PAYE Penalties

An upper tier tax tribunal has overturned a lower tribunal decision in which the original judge criticised HMRC for using the PAYE penalty system as “cash generating scheme”.

The tax department’s successful appeal [2012] UKUT 363 (TCC) against last year’s HOK v HMRC decision represents an important counterweight for the views of tribunal judge Geraint Jones QC, who appeared to have redrawn the rules around the fairness of tax penalties in the last year or so.

Jones found it “inexplicable why HMRC deliberately delays sending out a penalty notice for four months” so that penalties amounting to £400 built up for companies that were not aware of their filing lapses until notified in September, four months after the 19 May deadline. Because of the timing of the letter, another £100 would accrue before the taxpayer could comply.

Several other appeals documented in AccountingWEB’s 2011 reasonable excuse scorecard turned on similar rulings to HOK, including HMD Response v HMRC.

In their decision, Mr Justice Warren Judge Colin Bishopp noted that more cases are pending before the first tier tribunal.

HMRC argued that the tax tribunals have no jurisdiction to discharge such penalties and that the their jurisdiction is limited to determining whether or not the return was late as a matter of fact and, if so, whether there is a reasonable excuse for the lateness.

In their decision the upper tier judges determined that the lower court had no evidence from which it could conclude that HMRC was delaying penalty notices to increase revenue: “It was based entirely upon the judge’s perception.”

The judges looked at the more recent Royal Institute of Navigation v HMRCcase [2012] UKFTT 472 (TC), which documented HMRC’s changes to its penalty notice system. They noted Jones's suggestion that this was as close to an admission of unfairness as the department is likely to come. In neither case, however, did the first tier judge give HMRC an opportunity to make representations before condemning its conduct as unfair.

“Against that background, in our judgment, the Tribunal’s comments to that effect were not appropriate,” the upper tier judges concluded.

They allowed HMRC’s appeal and the penalties purportedly discharged by the lower court were restored.

Because it was a test case, HMRC said from the outset it would not seek costs. While the department deployed counsel Richard Vallat on it behalf, HOK did not appear before the tribunal, but made some written submissions instead.

Following the verdict, HMRC released a statement that said: “We are pleased with the decision, which confirms HMRC’s interpretation of the law."

The department had no plans to revisit cases that had been finalised, but added: “We expect that cases stood behind Hok will be resolved in line with the decision, following normal procedures."

Anne Fairpo highlighted the decision in this week's AccountingWEB tax podcast. “They didn’t actually say HMRC was fine and dandy and behaving correctly. They actually criticised the judgment for not following the rules properly in this context... It is a setback for taxpayers," she said.

The HOK decision was not a definitive ruling in HMRC's favour she noted, but anyone wishing to challenge the fairness of HMRC's penalty regime will need to seek a judicial review, which is more difficult than going to a tax tribunal.

As noted by the judges in their reference to the Royal Institue of Navigation case, HMRC has responded to representations from the profession to improve its communications around accumulating penalty notices, but the upper tier ruling in the HOK will reduce pressure on the department to do anything further about penalties, Fairpo noted. HMRC still has a tendency to be less prompt on sending out notices for PAYE and VAT penalties where any delay increases the amount due from taxpayers. "HMRC should be consistent," Fairpo said.