The tribunal found him to be an honest and candid witness and counsel for HMRC were forced to agree that this might amount to reasonable excuse even though it was not exceptional.

The tribunal also stated there was no logical reason for the delay in sending out the penalty notices for four months.

The tribunal upheld the appeal against the penalty in full, adding that HMRC had ‘neither acted fairly nor in good conscience’.

 This case has a wide-ranging impact on excuses for late filing of returns.

The tribunal ruling goes directly against HMRC’s longstanding view and published guidance that reasonable excuse equates to exceptional circumstances outside the taxpayer’s control.

The tribunal’s view was that reasonable excuse should be given its ordinary meaning.

HMRC to Identify Evaders Using “Web bots”

In their quest to collect more tax, HMRC are to use “Web bots”.

“Web-bots” refer to a script or software programme that is set up to trace words in internet pages or chatter.

HMRC believe that if they collate data on certain companies within specific trading areas they will be able to extrapolate turnover and/or expected profitability.

A general search on the internet for each client might be useful as a general check regarding profits declared.

Success for our Client

After 18 months of correspondence with HMRC we are proud to mention an excellent outcome for an Eaves & Co client.

The case revolved around whether a late election should be allowed. HMRC resisted the election until the pressure to bear from Eaves & Co regarding case law and the legislation became too much.

A significant amount of tax, interest and penalties will be saved by the client, which is down to our thorough and robust approach.

If you are under a tax investigation and live in Yorkshire or Lancashire call Eaves & Co for an initial conversation.

Changes to penalties for late CIS contractor returns

Penalties for late Construction Industry Scheme (CIS) contractor monthly returns are due to change from October 2011 onwards.

The new penalty regime could produce lower penalties than those under the current rules. A key change will be for new CIS contractors who will now have an upper limit to some of the penalties that are charged.

The upper limit will apply when new contractors first send a monthly return, where that return and any other late monthly returns that are submitted at the same time.

The new penalties do not start until October 2011, however, any contractor who is liable to penalties for filing a late monthly return prior to October 2011 is entitled to request that HMRC calculate the level of penalties under the new rules.  If this is less than the amount already charged, HMRC should agree to reduce the penalties to the lesser amount.

Eaves and Co Specialist Tax Advisors in Leeds are experienced in the construction industry scheme penalties and enquiries can assist in corresponding with HMRC to ensure the best position for our clients.