In Jackson v HMRC  UKFTT 0064 (TC), the First-tier Tribunal (FTT) has held that HMRC had misapplied the law in respect of penalties it had issued to the taxpayer for filing late returns.
The below is based on an article first published in Taxation on 28 March 2018. A copy of that article can be viewed here.
Since 6 April 2015, disposals of UK residential property by non-UK residents have been subject to non-resident capital gains tax (NRCGT). A return must be filed within 30 days of disposal of the relevant property.
The taxpayer was non-UK resident for tax purposes. He disposed of two properties in the UK in May and September 2015, with no gain arising.
In line with the other cases on this subject (Rachel McGreevy v HMRC  UKFTT 690 (TC); Hesketh v HMRC  UKFTT 871 (TC); Robert Clive Welland v HMRC  UKFTT 870 (TC); and Patsy-Anne Saunders v HMRC  UKFTT 0765 (TC)), the taxpayer did not realise that the rules had changed, creating an additional filing obligation. It was his intention to comply with what he thought was the relevant deadline and to this end he visited his accountant on 1 October 2016 to discuss his annual self-assessment return which had to be filed by 31 January 2017. It was on this visit that he became aware of the change in the law and immediately completed the required NRCGT returns which showed that no capital gain had been made on the disposal of either property and as a consequence no capital gains tax was due. The returns were received by HMRC on 2 October 2016 and as they were late HMRC issued eight penalties, pursuant to paragraphs 1, 3, 4, 5 and 6, Schedule 55, Finance Act 2009.
The penalties originally totalled £3,200, which included daily penalties of £1,800. HMRC exercised its discretion to reduce the daily penalties to nil leaving a balance of £1,400 outstanding (£100 for being late, £300 for being six months late and £300 for being twelve months late in respect of each property).
The taxpayer appealed against the penalties claiming that the returns were submitted late due to the fact that he had missed the relevant changes in UK tax law in respect of when notification was to be made.
The taxpayer contended that the penalties were disproportionate and should not have been issued.
HMRC contended that the taxpayer had an obligation to stay up to date with legislation affecting his activities in the UK. On the sale of his UK properties, HMRC expected the taxpayer, acting as a prudent person, exercising reasonable foresight and due diligence and having proper regard to his responsibilities under the Tax Acts, to have researched what is required of him. HMRC further contended that the taxpayer did not take care to avoid the failure to ensure that the NRCGT returns were filed within the statutory 30 day time limit and did not have a reasonable excuse for this failure.
In determining the appeal, the FTT considered whether:
1. HMRC had correctly addressed and notified the penalties; 2. HMRC had applied the penalty legislation correctly including in relation to the calculation of the amount of the penalties; 3. the taxpayer had a reasonable excuse for his failure to submit the returns on time; 4. there were special circumstances which would allow HMRC to reduce the penalties and whether HMRC’s decision on special circumstances was flawed; 5. the penalties were disproportionate, harsh or unfair.
Issue 1 was determined in favour of HMRC as the taxpayer had referred to the penalty notices in correspondence, albeit HMRC could not produce copies of the notices.
Paragraph 3, Schedule 55, Finance Act 2009, imposes a fixed penalty of £100 if a return is submitted late. This is a fixed penalty with no reference to the amount of tax due. The FTT concluded that HMRC had applied this aspect of the legislation correctly and upheld those penalties.
With regard to the remaining penalties (issued under paragraphs 5 and 6, Schedule 55, which provide that a penalty issued under those paragraphs is the greater of (i) 5% of any liability to tax which would have been shown in the return in question, and (ii) £300), the FTT concluded that HMRC had erred in its interpretation of the legislation.
It was accepted by HMRC that with regard to the disposal of each property, no capital gains tax was due. Accordingly, in determining which was the greater, HMRC proceeded on the basis that as 5% of a nil liability to tax is nil, the penalty should be in the greater amount of £300. HMRC had issued two penalties, each in the sum of £300, in respect of each property.
The FTT observed that in making these four penalty calculations, HMRC had to consider the taxpayer's liability to tax and said at para :
"The Tribunal considers that in making the 4 assessments of £300 HMRC have overlooked the provisions of paragraphs 1(3) and 17 (3) of Schedule 55. Paragraph 17(3) states: (3)Where P is liable for a penalty under more than one paragraph of this Schedule which is determined by reference to a liability to tax, the aggregate of the amounts of those penalties must not exceed 100% of the liability to tax. It is clear that the appellant was liable to a penalty under more than one paragraph of Schedule 55 namely paragraphs (3),(4),(5), and (6) albeit HMRC have cancelled or withdrawn the daily penalty described in paragraph (4) … . The penalties under paragraphs (5) and (6) for each disposal were all notified to the appellant by HMRC on the same day, 21 November 2016, so HMRC must have been aware for each disposal that they had notified more than one penalty determined by reference to a liability to tax. It is accepted that the tax liability for each disposal is nil. 100% of a nil liability to tax is nil. Therefore the aggregate of the penalties determined by a liability to tax must not exceed nil. The Tribunal has therefore applied this provision and concludes that none of the four penalties of £300 should have been assessed." (Emphasis added).
The FTT therefore concluded that none of the four penalties of £300 should have been issued.
