Upper Tribunal rules on taxpayer liability for fixed penalty

Steven Porter, tax law expert at Pinsent Masons, said: “This is a curious case due to its unusual fact pattern, with HMRC issuing and then cancelling one set of penalties, and then issuing a further penalty before the time provided for compliance with the information notice had expired.”

In this case (21 pages / 443 KB ), HM Revenue and Customs (HMRC) issued the taxpayer with an information notice that had been approved by the tribunal. An information notice requires ‘relevant information’ to be provided to HMRC to determine a business’ or person’s tax position.  Due to delays in issuing, HMRC had changed the date of compliance with the tribunal-approved information notice.

Following this, HMRC applied to the Upper Tribunal for a ‘tax-related penalty’ of approximately £14 million. The taxpayer applied to strike out HMRC’s application on the grounds that the statutory pre-conditions for issuing the penalty had not been met and therefore HMRC’s application had no reasonable prospects of success.

The Upper Tribunal granted the taxpayer’s application to strike out HMRC's application for a tax-related penalty under paragraph 50 of Schedule 36 to the Finance Act 2008. It found that HMRC’s application had no reasonable prospect of success for one of two reasons. First, HMRC had varied the date for compliance with the notice and then attempted, incorrectly, to issue a fixed penalty before the time for compliance had expired meaning therefore the statutory pre-conditions for issuing a tax-related penalty had not been met. Or second, HMRC sought to apply for a tax-related penalty outside the statutory 12-month window within which to do so.

Porter said: “The Upper Tribunal was at pains to stress that it was not deciding as to whether or not HMRC can extend a time limit for compliance, but did give strong indications that HMRC does not have that power. If correct, it could have a substantial impact on taxpayers, who seek, with good grounds, extensions to time limits. It also leads to operational difficulties as to whether HMRC can go back to the tribunal to get an extension agreed within the time set for compliance in the first place.”

The Upper Tribunal subsequently rejected the taxpayer’s argument that a person who has appealed against a fixed penalty is not ‘liable’ to that penalty until the appeal has been finalised. Instead, it held that the requirement of the taxpayer being ‘liable’ to a penalty is satisfied automatically by a failure to comply with an information notice. However, the decision did note that the Upper Tribunal's decision as to whether to approve a tax-related penalty would usually be deferred until any live questions around liability to a fixed penalty in an appeal had been resolved.

Ian Robotham, tax law expert at Pinsent Masons, said: “The Upper Tribunal views on when a taxpayer is liable for a fixed penalty and when tax-related penalties can be applied for will be of interest to any taxpayer who receives an information notice. As long as there has been a failure to comply with an information notice, HMRC can move straight to asking the Upper Tribunal for a tax-related penalty to be applied.”

While the Upper Tribunal noted that the usual course of events is that penalties can escalate from fixed, to daily, to tax-related, it concluded that the legislation does not require this escalation.

“This could be important for taxpayers as a relatively short-lived failure to comply with an information notice could potentially have serious financial implications. The difference between, in this case, a fixed penalty of £300 and a tax related penalty of £14 million,” Robotham said.