Introduction

Sudall v. Revenue and Customs ([2017] UKFTT 404 (TC)) is a significant judgment rendered by the First-tier Tribunal (Tax) on May 10, 2017. The case centers on the appellant, Mr. D.R. Sudall, who contested penalties imposed by Her Majesty's Revenue and Customs (HMRC) for the late submission of a partnership tax return for the fiscal year 2011-12. The primary legal question pertained to the validity and applicability of the penalties under Schedule 55 of the Finance Act 2009, specifically focusing on the circumstances under which daily and six-monthly penalties could be levied for delayed tax filings.

The crux of the dispute involved whether Mr. Sudall had a reasonable excuse for the delays in filing and whether HMRC had adhered to the statutory requirements in imposing the penalties. The case also examined the extent to which precedent cases, notably Donaldson v HMRC [2016] EWCA Civ 761, influenced the tribunal's decision-making process.

Summary of the Judgment

The tribunal upheld HMRC's decision to impose a six-month late filing penalty of £300 on Mr. Sudall but canceled the daily penalties totaling £900. The 100-pound fixed late filing penalty was accepted by Mr. Sudall and was not subject to appeal.

The tribunal found that while HMRC had a generic policy to charge daily penalties for returns more than three months late, they failed to provide sufficient evidence that the necessary notifications under Schedule 55, particularly paragraph 4(1)(c), had been properly served to Mr. Sudall. Consequently, the daily penalties could not be enforced.

Regarding the six-month penalty, the tribunal determined that Mr. Sudall did not present a reasonable excuse for the initial failure to file the return by the deadline of October 31, 2012. Consequently, the defense of a reasonable excuse was not applicable to waive the six-month penalty.

Analysis

Precedents Cited

A pivotal precedent in this case was the Court of Appeal decision in Donaldson v HMRC [2016] EWCA Civ 761. In Donaldson, the court deliberated on HMRC's authority to impose daily penalties for late tax filings and the adequacy of notifications provided to taxpayers. The decision clarified that a high-level policy decision by HMRC to charge daily penalties for returns more than three months late was sufficient under paragraph 4(1)(b) of Schedule 55. Additionally, it established that specific notices, such as the SA Reminder and SA 326D notice, were necessary to inform taxpayers of impending penalties adequately.

In the current judgment, HMRC referenced Donaldson to support its imposition of daily penalties on Mr. Sudall. However, the tribunal noted that HMRC did not specifically demonstrate how the requirements of paragraph 4(1)(b) and 4(1)(c) of Schedule 55 were met in Mr. Sudall's case, unlike in Donaldson.

Furthermore, the tribunal cited Burgess and Brimheath Limited v HMRC [2015] UKUT 578 (TCC) to emphasize that HMRC bears the burden of proof in demonstrating that the statutory requirements for penalties are satisfied, even if the taxpayer does not contest these aspects.

Legal Reasoning

The tribunal's legal reasoning hinged on the statutory interpretation of Schedule 55 of the Finance Act 2009. Key points in their reasoning included:

• Burden of Proof: HMRC is responsible for proving that all conditions for imposing penalties, particularly under paragraph 4(1)(c), were satisfied. This includes demonstrating that appropriate notices were sent to the taxpayer specifying the commencement date for daily penalties.
• Evidence of Submission Date: The tribunal evaluated the evidence regarding when the partnership tax return was actually submitted to HMRC. Mr. Sudall claimed submission in December 2012, whereas HMRC's records indicated August 2013. The tribunal found Mr. Sudall's evidence insufficient to rebut HMRC's computer records.
• Reasonable Excuse Defense: The tribunal analyzed whether Mr. Sudall had a reasonable excuse for failing to file the return on time. It concluded that because Mr. Sudall did not contest the fixed penalty, he implicitly accepted that there was no reasonable excuse for the initial late submission, thereby negating the defense for the six-month penalty.
• Special Circumstances: Although Mr. Sudall suggested that his genuine belief in having submitted the return could constitute special circumstances, the tribunal found that HMRC had not sufficiently demonstrated that such circumstances existed to warrant a reduction in penalties.

The tribunal meticulously dissected the legislative framework, ensuring that each penalty imposed was backed by concrete evidence and adherence to procedural requirements. The failure of HMRC to provide explicit evidence of compliance with paragraph 4(1)(c) undermined the legitimacy of the daily penalties.

Impact

This judgment has several implications for future cases involving late tax return submissions and the imposition of penalties:

• Strict Adherence to Procedural Requirements: HMRC must ensure comprehensive compliance with procedural mandates when imposing penalties, especially regarding the notification of penalty commencement dates.
• