PAYE Penalties

Case Report: Kelcey And Hall Solicitors [2012] TC 02333

[2012] UKFTT 662 (TC)

Judge Sandy Radford, Mrs Norah Clarke

Decision released 25 October 2012

PAYE – appeal against the penalty imposed for the late payment of PAYE– FA 2009, Sch. 56 – although HMRC spoke to appellant on a monthly basis they failed to inform him that the penalty regime would be vigorously enforced and instead told him that they were not sure how it would work – in accordance with DMBM210105 this was a case where exceptionally the customer's allocation was not in their best interests and PAYE staff could have suggested a different allocation – appeal allowed in respect of month 5 onwards

Summary

The First-tier Tribunal decided that in view of the special circumstances in the taxpayer firm's case, HMRC's penalty, imposed for the late payment of the monthly pay as you earn (‘PAYE’) during the relevant period, should be reduced in accordance with Finance Act 2009 (‘FA 2009’), Sch. 56, para. 9. Although HMRC spoke to the taxpayer on a monthly basis, they failed to inform the latter that the new penalty regime would be vigorously enforced, and instead, told the taxpayer that they were not sure how it would work. Thus, this was a case under HMRC's DMBM210105 where, exceptionally, the taxpayer's payment allocation was not in its best interests and HMRC could have suggested a different allocation.

Facts

The taxpayer firm appealed against the penalty imposed by HMRC for the late payment of its PAYE in every month of the tax year ending 5 April 2011.

The taxpayer did not have the money to pay the April payment due on 21 May 2010 because of defaulting clients. Its procedure was to make the PAYE payments early in the month following payment of the salaries so that a payment on June 2010 was actually for the May 2010 salaries. However, because the April payment had been missed due to lack of funds, it was allocated to April in respect of April salaries.

HMRC had called the taxpayer every month to seek payment. During the calls, the introduction of the new penalty regime which had come into force was mentioned, but the HMRC personnel had said that they did not know how it would be implemented in the first year. The taxpayer duly paid each payment in the sequence as they appeared in HMRC's standard paying in book without fully realising the ramifications as regards the impact of the penalties being incurred.

In June 2011, HMRC wrote to the taxpayer setting out the penalties it had defaulted on the May 2011 payment. In July 2011, the taxpayer's payment was allocated to month 3 (June 2011), instead of month 2 (May 2011). That resulted in a visit from an HMRC inspector, who asked why the taxpayer had paid month 3, but not month 2. The taxpayer explained what had happened and eventually, a repayment programme was agreed whereby the taxpayer paid back £1,200 per month over eleven months. The debt had actually been repaid after nine months.

The taxpayer submitted that this was a special circumstance of a genuine misunderstanding, where HMRC could reduce or even waive the penalty. At no time during the regular monthly calls from HMRC did anyone mention that it would be in the taxpayer's best interests to skip a month and pay for the following tax period to which the payment actually applied. For that argument, the taxpayer referred to HMRC's DMBM210105.

HMRC submitted that penalty had been correctly charged in accordance with the legislation and the taxpayer had no reasonable excuse for the late payments for each month. At the time of the phone calls, they did not know how many defaults there would be. The taxpayer should have told them of its difficulty and it would then have been assisted. HMRC would not reallocate payments without being asked. The first payment was due by 21 May 2010, but was not received until 8 June 2010.

Issue

Whether the taxpayer's case was one under DMBM210105, where, exceptionally, the taxpayer's allocation was not in its best interests and HMRC could have suggested a different allocation.

Decision

Held, allowing the taxpayer's appeal in respect of months 5 onwards:

The Tribunal found the taxpayer to be conscientious, honest and sincere. He had been misled by the apparent relaxed attitude of HMRC's staff to whom he spoke and who certainly failed to inform him that the new regime was being vigorously applied from 2010–11. The taxpayer thought that it was doing the right thing and found that even if it had read all HMRC's literature concerning the new regime, it would still have been reassured by the apparent misinformation from the HMRC staff.

Referring to DMBM210105, the Tribunal held that this was a case where, exceptionally, the taxpayer's allocation was not in its best interests and HMRC's staff ought to have suggested that it allocate differently. By the time of the monthly conversation with the HMRC staff relating to the late payment in respect of month 5, either the HMRC staff ought to have known that the new regime was being immediately enforced or they ought to have suggested that the taxpayer allocate differently. As soon as the taxpayer became aware of the actual situation concerning the new regime, it was able to correct the matter by its own allocation. Therefore, as there were special circumstances in this case, the penalty should be reduced in accordance with FA 2009, Sch. 56, para. 9.

However, the taxpayer remained liable for penalties in respect of months 2, 3, and 4, as the first default in month 1 did not count towards the penalty