The taxpayer's 'reasonable excuse' for failing to file the returns on time was that he was unaware of the relevant legislative changes concerning filing deadline dates. Following the reasoning of the FTT in Robert Clive Welland v HMRC  UKFTT 870 (TC), the FTT concluded that ignorance of the law did not provide the taxpayer with a reasonable excuse for the late filing of his returns.
Issues 4 and 5
Paragraph 16(1), Schedule 55, Finance Act 2009, allows HMRC to reduce a penalty below the statutory minimum if there are 'special circumstances'.
In concluding that the taxpayer was able to rely upon such special circumstances, the FTT again referred to the Welland decision in which the FTT had held that the taxpayer in that case had not been given an opportunity to correct his behaviour. In Welland, the taxpayer had sold three properties and incurred three penalties before he became aware that he was required to submit a NRCGT return within 30 days of the date of disposal of the properties. In allowing the taxpayer's appeal, the FTT held that there were special circumstances that would engage HMRC's discretion to reduce the penalty under paragraph 16(1). This was because the taxpayer had made three property sales in quick succession and so was unable to learn from his non-compliance with the NRCGT reporting deadline. The FTT therefore considered that only the first out of the three penalties should be payable.
In the present case, and in line with Welland, the FTT concluded that the 6 month and 12 month penalties should not have been issued and cancelled them because the taxpayer had not been given an opportunity to learn from his non-compliance.
In relation to whether the penalties were disproportionate, harsh or unfair, the FTT said at para : "… HMRC consider that there are no special circumstances that gave rise to the late submission and the Tribunal considers that HMRC’s decision on that is flawed. It must be unusual for an appellant to receive eight penalties on one day in respect of two failures. The fact that all the penalties were issued on the same day clearly gave the appellant no opportunity to correct his behaviour or learn from his first mistake. It is clear that the system of penalties is designed in such a way as to progressively penalise a taxpayer until he rectifies his error. Eight penalties in one day denied the appellant that opportunity. Therefore the Tribunal has decided there were special circumstances and reduces the penalty to nil."
The FTT therefore reduced the penalties to nil in relation to the second return, and confirmed that the penalty of £100 in relation to the first return was correctly imposed, for the reasons set out in Welland, namely, that a taxpayer should be given an opportunity to affect future compliance. Issuing more than one penalty in one day was contrary to that requirement.
This decision confirms the view of the FTT expressed in Welland that, as the taxpayer had had no opportunity to correct his behaviour between the two late returns, special relief should be given to reduce the penalties on the second return to nil.
Perhaps of greater significance is the view expressed by the FTT in relation to Issue 2. The FTT noted that where a penalty is raised under more than one paragraph of Schedule 55, which is determined by reference to a liability to tax (ie a 'tax geared' penalty), paragraph 17(3) limits the total amount of those penalties to 100% of the tax liability. This means that where there is no tax liability, the total amount of penalties issued under more than one paragraph of Schedule 55, which are determined by reference to a liability to tax, will be nil. In this case, the FTT determined that the taxpayer was subject to more than one tax geared penalty and therefore, given that the total amount of tax payable was nil, the total liability of the penalties issued under paragraphs 5(2) and 6(5) should not exceed nil.
However, such an interpretation could lead to an anomalous result. For example, a taxpayer is required to file his 2015/16 self-assessment return by 31 January 2017. If we assume that no tax is due and the taxpayer misses this date, HMRC may issue a flat rate penalty of £100 under paragraph 3, Schedule 55. If the taxpayer continues to fail to file his return until 29 July 2017, HMRC may impose a flat rate daily penalty of £10 per day under paragraph 4(2), Schedule 55. If the return remains unfiled until 2 August 2017, HMRC may impose a penalty of 5% of any liability to tax or £300, whichever is the greater, under paragraph 5(2), Schedule 55.
So far so good, as paragraph 17(3) does not apply because the taxpayer is not subject to a tax geared penalty under more than one paragraph of Schedule 55. However, if the return is not submitted until, say, 14 March 2018 (ie more than 12 months after the due filing date of 31 January 2017), HMRC may impose a penalty of 5% of any liability to tax or £300, whichever is the greater, under paragraph 6(5), Schedule 55. In such circumstances, paragraph 17(3) would apply as there are now two tax geared penalties (imposed under paragraphs 5(2) and 6(5)) and it would appear from the FTT's decision in Jackson that the aggregate of all the penalties imposed under paragraphs 5(2) and 6(5) cannot exceed 100% of the liability to tax which, on the facts of our example, is nil. Accordingly, the aggregate of all the penalties imposed under paragraphs 5(2) and 6(5) would also be nil. If correct, this means that by delaying submission of his return by more than 12 months the taxpayer can escape all penalties imposed under these paragraphs.
An alternative interpretation, which would avoid such an anomalous result, would be to treat penalties imposed under paragraphs 5(2)(a) and 6(5)(a) as tax geared penalties and treat penalties imposed under paragraphs 5(2)(b) and 6(5)(b) (ie the £300 penalties) as flat rate penalties.
Given the wider implications of this decision, it would not be surprising if HMRC sought to appeal the decision to the Upper Tribunal.
A copy of the decision can be viewed here.