In the case of HMRC v HOK Ltd (published on 25 October 2012) the Upper Tribunal (UT) ruled that the First-tier Tribunal (FTT) was wrong to discharge late filing penalties on the grounds that they were unfair. The case highlights that the Tribunal is not tasked with supervising HMRC’s conduct nor can it override statute.
The Tribunal cannot discharge fixed penalties on the grounds of unfairness if they are properly due and prescribed by statute.
HOK Ltd was 5 months late filing its 2010 PAYE end of year return and did not realise there was a problem until September 2010 when HMRC sent out a penalty notice warning that it had incurred 4 monthly penalties of £100. The company did not have a reasonable excuse for the delay in submitting the end of year forms; however, the FTT ruled that the company only needed to pay £100 for one month and discharged the other penalties. The reason for this was that the FTT felt that HMRC had acted unfairly by not reminding the company after one month that it had incurred a penalty and stated:
“we have no doubt that any right thinking member of society would consider that to be unfair and falling very far below the standard of fair dealing and conscionable conduct to be expected of an organ of the State.”
The FTT went so far as to suggest that HMRC deliberately delayed issuing penalty notices so that the minimum penalty was £500.
HMRC appealed the decision and the matter was referred to the UT, which overturned it. The basis for its decision was that it was not within the FTT’s jurisdiction to ‘exercise a judicial review function’ or apply common law principles to penalties prescribed by statute.
What does this mean for UK taxpayers? The decision confirms that the FTT only has the jurisdiction conferred on it by statute and that it cannot override statute and apply common law principles. If the penalties charged are correct and the taxpayer has no reasonable excuse for the delay then the FTT cannot change the fixed penalty on the basis of fairness. It should be emphasised that the UT’s decision does not apply to appeals against the quantum of tax-geared penalties.
One other point that arises from the decision is that for 2012 onwards, HMRC have changed their procedures so that employers are warned after one month that a penalty has been incurred. Whether this case influenced that decision, is unclear!
Gabelle provides expert tax support to professionals on all HMRC powers and penalties. If you have any questions concerning the decision and how this may affect you and your clients, please contact TaxDesk on 0845 490 5009 and ask for John Hood or Noel Hankinson.