Analysis
On 27 September 2010 HMRC sent H Ltd a penalty notice in the sum of £400 on the basis that H Ltd had failed to file its employer’s end of year annual returns by 19 May 2010. The penalty was calculated at £100 per month for four months. On 21 October 2010 a further penalty notice in the sum of £100 was issued given that the necessary filing had taken place on 15 October 2010 once H Ltd had been alerted to its default.
H Ltd acknowledged that it did not comply with the duty to file the returns. It did so because it believed that as its only employee had ceased employment part way through the year. H Ltd acknowledges it was wrong in that belief and that HMRC were entitled to levy a penalty. The complaint was that had HMRC timeously notified it of its default it would have remedied it far earlier and therefore avoided ongoing penalties.
H Ltd requested a review of the penalty but it was upheld at £500. H Ltd appealed to the First-tier Tribunal.
Held (allowing the appeal)
- (1) HMRC had a power under s98A(2)(a) of the Taxes Management Act 1970 to levy penalty notices on persons who fail to make a return in accordance with the relevant provision on the basis that that person ‘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 occurs’. In applying that power HMRC are subject to the common law duty of fairness, R v SS Home Department [2003] EWCA Civ 364 and SS Home Department v Thakur [2011] UKUT 151. The power that HMRC has is essentially discretionary as the penalty is akin to a maximum fine.
- (2) HMRC had breached the common law duty of fairness because it deliberately waited four months before issuing the first penalty notice at a time when in fact the return could not be submitted before a further month of penalty had accrued. Although HMRC had no obligation to issue a reminder, any right thinking member of society would consider that position 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. There was no logical reason why HMRC should delay in sending out penalty notices creating a de facto penalty of £500 unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing. The penalty system had a legitimate aim, which is to ensure that appropriate filings take place in good time and to discourage default. It was not a function of the state to use the penalty system as a method of generating cash. It would be a very simple matter for HMRC to set its computer so that a default or penalty notice is sent out immediately after 19 May in any year instead of some four months later. Although this might generate less penalty cash for the state it would be fair and conscionable as between the taxpayer and the state.
- (3) As HMRC had not acted fairly or in good conscience the only penalty recoverable was £100 for the first month’s failure, as HMRC had failed to prove that if a penalty notice had been delivered in good time the default would in any event have continued.
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