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Compliance Handbook

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Special Reduction: First Tier Tribunal views on the meaning of ‘special circumstances’ in the context of penalty laws: Some FTT decision detailed extracts: For appeals and review team information

This page gives additional detail for review officers and appeals teams.

Comments in the following First Tier Tribunal (FTT) judgment extracts are not binding on HMRC (except in so far as they relate to the appeal that was decided). However, they do support HMRC’s views on the meaning and application of special reduction penalty law. They may be persuasive if quoted in relation to other appeals, but it is always important to remember that they represent findings made on the precise facts of the individual appeals decided by the FTT.

Dina Foods Limited (TC 01546) - FA 2009 schedule 56 late payment penalty

At paragraph 9 the FTT said:

‘The Tribunal can only rely upon the “special circumstances” provision in para 9 to a different extent than that applied by HMRC if it thinks that HMRC’s decision in that respect was flawed. Applying judicial review principles, the Tribunal must consider whether HMRC acted in a way that no reasonable body of commissioners could have acted, or whether they took into account some irrelevant matter or disregarded something to which they should have given weight. The Tribunal should also consider whether HMRC have erred on a point of law.’

At paragraph 31 the FTT said:

‘The legislation on PAYE penalties is clear. As we have described, except in the case of special circumstances, the scheme laid down by the statute gives no discretion: the rate of penalty is simply driven by the number of PAYE late payments in the tax year by the employer. A company that makes 11 late payments in the year will fall into the 4% penalty rate.’

At paragraphs 33-34 and 38-39 the FTT said:

‘33. The scheme of the PAYE legislation requires taxpayers to pay over PAYE on time. The legislation does not require HMRC to issue warnings to individual employers, though it would be expected that a responsible tax authority would issue general material about the new system. This HMRC did; in our view, the absence of specific warnings to Dina Foods Ltd about the consequences of failing to pay on time does not constitute a reasonable excuse for any of the late payments.

  1. With respect to Mr Kaye’s argument on the lack of any warning from HMRC that the penalty was building up, the comparison he drew with the VAT Default Surcharge system may be apt, but only in the sense that both seek to encourage a taxpayer to pay on time and penalise him if he does not. However, the comparison only goes so far. Parliament decided on a different system for PAYE, possibly because of the monthly schedule that usually applies to PAYE payments. But even though there is no provision for a formal warning, Schedule 56 does exclude the first default from the penalty regime.

  2. In this context we have a number of observations to make concerning the scheme of Schedule 56 as a whole, as it applies to PAYE and NICs payments. The penalty regime is based on the number of defaults over a complete tax year. There is no separate penalty for each individual default; the penalty can only be assessed once the aggregate of the late paid tax comprised in the total of the defaults for a particular tax year has been ascertained. A taxpayer who continues to pay late, so increasing both the amount of tax (and NICs) on which the penalty may be levied and the rate of the penalty, may well complain that his behaviour (and thus the amount of his liability) would have been different had a penalty been levied in respect of a default early in the tax year or at least a warning issued. But on the scheme of penalties that has been laid down, the total would not then have been capable of being ascertained, so the penalty could not at that earlier time have been assessed.

  3. We do not therefore consider that any failure on the part of HMRC to issue warnings to defaulting taxpayers, whether in respect of the imposition of penalties or the fact of late payment, is of itself capable of amounting either to a reasonable excuse or special circumstances.’

At paragraphs 41-42 the FTT said:

‘41. The issue of proportionality in this context is one of human rights, and whether, in accordance with the European Convention on Human Rights, Dina Foods Ltd could demonstrate that the imposition of the penalty is an unjustified interference with a possession. According to the settled law, in matters of taxation the State enjoys a wide margin of appreciation, and the European Court of Human Rights will respect the legislature’s assessment in such matters unless it is devoid of reasonable foundation. Nevertheless, it has been recognised that not merely must the impairment of the individual’s rights be no more than is necessary for the attainment of the public policy objective sought, but it must also not impose an excessive burden on the individual concerned. The test is whether the scheme is not merely harsh but plainly unfair so that, however effectively that unfairness may assist in achieving the social objective, it simply cannot be permitted.

