Hawthorn Properties Unlimited v The Commissioners for HMRC

With the consent of the parties, the form of the hearing was by video. The documents to which we were referred were: a bundle of documents running to 143 pps., HMRC’s updated Statement of Reasons, and a bundle of legislation and authorities. We also received additional written submissions from the Respondents dated 14.2.24, and from the Appellant dated 15.3.15, for which we are grateful.

Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.

This is an appeal by the Appellant against late filing penalties for the various tax years shown in the table below charged under Schedule 55 Finance Act 2009 (“Sch.55”).

The Appellant also sought to appeal the same set of penalties for the year ended 31.3.22 but had not appealed them to HMRC. The Tribunal therefore does not have jurisdiction to hear those appeals as they must first be appealed to HMRC (see para.20 Sch.55 and paras.35 – 36 Sch.33 Finance Act 2013). Those appeals are therefore struck out for want of jurisdiction. That should not be taken as being in itself any bar to the Appellant making an appeal to the Tribunal should (i) it make an appeal to HMRC first, and (ii) should issues as to the lateness of that appeal be resolved in the Appellant’s favour.

The penalties are predicated on the Appellant’s failure to make an Annual Tax on Enveloped Dwelling (“ATED”) return for the years in question.

The ATED legislation was introduced by the Finance Act 2013. In summary, a dwelling is “enveloped” when it is owned by a non-natural person (in this case a company). A tax is charged annually and is payable unless an exemption can be claimed.

The onus is upon the taxpayer to file an ATED return in respect of properties meeting the threshold for doing so. A return is due even where an exemption or relief applies. In this case a relief applied for the property being let on a commercial basis. The return is made annually.

For the tax years 2013/2014 and 2014/2015, the threshold property value for the charge to tax was £2,000,000 as at the date of 1.4.12 or later acquisition. For the tax year 2015/16, the value was reduced to £1,000,000 as at 1.4.12 or later acquisition. For the tax year 2016/2017, the value was reduced to £500,000 as at 1.4.12. The legislation also provides for fixed revaluation dates every five years regardless of when the property was acquired.

By paras.1(5) and 2 of Sch. 55 the penalties at paras. 3 to 6 of Sch. 55 apply to the failure to file an ATED return.

Other matters canvassed at the hearing have also narrowed the scope of this appeal. The Respondents accepted at the hearing that since the value of the relevant property was below the ATED threshold for the year ended 31.3.16, despite an ATED return belatedly being made for that period no such return was actually required, and therefore no penalty is actually due. The appeal is therefore allowed in respect of the 4 penalties imposed for the year ended 31.3.16 and those penalties are discharged.

The Appellant also confirmed that it does not appeal the initial £100 late filing penalties for the years ended 31.3.17, 31.3.19 and 31.3.21. The appeal is therefore dismissed in respect of those penalties. The Appellant does not dispute liability to the remainder of the penalties. The Appellant accepts that it does not have a reasonable excuse for the remainder of the penalties. This appeal, as the parties agreed at the hearing, is solely concerned with whether the remaining penalties should be reduced for special circumstances.

The late filing penalty regime is set out in Sch.55. The combined effect of Para.1(1) (item 11A) and (4) Sch.55 is that a person is liable to a penalty when he does not file an ATED return by the date that HMRC has required him to. Paras. 3-6 of Sch.55 set out the initial and subsequent penalty amounts and the periods of time to which they are linked.

Para.16 Sch.55 states

In sub-paragraph (1) “special circumstances” does not include—

In sub-paragraph (1) the reference to reducing a penalty includes a reference to—

agreeing a compromise in relation to proceedings for a penalty.”

Para.20 Sch.55 states:

P may appeal against a decision of HMRC that a penalty is payable by P.

Para.22 Sch.55 states:

The Tribunal can therefore only consider whether there are special circumstances justifying a reduction in the amount of the penalties if HMRC’s decision on this aspect is “flawed” in a judicial review sense.

We find that the Appellant was not aware of the requirement to make ATED returns at the time that the returns that are the subject of this appeal were due. That was the Appellant’s mistake, it was a genuine mistake, and it was one genuine mistake that led to multiple defaults.

HMRC have considered special reduction. The appeal letters are largely generically worded, the review letter does not consider the totality of the penalties issued. In accordance with the decision in Bluu Solutions Limited [2015] UKFTT 95 [at 110] HMRC additionally have until the conclusion of the hearing to exercise their discretion in relation to special circumstances. HMRC have also considered special reduction in the Statement of Reasons, arguing specifically that the penalties are the result of six different mistakes, not one as the Appellant suggests. That is on the basis that the failure to submit an ATED return for each relevant period was a separate mistake, albeit one with a common root.

In Barry Edwards v HMRC [2019] UKUT 131 the Upper Tribunal warned against putting any "judicial gloss" on the words "special circumstances" - in other words, trying to define the term.  The Upper Tribunal also approved the following statement made by Judge Vos in Advanced Scaffolding v HMRC [2018] UKFTT 0744 (TC) at [102]:

Judge Vos also said in the same case at [106] that the right approach for the Tribunal is to look at all the relevant circumstances and consider whether, in the particular case in question, those circumstances are “special”. We agree.

