In Kestrel Guards Limited v Revenue & Customs [2014] UKFTT 184 (TC) the First-tier Tribunal (Tax Chamber) ("FTT") allowed the taxpayer's appeal and discharged a penalty which had been imposed by HMRC for the late filing of PAYE cheques.

The FTT was also critical of HMRC's evidence as to telephone records.

Background

Kestral Guards Limited (the "Company") had two director-shareholders, Mr Keith Matthews and his son, Mr James Matthews, who both worked full-time in the business.  The Company also had two other shareholders, one retired and the other who worked part-time.  Cheques issued for amounts in excess of £500 on the Company's accounts required two signatures.  This was usually Mr Keith Matthews and Mr James Matthews, although one of the other shareholders was also authorised to countersign cheques. 

Payments for PAYE must normally be made to HMRC on a monthly basis.  HMRC's website advises that where companies pay by post, their cheque must reach HMRC no later than the 19th of the month following the end of the tax month or quarter to which the payment relates, so that the payment for month 1 (ending on 5 May) should reach HMRC no later than 19 May.

Mr Keith Matthews became unexpectedly ill, and underwent an emergency quadruple bypass operation on 5 April 2010.  As Mr Keith Matthews was incapacitated, Mr James Matthews was left to run the business.

In a letter dated 13 June 2011, HMRC imposed penalties on the Company totalling £24,931.64 for late payment of PAYE in relation to the 2010/11 tax year.  The Company appealed and sought an internal review.

On 24 September 2011, following the review, HMRC reduced the penalty to £13,330.89, on the basis that the Company had a reasonable excuse for the late payments in May to June 2010 (ie months 1 to 3), that reasonable excuse being the disruption caused by Mr Keith Matthews's ill health.  By August 2010 (in which the payment would be made for month 4), HMRC expected that Mr James Matthews would have made any necessary adjustments to allow for the PAYE returns to be filed on time.  The Company did not challenge this on appeal.

FTT's decision

The Company contended that months 4-10 and month 12 (August to April with the exception of March) were filed on time.  This was because its PAYE cheque was sent by first class post to HMRC before the 19th of each month.  HMRC contended that cheques would be logged when they were received, and that the logging dates for each cheque (consistently after the 19th of each month during the year) evidenced that the payments were made late.

HMRC's submission that the logging date should be regarded as the effective date of payment ("EDP") was based upon its computer records and the HMRC officer's evidence that unspecified colleagues had informed him that 99% of cheques were logged the day they were received. 

Mr James Matthews' evidence was that he clearly recalled being warned in early 2010 (and HMRC's own telephone records reflected his recollection) that payments had to be received by the 19th of each month, and he decided from then onwards to pay by the 19th of each month in order to avoid incurring penalties.

Mr James Matthews' evidence was that each month he would obtain his father's signature and sign the cheque himself, and then post the cheque on the day it was dated in a first class envelope provided by HMRC.  HMRC challenged this evidence, and pointed out that he had not produced any proof of posting.  The FTT considered the lack of evidence of posting to be irrelevant and accepted Mr James Matthews' evidence that the cheques were posted to HMRC by first class post on the date which appeared on the cheques.

The FTT considered that "in the ordinary course first class post posted before the last collection time should arrive at its destination the next day."  The FTT also noted that section 7 of the Interpretation Act 2010 (references to service by post) provides for deemed service of post.

The FTT also noted that HMRC's logged EDP dates were usually two working days before the cheque payment was shown as withdrawn from the Company's bank account.  This indicated that the EDP was not the date the cheque was received. The FTT observed that "logic suggests that around the 19th of every month HMRC would be inundated with PAYE payments from all employers and might be unable to deal with all the post on the day it was received". It commented  that HMRC "does not have a system for recording the date that PAYE cheques are actually received as opposed to the date the envelope is opened and the cheque banked." 

HMRC had not, therefore, established that any of the payments were late, other than those for months 1 to 3 and month 11, which the Company accepted were late.  All of the other months were, on the evidence produced on behalf of the Company, which the FTT accepted, posted by first class post in sufficient time to arrive on or before the due date.

The appeals for months 4-10 were therefore allowed. 

As noted above, month 11 was late, but without reasonable excuse.  The cheque was dated the 23rd March 2011, so could not have reached HMRC in advance of the 19th.  Mr James Matthews could not remember why it was paid late.  It was suggested that this may have been due to holiday, but that would not normally constitute a reasonable excuse.  Given the FTT's other findings, this was the first default of the 2010/11 year and so (through the operation of paragraph 6(3) and 16(1)(b), Schedule 56, Finance Act 2009) no penalty arose in respect of this late payment.

The Company's secondary argument

In case the matter proceeded further on appeal, the FTT recorded its findings in relation to the Company's secondary argument, that even if the payments were late, it had a reasonable excuse for late payment in months 4 to 10, on the basis that it believed its payments would be received by HMRC in time.

Given Mr James Matthews' evidence that he genuinely believed that cheques posted by first class post would arrive the next day, and the reliability of the post service, in the view of the FTT his actions were reasonable.

HMRC argued that the Company ought to have known that HMRC were not receiving the cheques on time.  HMRC relied in support of this argument on eight telephone calls made to the Company which should, in its view, have alerted the Company to HMRC's views.

The FTT found as a fact that HMRC only spoke to Mr James Matthews in months 1 and 3, which would not alert him to HMRC's view that the payments were being received late.  All the other calls apparently requested Mr James Matthews to call HMRC back.

In any event, there were a number of problems with HMRC's records of call.  Two of the calls recorded a message being left with a named person who did not work for the Company.  Another call was recorded as having taken place on Christmas Day.  Of greater concern was the fact that a number of the call entries recorded that the Company "Refuses to pay".

It was accepted by HMRC that the Company had never refused to pay.  HMRC's explanation for this discrepancy was that it was due to a coding error.  The FTT expressed some concern that the coding error existed, and that despite being identified "in at least one earlier Tribunal decision" (namely, Calberto) it was yet to be rectified by HMRC.

The FTT did not consider that P101s which HMRC sent to the Company (which did not state that payment had been received late, and stated that they could be ignored if payment had been made in the preceding few days) did anything to alert the Company to HMRC's view that the payments were being received late.

The FTT therefore concluded that had it been necessary to do so, it would have found that the Company had a reasonable excuse for late payment.

Comment

The criticisms made of HMRC by the FTT in this case are particularly strong. The FTT said that it was "very concerned by HMRC's failure to issue warnings as the penalties accumulate", and observed that "a taxpayer cannot minimise its defaults if it does not know it is in default". It also  commented that:

"In keeping records, and producing them to the Tribunal, that untruthfully show the taxpayer as having refused to pay its tax liability, HMRC is acting unfairly and probably unlawfully.  Fortunately, we have not been misled by this erroneous record."

It is of concern that HMRC's internal systems recorded (incorrectly) such a serious allegation about a taxpayer, especially given the length of time that HMRC have been aware of this problem (the Calberto case was handed down on 29 November 2012).  It is to be hoped that HMRC will take on board the criticisms made of it by the FTT and correct its systems without any further delay.