TC02720: Robert Morgan and related appeal
First tier Tribunal
In a potentially important case, the taxpayer did not submit his return by the due date and HMRC imposed a penalty of £100 and daily penalties of £870, the latter being appealed.
HMRC's policy is that the imposition of all late filing penalties (bar those for returns more than a year late) should be computer generated and automatic due to the high number of taxpayers filing late. HMRC also told Parliament in January 2012 that HMRC would repeatedly contact taxpayers with outstanding tax returns urging them to avoid incurring daily penalties.
The Tribunal found that:
'...warnings about the risk of incurring daily penalties were on the blank paper tax return issued to taxpayers... in the April of 2011 and a single reminder to each taxpayer...was issued in batches between 18 December 2011 and 6 January 2012.
Para 4 Sch 55 FA 2007 states:
'(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.'
The taxpayer argued that the only decisions which HMRC made were:
• a policy decision that all taxpayers more than three months late should automatically be charged daily penalties;
• an individual decision by a computer, programmed in accordance with that policy, to identify taxpayers meeting the parameters and to issue a penalty assessment
and that this was not sufficient to meet para 4(1)(b).
HMRC argued that it would be impractical to require an HMRC officer to make each individual assessment (there were over 1,000,000 late returns in 2012) and the legislation does not require this.
The Tribunal disagreed:
'If paragraph 4 had been intended as a revenue generating measure or even as a one-off penalty like the £100 in paragraph 3, the provisions would have been quite different. HMRC would not have been required to give a warning and the penalty would have been one-off and not accruing on a daily basis. On the contrary, paragraph 4 is clearly intended primarily as a measure to incentivise compliance rather than merely to punish non-compliance.
Further, the explanatory notes to the legislation itself read as follows:
'Paragraph 4(3) provides for the date specified in the notice from which the penalty is payable to be earlier than the date on which the notice is given. This is because HMRC will be unaware of certain returns for taxes such as SDLT and IHT until they are received. The date specified in the notice may not be earlier than the end of the period of three months after the filing date.'
This clearly indicates that Parliament intended the power to back-date a notice to be limited to cases where HMRC would not know the date the tax return was due.
It therefore follows that paragraph 4(3)(a) must have been intended as an exception to a general expectation that notices would be given on or before the commencement date. HMRC have discretion to impose daily penalties, and a discretion when doing so to backdate the commencement date: but it seems to us that HMRC could only have been intended by Parliament to do so in an exceptional case as to do otherwise would defeat the object of paragraph 4.
Applying this purposive construction, we consider that when Parliament said HMRC must "give notice specifying the date from which the penalty is payable" they intended that the taxpayer (1) should be given clear warning of the (in general) future imposition of a penalty charged each day he failed to file and (2) clear notice of the date from which such daily penalties would run.'
'Both documents said by HMRC to be notices under paragraph 4(1)(c) specified two dates from which daily penalties would be payable, depending on whether the returns were filed by post or over the internet. Could specifying two dates possibly comply with paragraph 4(1)(c)?
...we think Parliament intended taxpayers to be given an unequivocal prior warning of the risk they ran of daily penalties if they continued to fail to file their return. But looking at the provisions in the TMA relating to income returns, Parliament also clearly intended to make a distinction between online and paper returns, and in particular to discriminate in favour of taxpayers filing online by giving them later filing dates and later penalty dates than taxpayers filing on paper.
...paragraph 4(1)(c) must be interpreted as allowing HMRC to specify in a single notice two dates from which the daily penalties would run, depending on whether paper or electronic returns were filed. It inevitably follows that this would need to be clearly expressed in the notice or it would fail to be notice at all.
HMRC's primary case was that the SA326D was notice. But so far as the SA326D is concerned, by itself the sentence "If your tax return is more than three months late we will charge you a penalty of £10 for each day it remains outstanding" is not notice within paragraph 4(1)(c) as no date is specified. The next sentence "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 is not notice either because it uses the word "can" rather than "will". It could simply be read as a warning: daily penalties could be so charged: it does not mean that they will be so charged. Further we take account of the context of these two sentences. The reader's attention was not drawn to them. There was no heading or bold text that related specifically to daily penalties. Relegated to small print, we consider their natural interpretation is as a warning that HMRC had power to charge daily penalties rather than notice that HMRC would be charging daily penalties. We find that that the two sentences alone or combined in the context of the SA326D did not amount to "notice" within paragraph 4(1)(c) as intended by Parliament. Parliament intended taxpayers to be given clear warning that they would be liable to daily penalties from a specified date. The SA326D failed to do this as in the context of the whole document as the warning was in the small print and the actual wording was ambiguous over whether HMRC were telling the taxpayer that daily penalties would be charged or merely could be charged.'
In addition, on the facts of the case:
'We consider that overall there were special circumstances in this case. It is crucial to our finding that Mr Morgan attempted to resolve his default but that in direct contact with HMRC he was given misleading or at least less than complete information on the telephone and then received a letter from HMRC which in effect invited him to submit paper returns when it was not in his interests to so do.
This entirely distinguishes this case from the cases mentioned above where the taxpayer was simply unaware of the penalty regime. Here we find Mr Morgan relied on misleading advice from HMRC.'