December 2014 - Levy and Levy

The Upper Tribunal (UT) has overturned a First-tier Tribunal (FTT) decision on daily penalties for the late filing of a self-assessment to tax, holding that HMRCʼs SA Reminder and form SA326D satisfy the notification requirements of FA 2009, Sch. 55 para 4(1)(c). The result is that Mr Donaldson had to pay a daily penalty of £10 amounting to £900 in all – Revenue and Customs Commissioners v Donaldson [2014] UKUT 0536 (TCC).

The legislative background

A new penalty regime for failure to make a return was introduced by FA 2009, Sch. 55. The new regime applies to in respect of returns for the tax year 2010–11 onwards. Under the new regime, a failure to submit a return results in the taxpayer becoming liable to a penalty of £100.

Sch 55 para 4(1)( c) then provides:-

4(1) P is liable to a penalty under this paragraph if (and only if)–

(a)P’s failure continues after the end of the period of 3 months beginning with the penalty date,

(b)HMRC decide that such a penalty should be payable, and

(c)HMRC give notice to P specifying the date from which the penalty is payable.

4(2) The penalty under this paragraph is £10 for each day that the failure continues during the period of 90 days beginning with the date specified in the notice given under sub-paragraph (1)(c).

4(3) The date specified in the notice under sub-paragraph (1)(c)–

(a)may be earlier than the date on which the notice is given, but

(b)may not be earlier than the end of the period mentioned in sub-paragraph (1)(a).

Further tax geared penalties are payable if the return is still outstanding for longer periods of six and twelve months.

The facts of this case

Mr Donaldson submitted his 2010–11 tax return on paper on 1 May 2012 six months and one day late. HMRC imposed a late filing penalty of £100 (under FA 2009, Sch. 55, para. 3), daily penalties of £900 (under FA 2009, Sch. 55, para. 4) and a further late filing penalty of £300 because the return was more than six months late (under FA 2009, Sch. 55, para. 5).

Mr Donaldson appealed against all of the penalties and because the issues raised were similar to that of a Mr Morgan their appeals were heard together. The FTT dismissed Mr Donaldsonʼs appeals against the £100 and £300 penalties as they did not accept that he had a reasonable excuse for the delay in filing and did not find that he had any special circumstances. In respect of the £900 daily penalties the FTT found that neither the SA Reminder nor the form SA326D (‘notice of penalty assessment’) amounted to a ‘notice’ within FA 2009, Sch. 55, para. 4(1)(c). As a result, Mr Donaldsonʼs appeal against the daily penalties was allowed.

The FTT’s reasoning

The FTT examined in detail the SA Reminder and SA326D to consider whether either complied with the statutory requirements in FA 2009, Sch. 55, para. 4(1)(c). The FTT found that:

The first sentence in SA326D ‘if your tax return is more than three months late we will charge you a penalty of £10 for each day it remains outstanding’ did not satisfy FA 2009, Sch. 55, para. 4(1)(c) because it did not specify a starting date of the penalties;
The second sentence in the SA326D ‘daily penalties can be charged for a maximum of 90 days starting from 1 February for paper returns or 1 May for online returns’ by itself could simply be read as a warning that daily penalties could be so charged rather than would be charged;
The above two warnings were in the ‘small print’ of the notice without adequate notice being drawn to them and were not the clear and unambiguous statement that the Parliament required for HMRC in giving notice to the taxpayer.

In the UT

The rejected the FTTʼs interpretation. In the UT’s view neither document was ambiguous. Taxpayers were left in no doubt that HMRC would charge penalties of £10 per day under SA326D and even if the message was in the small print it would make no difference to the outcome of the appeal. The notice was sufficient to constitute a proper notice in the absence of any other requirements in the legislation. HMRC succeeded, therefore, in the appeal and the daily penalties of £900 imposed on Mr Donaldson were accordingly restored.

Levy and Levy comment

Generally, the Tax Tribunals have been sympathetic to penalty cases in stark contrast to the very tough line taken by the FTT and the UT in cases of ‘tax avoidance.’ This case, however, is a salutary warning that a lenient approach can by no means be taken for granted and that HMRC will pursue cases vigorously to appeal.

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells

Murray Group Holdings Ltd [2014] BTC 521) is now moving on from the Upper Tribunal to the Scottish Court of Session and the battle, therefore, continues. In the meantime taxpayers have some strategic thinking to do.

Withdrawal of the Employee Benefit Trust (“EBT”) Settlement opportunity

HMRC announced, in August 2014, that they were withdrawing the EBT Settlement opportunity with effect from March 2015. As a result of the withdrawal, the settlement opportunity will only be available to employers who have notified HMRC of their intention to settle before 31 March 2015 and then have subsequently entered into a settlement before 31 July 2015, having paid all tax due by that date (or later by agreement). According to HMRC, take up rate of the settlement opportunity has been encouraging, with sign up by over 700 employers raising 800m. The idea is that HMRC will settle enquiries on the basis that payments and allocations made to individuals out of EBTs prior to 6 April 2011 will be treated as earnings and the income taxed once and for all on that basis.

Is the settlement opportunity a good deal for taxpayers?

Probably not is the short answer, at least where loans out of the trust to beneficiaries are concerned. In Murray Group the arrangements involved establishment of a remuneration trust for the benefit of group employees and their families, the creation of some 100 sub-trusts, funding by employer companies, and loans to employees. Loans for an extended term on a discounted basis were then granted by the trustees to employees. The terms of the loans had not expired, but the employees’ general expectation was that they would be renewed. For similar cases, settling with HMRC does not seem an attractive option. However, EBT’s come in all shapes and sizes and some are very much better managed and implemented than others; each case has to be judged on its own merits after an examination of the paperwork which will include notes, minutes, memoranda, e-mails, notes of meeting, letters, and any other written information relating to the setting up of the trust and its subsequent management, including loans and any other benefits granted to beneficiaries.

Levy and Levy conclusion

The EBT settlement opportunity has been around now for a long time, four years, and in the light of Murray Group has surely outlived its useful purpose. However, the door is still open for taxpayers with an unfavourable act pattern, or those worried that the Upper Tribunal’s decision in Murray Group will be overturned, to settle with HMRC. Now is the time to assess the documentation and decide.

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells

Upper Tribunal gets tough on penalties

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Archive for month: December, 2014