Gerrit Wals v The Commissioners For HMRC

In summary Mr Ness submitted as follows:

The tax returns were filed very late.

The evidence that notices the file were served on the appellant is the fact that those tax returns were ultimately filed and noted as received on HMRC’s computer.

The evidence that the penalty notices were properly served on the appellant stems from HMRC’s computer record combined by the self-assessment notes which reflect conversations with the appellant in which he acknowledged that he had received the penalty notices.

It is not correct that the first time the appellant knew about these penalties was in March 2022. He clearly knew about them as long ago as May 2013.

The fact that there was no tax liability in the years in which the tax returns were filed late, does not affect the validity of the penalties. This was made clear to the appellant in Judge Rankin’s decision and stems from the Upper Tribunal’s decision in Edwards.

Similarly, we have no power to discharge or adjust a fixed penalty simply because we consider it to be unfair (see Hok Ltd v HMRC [2012] UKUT 363 (“Hok”).

Reliance on an agent cannot be a reasonable excuse by dint of paragraph 23(2)(b) Schedule 55.

Furthermore, the appellant should have taken steps to ensure that Mr Smith actually filed the returns. In the absence of evidence to demonstrate this, he has no reasonable excuse.

This tribunal has no jurisdiction to consider interest.

There are no special circumstances which warrant an adjustment to the penalties.

In summary Mr Ross submitted as follows:

HMRC have not established that valid notices to file were served on the appellant.

The appellant put his tax affairs in the hands of a chartered accountant and was justifiably entitled to expect that accountant (Mr Smith) to have filed his returns on a timely basis as he was instructed to do.

There was nothing which put the appellant on notice that Mr Smith was not wholly competent to undertake this task, nor that he was filing the appellant’s returns late.

The appellant has been prejudiced by the delay in contact from HMRC between 2016 and 2022. He was entitled to assume that the penalties had been rescinded by HMRC.

Given that there is no tax to pay during the years in question, it is unfair and disproportionate to visit penalties on the appellant.

The burden of establishing that the penalties have been validly issued and served upon the appellant and correctly calculated, rests with HMRC. They must establish this to the civil standard of proof, namely the balance of probabilities.

If HMRC have established this, then the burden of proof switches to the appellant to show that he has a reasonable excuse or that there are special circumstances which justify a reduction to the penalties.

We start by saying that although we have recorded Mr Ross’s submissions above, he made a considerable number which we have not recorded. The reason for this is that they were largely irrelevant to the issues which we have to decide. They were (broadly summarised) complaints about HMRC’s behaviour towards the appellant. As we explained to him at the hearing, this was not something over which we have jurisdiction unless the appellant’s case was that he could not receive a fair trial because of HMRC’s behaviour and delays. We pointed out that it was no part of the appellant pleaded case that he could not receive a fair trial, hence the reason that we did not consider his submissions relevant, and this is the reason we have not summarised them this decision.

As regards the service of valid notices to file, we do not think that the evidence suggested by Mr Ness comes anywhere close to establishing that such valid notices were served on the appellant. The fact that tax returns were actually received from the appellant is wholly insufficient. These returns could have been voluntary returns and not submitted in response to a notice to file.

Unfortunately for the appellant, the law was changed in relation to voluntary returns in the Finance Act 2019, as a result of which a voluntary return is treated as having been made in response to a valid notice to file even if, as a matter of fact, no such notice was indeed served on the appellant.

This change in legislation has both prospective and retrospective effect subject to certain exclusions, none of which are relevant to the appellant’s circumstances.

So the fact that HMRC have not established that valid notices to file were served on the appellant does not invalidate any penalties which are visited on the appellant as a result of the late filing of a tax return.

Nor, frankly, is there any mileage in the submissions that the penalties are disproportionate and unfair. Judge Rankin’s decision makes it clear that Edwards is authority that the fixed penalty regime is proportionate, and that Hok is authority that we have no jurisdiction to consider the fairness of those penalties. We take the same view as Judge Rankin. The fixed penalty regime in Schedule 55 is a proportionate regime, and we do not believe that it operates either disproportionately or unfairly as regards this particular appellant.

We find, as a fact, based on the computer evidence adduced by HMRC combined with the self-assessment notes, that the penalty notices were issued by HMRC on or around the dates reflected in their computer evidence. It is clear from the self-assessment notes that in May 2013 the appellant was able to telephone HMRC to discuss daily penalties. It was his oral evidence that if he had received any notices from HMRC he would have read them and passed them on to his accountant to deal with. Although he could not remember receiving these actual notices (hardly surprising given the passage of time) we find that it is more likely than not that he received the penalty notices in respect of all of the penalties and passed them on to Mr Smith to deal with.

So we find that HMRC have established that valid penalty notices for the penalties were issued to the appellant. So the burden now shifts to the appellant to show that he has a reasonable excuse or that there are special circumstances.

It is our view that the appellant has behaved in an exemplary fashion towards the UK tax system and HMRC. Coming from Holland he was uncertain about the UK tax system and wanted to ensure that he complied with it. He therefore took advice which was that he should employ not just an accountant, but a chartered accountant, to deal with his accounts and tax affairs. He employed Mr Smith to do just that. It is entirely reasonable for him to have expected Mr Smith to have the skills to submit his tax returns on a timely basis, and indeed this is borne out by the evidence that having submitted all the relevant information to enable Mr Smith to compile his tax returns, and submit them before the appropriate deadlines, he would meet Mr Smith to discuss the return and would then sign the completed return, and give it to Mr Smith for on line filing.

