FA 2009 Sch 55 gives HMRC the power to impose fixed penalties
where a taxpayer fails to file a return on time. It provides for an initial
penalty of £100, with subsequent penalties if the failure continues beyond
three months, six months and 12 months. Although the penalties under are fixed,
para 16 of Sch 55 permits HMRC to reduce a penalty if ‘HMRC think it right
because of special circumstances’. There have been many cases where the FTT has
considered the scope of ‘special circumstances’, with varying results.
In the recent case of Edwards v HMRC [2019] UKUT 131 (TCC),
HMRC had charged Mr Edwards penalties totalling £3,880 (plus interest) for
failing to file his self-assessment tax returns over the course of three tax
years. These penalties were imposed even though Mr Edward’s did not owe any tax
for the years in question.
Mr Edwards argued that the penalties were disproportionate
to the amount of tax owed and that this should have been taken into account as
a ‘special circumstance’ under para 16, with the penalties being reduced
accordingly. Having lost at the FTT, Mr Edwards secured pro bono representation
to take his case to the Upper Tribunal (UT).
To determine whether the late filing penalties were
disproportionate, the UT considered the test for proportionality as set out in
HMRC v Total Technology (Engineering) Ltd [2012] UKUT 418 (TCC). Broadly, the
test applied was:
what is the
aim of the penalty regime, and is that a legitimate aim in the public interest;
and
is there a
reasonable relationship of proportionality between the penalties imposed by the
regime and the aim of the regime?
The UT determined that the aim of the Sch 55 penalty regime
is to penalise taxpayers for late filings and to incentivise taxpayers to
comply with notifications to file on time. It regarded this as a legitimate
aim, irrespective of whether tax is actually due. The UT also concluded that as
Sch 55 penalties have an upper limit, the regime resulted in ‘a fair balance
between ensuring that taxpayers file their returns on time and the financial
burden that a taxpayer who does not comply with the statutory requirement will
have to bear’. As a result, it held that the penalties imposed under Sch 55
could not be regarded as disproportionate even where no tax is ultimately due.
Therefore, there was no ‘special circumstance’ for the purposes of para 16; the
penalties were upheld.
We do not know the financial position of Mr Edwards, but it
is hard to see how penalties of almost £4,000 can be considered a ‘fair
financial burden’ without reference to a taxpayer’s individual circumstances.
At one point in its judgment, the UT seems to acknowledge this, referring to
the decision of Court of Appeal in International Transport Roth GmbH v Home
Secretary [2003] QB 728. In that case, Simon Brown LJ said that it is implicit
in the concept of proportionality that ‘the attainment of the public policy
objective sought… must not impose an excessive burden on the individual
concerned’.
It is disappointing that this point was not considered
further by the UT. Of course a penalty system is needed to enforce filing
obligations, but whether those penalties are proportionate must depend on the
individual circumstances of a taxpayer.
Without considering the individual in cases such as this,
the regime produces harsh results for taxpayers who are not in a position to
seek professional advice and who do not understand the self-assessment system.
FA 2009 Sch 55 gives HMRC the power to impose fixed penalties
where a taxpayer fails to file a return on time. It provides for an initial
penalty of £100, with subsequent penalties if the failure continues beyond
three months, six months and 12 months. Although the penalties under are fixed,
para 16 of Sch 55 permits HMRC to reduce a penalty if ‘HMRC think it right
because of special circumstances’. There have been many cases where the FTT has
considered the scope of ‘special circumstances’, with varying results.
In the recent case of Edwards v HMRC [2019] UKUT 131 (TCC),
HMRC had charged Mr Edwards penalties totalling £3,880 (plus interest) for
failing to file his self-assessment tax returns over the course of three tax
years. These penalties were imposed even though Mr Edward’s did not owe any tax
for the years in question.
Mr Edwards argued that the penalties were disproportionate
to the amount of tax owed and that this should have been taken into account as
a ‘special circumstance’ under para 16, with the penalties being reduced
accordingly. Having lost at the FTT, Mr Edwards secured pro bono representation
to take his case to the Upper Tribunal (UT).
To determine whether the late filing penalties were
disproportionate, the UT considered the test for proportionality as set out in
HMRC v Total Technology (Engineering) Ltd [2012] UKUT 418 (TCC). Broadly, the
test applied was:
what is the
aim of the penalty regime, and is that a legitimate aim in the public interest;
and
is there a
reasonable relationship of proportionality between the penalties imposed by the
regime and the aim of the regime?
The UT determined that the aim of the Sch 55 penalty regime
is to penalise taxpayers for late filings and to incentivise taxpayers to
comply with notifications to file on time. It regarded this as a legitimate
aim, irrespective of whether tax is actually due. The UT also concluded that as
Sch 55 penalties have an upper limit, the regime resulted in ‘a fair balance
between ensuring that taxpayers file their returns on time and the financial
burden that a taxpayer who does not comply with the statutory requirement will
have to bear’. As a result, it held that the penalties imposed under Sch 55
could not be regarded as disproportionate even where no tax is ultimately due.
Therefore, there was no ‘special circumstance’ for the purposes of para 16; the
penalties were upheld.
We do not know the financial position of Mr Edwards, but it
is hard to see how penalties of almost £4,000 can be considered a ‘fair
financial burden’ without reference to a taxpayer’s individual circumstances.
At one point in its judgment, the UT seems to acknowledge this, referring to
the decision of Court of Appeal in International Transport Roth GmbH v Home
Secretary [2003] QB 728. In that case, Simon Brown LJ said that it is implicit
in the concept of proportionality that ‘the attainment of the public policy
objective sought… must not impose an excessive burden on the individual
concerned’.
It is disappointing that this point was not considered
further by the UT. Of course a penalty system is needed to enforce filing
obligations, but whether those penalties are proportionate must depend on the
individual circumstances of a taxpayer.
Without considering the individual in cases such as this,
the regime produces harsh results for taxpayers who are not in a position to
seek professional advice and who do not understand the self-assessment system.
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