Taxpayers have recently been successful in a number of appeals before the tax tribunal on the grounds of ‘reasonable excuse’, mainly in respect of late filing penalties. One such case is highlighted below. In addition, the approach of HM Revenue and Customs (HMRC) in a case involving a discovery assessment was criticised by the tribunal, which awarded costs against HMRC. Perhaps a pattern is developing here – the taxpayer strikes back!
In The Executors of David Atkins (deceased) v Revenue and Customs  UKFTT 468 (TC), HMRC had withdrawn a discovery assessment at a very late stage before an appeal against it was due to be heard. However, the appellants pursued an application for costs. The tribunal pointed out costs could only be awarded if HMRC had “acted unreasonably in bringing, defending or conducting the proceedings”. The deceased taxpayer had been a Lloyd’s ‘name’. Due to the way in which Lloyd’s activity is treated for tax purposes, it can be some time after the enquiry window is closed before a tax return can be finalised for a particular year. HMRC practice was therefore to open enquiries into returns, in order to keep Lloyd’s matters open. HMRC had guidelines for executors of Lloyd’s names to this effect, in connection with ‘Special Reserve Fund’ valuations and later adjustments to the tax return for the last period preceding death.
The deceased taxpayer's agent had sent HMRC a letter reminding them to open an enquiry. However, no enquiry was opened. HMRC subsequently sought to make a discovery assessment, as this was the only way of assessing tax in respect of the Lloyd's income following the closure of the enquiry window for the relevant tax return. Considerable work was undertaken by the taxpayer's agent in preparing for an appeal against the discovery assessment.
The tribunal pointed out that, for a discovery assessment to be made, the tax return must be wrong in some way, and considered that the return was made in accordance with correct practice, in conformity with HMRC guidelines, and was absolutely correct. The tribunal judge commented: "The problem in this case results entirely from the way in which HMRC have themselves failed to act in accordance with their own guidelines in failing to open an enquiry into the relevant return."
Penalties and Costs
The tribunal concluded that HMRC had forced the appellants to prepare for an appeal that involved considerable costs and no deserved merit. The Judge said: “HMRC have… been very unforthcoming to either the appellant or to me in admitting their fundamental errors”, and awarded the appellants their costs.
HMRC’s actions were also criticised in Hok Ltd V Revenue and Customs  UKFTT 433 (TC). In that case, HMRC sent the appellant company a penalty notice for £400 on 27 September 2010, in respect of late PAYE return forms P35 and P14, which were due by 19 May 2010. The penalty was calculated at £100 per month for four months. A further penalty notice for £100 was issued on 21 October 2010, as the returns had been filed on 15 October 2010. The company had been under the mistaken belief that the returns were not required because its only employee had ceased employment part way through the year. The company accepted that a penalty was due, but complained that if HMRC had notified the default sooner, it would have been remedied at a far earlier time, thus avoiding ongoing penalties. The company’s appeal was therefore based on the penalties being excessive. The tribunal considered that the company was entitled to rely upon the common law duty of a public body to act fairly in both its decision making process and the administration of its statutory powers. It stated: “We are in no doubt that such a body does not act fairly where it deliberately desists from sending a penalty notice, for four months or more, knowing that the effect will be to impose a minimum penalty of £500 upon somebody whose sin may be no more than oversight or forgetfulness.”
The tribunal noted that HMRC deliberately waits until four months have gone by and does not issue the first penalty notice until September in the year of default. Whilst appreciating HMRC’s stance that it had no
obligation to issue any reminder for outstanding returns, the tribunal had no doubt that “any right thinking member of
society” would consider that to be unfair and falling very far below the standard of fair dealing and conscionable conduct to be expected of an organ of the state.
here was no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months. The tribunal said that it is no function of the state to use the penalty system as a “cash generating scheme”. The tribunal considered that “it would be a very simple matter for HMRC to set its computer settings so that a default or penalty notice was sent out immediately after 19 May in any year, instead of some four months later.” There was nothing fair or reasonable about setting a computer system so that it does not generate a penalty notice until the return was four months late, thereby ensuring a penalty of not less than £500. The tribunal held that HMRC had “acted neither fairly nor in a
good conscience”, and that no penalty was chargeable over and above the £100 penalty for the first month.
Both cases should give some taxpayers some encouragement to challenge HMRC’s behaviour and practices if they seem to be unreasonable. It will be interesting to see whether, following the Hok case, HMRC will change its practice about penalty notices for late returns and start issuing them sooner after the filing date.