He behaved, in the words of Judge Medd as “…a responsible trader conscious of and intending to comply with his obligations regarding tax…”.

And it is equally clear that for whatever reason, he was badly let down by Mr Smith who failed to submit the appellant’s tax returns on a timely basis.

Without more, therefore, we would have found that the appellant had a reasonable excuse.

The difficulty for the appellant, however, is the statutory exclusion set out in paragraph 23(2)(b) of Schedule 55.

The relevant statutory provision reads as follows:

“23(1) Liability to a penalty… does not arise in relation to a failure to make a return if P [satisfies the tribunal] that there is a reasonable excuse for the failure.

23(2) For the purposes of sub- paragraph (1) –

(a)

…

(b)

where P relies on any other person to do anything, that is not a reasonable excuse unless P took reasonable care to avoid the failure, and

(c)

where P had a reasonable excuse for the failure but the excuse has ceased, P is to be treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased”.

In this case the appellant had put his tax affairs in the hands of Mr Smith and he relied on Mr Smith to make timely returns. This puts the appellant firmly within the statutory exclusion unless he can show that he took “reasonable care to avoid the failure”. That failure is the failure to make timely returns. And the responsibility for making those returns rested with Mr Smith.

This reasonable care extends beyond appointing a suitably qualified agent in the first place. It requires a taxpayer to take reasonable care to avoid the specific failures of that agent.

So what evidence is there that the appellant took reasonable care to avoid those failures by Mr Smith?

The appellant’s evidence is that he relied on Mr Smith to submit his returns on time. But there is no evidence that he checked up on Mr Smith as to whether he had done so. Mr Ness submits that this means that he has not taken reasonable care. We do not agree with this. We think that it is entirely reasonable for the appellant to have relied on Mr Smith as a chartered accountant, to have submitted his returns on a timely basis especially given the fact that they would have met in good time to ensure that the returns were completed and filed before the due deadline.

However, it was clearly apparent to the appellant at or around 20 May 2013, that Mr Smith had failed in his duty to the appellant as the self-assessment notes record that on that date he was able to telephone HMRC to discuss the daily penalties for the tax year 2011/2012.

By that date, the late filing penalty of £100 for 2010/2011 had been issued (on 14 February 2012) as, too, had the late filing penalty of £100 for 2011/2012.

We have found as a fact that the appellant is more likely than not to have received the penalty notices on or around the dates that are recorded on HMRC’s computer. And that he would have read them and passed them on to Mr Smith to deal with.

He would therefore have been on notice on and from 14 February 2012 that Mr Smith had not submitted his tax return for 2010/11 within the statutory deadline, as he had been instructed to do.

Yet the appellant was not able to provide any evidence of any conversation or communications with Mr Smith asking why the latter had failed to meet the deadline and, as we would have expected from a man as prudent as the appellant, asking for assurances from Mr Smith that he would not just put in a return for that year without further delay but would ensure that, in future, all his tax returns would be filed on time.

The same applies for the notification of the penalties for other years. We find that it is more likely than not that these were received by the appellant, read by him, and then passed on to Mr Smith. This is evidenced by the self-assessment notes which record telephone conversations between the appellant and HMRC in July 2013 and August 2013.

It seems clear to us that the appellant was on notice that Mr Smith was not filing his tax returns on time, yet there is no evidence before us to suggest that he told Mr Smith that his professional performance was unsatisfactory, nor sought assurances that Mr Smith would in the future file returns on time, nor did he ask for reasons why the returns were late. He continued to use Mr Smith despite the evidence that Mr Smith was clearly not submitting his returns on a timely basis which he had been instructed to do.

So whilst we think generally that the appellant took reasonable care, by dint of his meetings and discussions with Mr Smith prior to the submission of his tax returns, this reasonable care ceased once he was on notice that Mr Smith had not submitted his tax returns on time. However, the appellant could still show that he had taken reasonable care if there is evidence that he had raised this with Mr Smith and sought assurances from Mr Smith that the failings evidenced by the penalties would not be repeated.

Unfortunately for the appellant, we have no such evidence. Given that the burden of establishing that the appellant has a reasonable excuse rests with him, we cannot find that he took reasonable care once he was on notice of Mr Smith’s failings.

So, whilst we are prepared to accept that he took reasonable care for the tax return for 2010/2011 in respect of which there is a £100 late filing penalty, we do not accept that he took reasonable care in respect of the subsequent tax returns which were filed late, and the penalties associated therewith.

We have also considered special circumstances. There is no evidence that HMRC, prior to the statement of case considered special circumstances. However, they were considered in the statement of case in which HMRC say that they do not consider there to be special circumstances which warrant a special reduction under paragraph 16 of Schedule 55. We agree. In our view, reliance on an agent who then fails to do what he is instructed to do is not sufficiently special that it is right to reduce the amount of the penalties. Frankly, it is a circumstance which we come across regularly in this tribunal and does not warrant a reduction.

Drawing these threads together, we have found that the appellant does have a reasonable excuse in relation to the daily penalty of £100 in respect of the late filing of his tax return for the tax year 2010/2011.

However, he has no such reasonable excuse in relation to the other penalties which have been visited on him by HMRC, nor do we think it right to reduce those penalties because of special circumstances.

We therefore allowed the appellant’s appeal against the £100 penalty in respect of the late filing of his tax return for 2010/2011, but we dismiss his appeal against the other penalties.

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.

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