  1. Applying this test, whilst any penalty may be perceived as harsh, we do not consider that the levying of the penalty in this case was plainly unfair. It is in our view clear that the scheme of the legislation as a whole, which seeks to provide both an incentive for taxpayers to comply with their payment obligations, and the consequence of penalties should they fail to do so, cannot be described as wholly devoid of reasonable foundation. We have described earlier the graduated level of penalties depending on the number of defaults in a tax year, the fact that the first late payment is not counted as a default, the availability of a reasonable excuse defence and the ability to reduce a penalty in special circumstances. The taxpayer also has the right of an appeal to the Tribunal. Although the size of penalty that has rapidly accrued in the current case may seem harsh, the scheme of the legislation is in our view within the margin of appreciation afforded to the State in this respect. Accordingly we find that no Convention right has been infringed and the appeal cannot succeed on that basis.’

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David Collis (TC01431) - FA 2007 schedule 24 inaccuracy penalty

At paragraph 36 of its decision the FTT said:

‘In the context of a decision of HMRC as to whether a reduction in a penalty should be made on account of special circumstances, the general test will be whether the decision is so demonstrably unreasonable as to be irrational or perverse, such that no reasonable authority could ever have come to it.

This is an application of the well known test set by the House of Lords in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223.

This is not quite the end of the matter, however, since the FTT may have regard not only to whether the decision of HMRC was reasonable in these terms but also:

‘whether they took into account some irrelevant matter or disregarded something to which they should have given weight (paragraph 37 of the Collis decision).’

The Collis case itself was one where the failure to consider a relevant factor resulted in the decision being held to be flawed, though there were subsequently found to be no special circumstances. In reaching its decision on this point, in paragraph 40 of its decision, the FTT made an important point:

‘to be a special circumstance the circumstance in question must operate on the particular individual, and not be a mere general circumstance that applies to many taxpayers by virtue of the scheme of the provisions themselves.’

St John Patrick Publishers Ltd (TC01719)

At paragraph 20 of its decision the FTT said:

‘The Tribunal finds, consistently with Dina Foods, that:

(1) the scheme laid down by the statute gives no discretion (subject to paragraph 9): the rate of penalty is simply driven by the number of PAYE late payments in the tax year by the employer;

(2) the legislation does not require HMRC to issue warnings to individual employers, though it would be expected that a responsible tax authority would issue general material about the new system;

(3) lack of awareness of the penalty regime is not capable of constituting a special circumstance; in any event, no reasonable employer, aware generally of its responsibilities to make timely payments of PAYE and NIC amounts due, could fail to have seen and taken note of at least some of the information published and provided by HMRC;

(4) any failure on the part of HMRC to issue warnings to defaulting taxpayers, whether in respect of the imposition of penalties or the fact of late payment, is not of itself capable of amounting either to a reasonable excuse or special circumstances.’

At paragraph 27 the FTT said:

‘Having given careful consideration to the matter, the Tribunal has ultimately concluded that where a time to pay agreement is not sought until after the relevant deadline or where payment is ultimately not made until after the agreed deferred deadline, the mere fact that the appellant has sought to engage with HMRC cannot of itself be said to be a “special circumstance”.’

At paragraph 28 the FTT said:

‘That does not exclude the possibility that that the fact that an appellant has sought to engage in good faith with HMRC , together with other relevant circumstances, might in combination amount to a reasonable excuse or special circumstances. The Tribunal has therefore considered the circumstances of this case as a whole. The legislation expressly provides that inability to pay cannot be a reasonable excuse or a special circumstance.’

At paragraph 29 the FTT said:

‘Where the Tribunal finds that there are special circumstances for purposes of paragraph 9, the Tribunal has a discretion to reduce the penalty. However, unless the Tribunal first finds that there are special circumstances for purposes of paragraph 9, the Tribunal has no general discretion to reduce the penalties.’