Advanced Scaffolding was a case on penalties for CIS returns. Judge Vos addressed para.13 of Sch.55 at [126] – [128], saying:

Mr. Hackett submitted that if Parliament had intended to limit the number of penalties chargeable to a taxpayer for submitting multiple ATED returns at once for the first time, it would have expanded para.13 of Sch.55 or introduced a similar paragraph covering ATED returns in later legislation such as the Finance Act 2013. Mr. Hackett submitted that in the absence of such legislation Parliament must have intended that taxpayers would receive the full number of penalties chargeable under the law even when submitting multiple late ATED returns.

We do not accept those submissions. Firstly, as Judge Vos said in [127] of Advanced Scaffolding, CIS returns are made monthly so the legislation was intended to avoid the defaulter being subject to multiple monthly penalties which could very quickly run up to very significant amounts of money. ATED returns however, are made on a different basis, being made annually.

Secondly, and more fundamentally, Parliament did intend to limit what could be included within special circumstances under para.16 of Sch.55, and provided two specific matters therein that were not included. What Parliament did not do was also exclude from special circumstances multiple penalties arising from a single mistake. Had Parliament have wished to, it could and would have done so. We therefore do not accept the legislative intention ascribed to the provisions by Mr. Hackett.

Thirdly, Mr. Hackett himself said in his written submissions: “Whilst the Respondents accept that incurring multiple penalties is a relevant circumstance, they do not accept that makes them a special circumstance.” If incurring multiple penalties is accepted to be a relevant circumstance, that rather undermines the argument on legislative intention.

Mr. Hackett also submitted that ATED is a self-assessed tax, the Appellant had a responsibility to keep its tax knowledge up to date, and the Appellant had “six opportunities” to become aware of their error. We accept the first two parts of that submission, and the Appellant does not argue that it had a reasonable excuse. We do not accept the last submission. As we return to below, characterising an annual return requirement as an “opportunity” to become aware of an error that one does not know that one has made is, in our view irrational. The annual return requirement itself, and the knowledge of that requirement are two separate things. If one does not come to know of the requirement, the separate fact of the annual requirement to make the return is no “opportunity” at all to become aware of a subsisting error.

Mr. Hackett also submitted that overall there were no special circumstances.

The Tribunal finds HMRC’s treatment of special reduction to have been irrational and therefore flawed in public law terms. Where a taxpayer has no knowledge of the requirement to file an ATED return that means that where the requirement is not met in year 1, it will inevitably not be yet in year 2, and so, on until the taxpayer becomes aware of it. The effect is that one mistake, the failure to understand the requirement to submit an ATED return leads to numerous penalties being issued. Characterising that one mistake as six solely by reference to the legislative requirement to submit a return for each tax year is, as we have found above, irrational.

That finding does not mean that the circumstances are special at this stage of the analysis, they simply mean that the Tribunal is entitled to consider for itself the issue of special reduction.

The Appellant puts forward that its compliance history is, but for this issue, exemplary. In the Tribunal’s view, that should be the norm, and of itself is not a special circumstance.

The Appellant puts forward that this was a genuine mistake. We have accepted that it was. We do not accept that of itself this is a special circumstance where the regime encourages taxpayers not to make such mistakes.

The Appellant puts forward that there was no loss of tax, and we accept that there was no loss of tax. We do not accept that this is itself a special circumstance, since the regime requires a return to be made even where there is no tax due.

We note than unlike other penalty regimes there is no requirement for HMRC to provide any form of warning to the taxpayer that such penalties are accruing, but that is a legislative choice we must respect, and in and of itself cannot be a special circumstance.

Proportionality by reference to the size of the penalty cannot be a special circumstance in cases where there is no liability and a minimum penalty is levied (Marano v HMRC [2023] UKUT 113 (TCC) at [138].

We do, however, think that it is right to consider all the above issues, save for proportionality by reference to the size of the penalty, in the round. In doing so we have come to the conclusion that cumulatively the following amount to “special circumstances”:

Those circumstances justify, in our view, reducing some of the penalties, as is set out below.

We maintain in full the remaining penalties for the year ending 31.3.17 which was the first year that the Appellant was required to make an ATED return. We do not find it a special circumstance that one failure to make a return should lead to multiple penalties, capped by the legislation, for the failure to make the initial return.

We do however view the circumstances we have set out above as sufficiently special where that one failure causes the whole penalty process to start again in relation to subsequent years. That is because there is then (i) a greater temporal dislocation between the initial mistake and its consequence, and (ii) a greater remoteness of culpability, in that it is the original error that causes the iteration of the failure to make the subsequent return, and the penalties to accrue in relation to those subsequent returns.

The Appellant accepts the remainder of the initial late filing penalties for the years 31.3.19 and 31.3.21. We reduce the remaining penalties for those two years to nil.

The appeal against the penalties for tax year ended 31.3.16 are allowed as the Appellant was under no requirement to make an ATED return and so no penalty was due.

The appeal against the 4 penalties for the tax year ended 31.3.17 is dismissed.

The appeal against the penalties for the tax years ended 31.3.19 and 31.3.21 is, save for the £100 initial daily penalty for each year, allowed.

The appeal in respect of the penalties for the tax year ended 31.3.22 is struck out.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.