The penalty regimes for failure to pay tax (FA 2009, Sch 56) and failure to make returns (FA 2009, Sch 55) can result in significant penalties in some cases. One day can make all the difference, in terms of whether a return is on time, or is late and incurs a penalty. It can sometimes be difficult to establish when HMRC has received a payment or return, and there have been recent tribunal cases in this area.
In the case of monthly PAYE and National Insurance deductions, the employer must make payments electronically within 17 days after the end of the tax period, or within 14 days after the end of the tax period otherwise (The Income Tax (Pay As You Earn) Regulations, SI 2003/2682, reg 69). Where the payment is made by cheque, the legislation provides that if the cheque is paid on first presentation, the payment is treated as made on the day on which the cheque was received by HMRC (SI 2003/2682, reg 219).
In Browns CTP Ltd v Revenue & Customs  UKFTT 566 (TC), the company appealed against penalties for late payment of PAYE and NIC for a number of monthly periods. The company argued that the cheque payments for the months in dispute were sent to HMRC prior to the date of payment, and HMRC should have received them in the ordinary course of post on or before the due date. In other words, the company claimed that it had a reasonable excuse, i.e. that the cheques were posted so that they might reasonably be expected to arrive on or before the due date.
The tribunal summarised the dates on which the company's cheques were posted and received by HMRC, as follows (nb the tribunal noted that the company always sent post using first class stamps):
Month 3 - Posted Friday 16 July 2010; received by HMRC Thursday 22 July 2010
Month 4 - Posted Wednesday 18 August 2010; received by HMRC Saturday 21 August 2010
Month 6 - Posted Monday 18 October 2010; received by HMRC Thursday 21 October 2010
Month 7 - Posted Thursday 18 November 2010; received by HMRC Tuesday 23 November 2010
Month 8 - Posted Friday 17 December 2010; received by HMRC Wednesday 22 December 2010
HMRC's position was that where the 19th day of the month fell on a weekend, payment must be received by the previous Friday, or there would be a default. However, HMRC was unable to direct the tribunal to any authority for this proposition. As the legislation was silent on this point, the key date would be the date on which HMRC received the cheque. Nevertheless, in each case the cheques were received by HMRC after the due dates, so the question was whether the company had a reasonable excuse for the late payments.
The tribunal considered that postal delays can give rise to a reasonable excuse, depending on the circumstances. It perceived that there had been "deterioration in the service standards of Royal Mail in respect of first class post" since 1995, and considered this to be an appropriate factor to take into account. The tribunal said that what was important was the reasonable expectation of the taxpayer when making payment.
Ordinary course of post
The conclusion of the tribunal was that a reasonable employer is generally entitled to rely on next day delivery in the ordinary course of first class post. However, the particular circumstances would still be relevant to individual cases, and there is also still a burden on the employer to establish the actual date with evidence. The company's appeal was allowed.
The Interpretation Act 1978 states that service by post is: "...unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post" (IA 1978, s 7). In Browns CTP, HMRC did not dispute that in the ordinary course of first class post a letter should be delivered the next day, including Sundays. However, HMRC guidance on cheque payments in the context of PAYE/NIC deadlines states the following (www.hmrc.gov.uk/paye/file-or-pay/payments/deadlines.htm):
"If paying by post, your cheque payment must be posted early enough to reach HMRC no later than the 19th of the month following the end of the tax month or quarter to which it relates, so please allow at least three working days. Obviously postal delays are out of your and HMRC's hands which is why HMRC recommends the security and certainty of electronic payments."
It is not known at the time of writing whether HMRC will appeal the Browns CTP case. In any event, it would be surprising (to me at least) if HMRC changed the above statement, as it is only guidance of HMRC's view and has no legal effect.
Interestingly, reliance on the postal service was held not to amount to a reasonable excuse for late payment of monthly PAYE in another recent case, Metokote UK Ltd v Revenue & Customs  UKFTT 592 (TC). Best practice would therefore be to ensure that cheques are posted to arrive in good time.
Finally, it is worth noting that the tribunal in Browns CTP referred to the case Agar Ltd v Revenue & Customs  UKFTT 773 (TC) as authority to reduce penalties for late payment of PAYE and National Insurance contributions. In Agar Ltd, the tribunal noted that the first payment default in the tax year is generally disregarded for penalty purposes (FA 2009, Sch 56, para 6(3)). However, the tribunal held that additionally no penalty could be levied in respect of deductions for month 12 of a tax year. This is on the basis that the penalty notice was specifically stated to apply to a particular tax year (in that case, the year in question was 2010/11), and that payment for month 12 was due on 19 (or 22) April 2011, i.e. in the following tax year. A late payment for month 12 would therefore represent the first default of the following tax year. The decision in Agar was taken into account in the Browns CTP case, resulting in a penalty reduction.
What is the position if (for example) HMRC imposes a penalty for the late filing of a tax return, where the taxpayer (or agent) alleges that the return was posted in time to reach HMRC before the filing deadline? Must the taxpayer prove that the return was sent in good time, or is the onus on HMRC to demonstrate that the return was received late?
Following the European Court of Human Rights case Jussila v Finland (73053/01  ECHR 996), there have been a number of cases in which the first-tier tribunal has taken the view that HMRC must prove the default on which the penalty is charged. The Jussila case is authority for the proposition that tax penalties or surcharges can be 'criminal' within Article 6 of the Human Rights Act 1998, thus entitling the taxpayer to a hearing. However, the standard of proof applied by tribunals in tax cases has generally continued to be the civil standard (balance of probabilities), not the criminal standard (beyond reasonable doubt).
Placing the onus of proof on HMRC to demonstrate that a return has been submitted late is potentially helpful to taxpayers. For example, in The Source Partnership v Revenue & Customs  UKFTT 458 (TC), the taxpayers appealed against penalties for a late partnership return, contending that the return was sent to HMRC by the filing deadline. The partnership’s accountants asserted that the return was sent to HMRC, but it appeared that the original return was not processed. A further return was therefore submitted to HMRC after the filing date.
The tribunal held that once a tax return has been sent to HMRC through the postal system, there is a presumption that the return has been delivered in the due course of post. HMRC had demanded evidence that the original return was received before the filing date. However, the tribunal held that HMRC’s approach was misplaced, because if HMRC intended to impose a penalty, the onus of proving the default was upon them. The tribunal concluded that there had been a failure by HMRC to prove, on the balance of probabilities, the trigger for the penalties. The taxpayer’s appeal was therefore allowed.
Better safe than sorry?
The above cases are potentially helpful to taxpayers who send returns and payments through the postal service very shortly before the statutory deadlines.
However, it would obviously be better to avoid disputes with HMRC and possible tribunal appeals in the first place, by ensuring that returns and payments are received by HMRC well before the relevant deadlines, and perhaps by following HMRC's own guidance on sending payments of PAYE deductions, i.e. allowing at least three working days.
Mark McLaughlin CTA (Fellow) ATT TEP