In David Goldsmith v HMRC [2018] UKFTT 0005 (TC), the First-tier Tribunal (FTT) has cancelled late filing penalties issued to the taxpayer as the statutory requirements in section 8(1), Taxes Management Act 1970 (TMA), had not been satisfied and HMRC did not have the power to require the taxpayer to deliver self-assessment returns.

Background

The taxpayer was not registered on HMRC's self-assessment computer system. During tax years 2011/12 and 2012/13, he received income from employment and a payment of taxable Employment and Support Allowance (ESA) from the Department of Work and Pensions. No tax was deducted from the payment from the taxpayer's employment because his personal allowance exceeded the amount of income he received. An error on the part of HMRC meant that no tax was deducted from the ESA payment. Income tax in the sum of £914.40 was payable.

The automatic reconciliation of the PAYE process identified the discrepancy and two forms P800, citing the underpayments were sent to the taxpayer informing him of the underpayments. Thereafter, HMRC issued tax returns in 2014 to enable the debt to be enforced.

In cases where an underpayment is a relatively small sum, it is normally "coded out" by the application of an adjusted code reducing the taxpayer's personal allowance in a later year. For reasons which were not made clear to the FTT, that did not happen in this case and HMRC sought payment from the taxpayer.

A payment plan was agreed with the taxpayer, however, after paying three of 33 installments, the taxpayer made no further payments. Seeking a way to compel the taxpayer to make good the underpayment, HMRC decided to issue notices to the taxpayer requiring him to file self-assessment returns for years relevant to the underpayments.

When those returns were not filed on time, HMRC issued penalties for failure to file the returns by the due dates. The taxpayer appealed the penalties to HMRC claiming that he had not received any notices requiring him to file or the tax returns purported to have been sent to him. His appeal was rejected and he appealed to the FTT.

The appeal was allocated to the paper track which meant that no hearing would be necessary and the FTT could determine the matter on the papers. On obtaining the appeal bundle, and having formed a view on the issues, the judge invited the parties to make written submissions. His provisional comments made it clear that he was minded to uphold the appeal and so HMRC filed written submissions and requested that, if the judge was not minded to agree with HMRC, it be given an opportunity to make oral submissions. Accordingly an oral hearing was held.

FTT decision

The appeal was allowed.

The penalties in issue were imposed under paragraph 1, Schedule 55, Finance Act 2009, which provides:

"(1) A penalty is payable by a person (“P”) where P fails to make or deliver a return, or to deliver any other document, specified in the Table below on or before the filing date."

The "return" in question was that referred to in section 8(1)(a), TMA, which provides:

"8.— Personal return. (1) For the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by him by way of income tax for that year, he may be required by a notice given to him by an officer of the Board— (a) to make and deliver to the officer, a return containing such information as may reasonably be required in pursuance of the notice, and (b) to deliver with the return such accounts, statements and documents, relating to information contained in the return, as may reasonably be so required. […]"

HMRC's first argument was that the FTT did not have jurisdiction to consider the validity of the notices. It argued that the FTT, being a "creature of statute", only had the power to consider the question of whether the taxpayer had a reasonable excuse which would lead to the cancellation of the penalties. It was not open to the FTT to consider whether HMRC's decision to issue a notice to file a return was valid as such a challenge could only be dealt with by way of judicial review proceedings in the Administrate Division of the High Court.

The FTT rejected HMRC's narrow interpretation of the case law in this area and found that it was open to it and necessary for it to consider whether the notice had been validly issued in order to establish whether or not the conditions relevant to the issue of penalties had been satisfied.

The FTT was also satisfied that HMRC had issued the notices and the burden of proof was therefore on the taxpayer to demonstrate that he had not received the returns. As the taxpayer was unable to discharge this burden, he had no reasonable excuse for not filing the returns.

However, the fact the taxpayer did not have a reasonable excuse for not filing the returns did not matter as, in the view of the FTT, the penalties were not valid on the basis that the returns had not been issued in accordance with section 8(1). The taxpayer had not been issued with a notice requiring him to file a return "For the purpose of establishing the amounts in which a person is chargeable", as HMRC already knew the amount of tax that was due from the taxpayer and could have collected the tax by coding it out. The reason HMRC had taken the course it had, was to create a circumstance where there would be a debt which could be enforced.

Comment

The effect of this decision appears to be that HMRC is unable to issue section 8 notices to non-self-assessment taxpayers unless the content of the return is genuinely required for the purpose of establishing the taxpayer's liability to tax. It would not therefore be a surprise if HMRC sought permission to appeal this decision to the Upper Tribunal.

A copy of the decision can be viewed here.