Introduction

In the landmark case of Hansard, Mr v. Revenue & Customs ([2018] UKFTT 292 (TC)), the First-tier Tribunal (Tax) addressed critical issues regarding the assessment and service of penalties for late delivery of tax returns and late payment of taxes. The appellant, Mr. Duncan Hansard, contested various penalties imposed by HM Revenue & Customs (HMRC) for the tax years 2010-11 and 2011-12. The key issues revolved around the validity of automatic assessments under paragraphs 5 and 6 of Schedule 55 of the Finance Act 2009, the correct figures in re-assessments, the applicability of Schedules 55 and 56 to Class 4 National Insurance Contributions (NICs), and the proper service of penalty notices.

Summary of the Judgment

The Tribunal meticulously examined the grounds for each penalty imposed on Mr. Hansard. It found that while the initial penalties under Schedule 55 were validly assessed, issues arose concerning the proper service of re-assessed penalties. Specifically, certain penalties were deemed invalid due to improper addressing and service of notices. Additionally, the Tribunal scrutinized the inclusion of Class 4 NICs in the penalty calculations under Schedule 55, ultimately affirming their applicability. Consequently, the Tribunal cancelled several improperly served penalties while affirming the validity of others, setting a clear precedent on the necessity of correct notice service and accurate penalty assessments.

Analysis

Precedents Cited

The judgment referenced several pivotal cases that influenced the Tribunal's decision:

• Donaldson v HMRC [2016] EWCA Civ 761: Influenced the procedural handling of penalty appeals.
• Halfaoui v HMRC [2018] UKFTT 13 (TC): Affirmed the burden of proof on HMRC in penalty cases.
• Patel & another v HMRC [2018] UKFTT 185 (TC) and Wood v HMRC [2018] UKFTT 74 (TC): Clarified the necessity of a formal "notice to file" for penalty applicability.
• Freetown Ltd v Assethold Ltd [2012] EWCA Civ 1657: Discussed the interpretation of "reasonable excuse" in penalty contexts.

Legal Reasoning

The Tribunal's legal reasoning was multifaceted, addressing both procedural and substantive elements of the penalties:

• Notice to File: The Tribunal emphasized the importance of a formally served "notice to file" as per Section 8(1) of the Taxes Management Act 1970 (TMA). It distinguished between notices incorporated within the tax return and standalone notices, determining that only the latter fulfilled the legal requirements.
• Automatic Assessments under Schedule 55: The Tribunal scrutinized HMRC's automated penalty assessments, particularly under paragraphs 5 and 6 of Schedule 55 FA 2009. It highlighted the necessity for HMRC officers to form a "best information and belief" before issuing penalties, a standard HMRC failed to meet in certain instances.
• Application to Class 4 NICs: The judgment clarified that Schedule 55 penalties extend to Class 4 NICs, following amendments in the Social Security Contributions and Benefits Act 1992. The Tribunal confirmed that penalties could be assessed based on both income tax and Class 4 NICs.
• Supplementary Assessments: Addressing the conflicting provisions of Schedule 55, the Tribunal concluded that re-assessments under paragraph 24 must replace initial assessments rather than supplement them, ensuring penalties reflect accurate tax liabilities.
• Reasonable Excuse: The appellant's claims of depression and reliance on accountants were deemed insufficient. The Tribunal underscored the burden of proof on the appellant to demonstrate a reasonable excuse for late filings and payments.

Impact

This judgment has significant implications for both taxpayers and HMRC:

• Strict Notice Service: Reinforces the necessity for HMRC to serve penalty notices correctly. Automated systems must ensure that addresses are accurate and notices are properly formatted.
• Clarification on Schedule 55 Application: Confirms that penalties under Schedule 55 include Class 4 NICs, broadening the scope of potential penalties for taxpayers.
• Reaffirmed Burden of Proof: Maintains that HMRC holds the burden to prove the validity of penalties, while taxpayers must substantiate their claims for reasonable excuses.
• Penalties Assessment Procedure: Sets a precedent for how supplementary assessments should be handled, ensuring they replace rather than add to initial penalties.

Complex Concepts Simplified

Schedule 55 and Schedule 56 of the Finance Act 2009

Schedule 55: Deals with penalties for failing to file tax returns or deliver other required documents on time. It outlines different types of penalties based on the duration of the delay, such as initial penalties, daily penalties, and higher penalties after six and twelve months.

Schedule 56: Pertains to penalties for failing to pay taxes by the due dates. Similar to Schedule 55, it categorizes penalties based on how late the payment is, with increasing fines the longer the delay.

Reasonable Excuse

A "reasonable excuse" is a legal justification that a taxpayer can present to avoid penalties for late filing or payment. It must demonstrate that the failure was beyond the taxpayer's control or that they took reasonable steps to comply but were hindered by unforeseen circumstances.

Notice to File

A "notice to file" is a formal communication from HMRC requiring a taxpayer to submit their tax return by a specific date. Proper service of this notice is crucial for the enforcement of penalties for non-compliance.

Class 4 National Insurance Contributions (NICs)

Class 4 NICs are contributions paid by self-employed individuals based on their profits. These are separate from income tax but are subject to similar penalties for late payments and filings.

Conclusion

The Hansard v. HMRC decision serves as a critical reminder of the stringent procedural requirements governing tax penalty assessments. By affirming the necessity of properly served notices and accurate penalty computations, the Tribunal has reinforced the legal safeguards that protect taxpayers from unjust penalties. Furthermore, the judgment clarifies the application of penalty schedules to Class 4 NICs, expanding the scope of enforcement. Taxpayers must ensure meticulous compliance with filing and payment deadlines, while HMRC must uphold rigorous standards in penalty administration. This precedent will undoubtedly influence future tax tribunal cases, emphasizing the importance of procedural correctness and fair assessment practices in the realm of tax law.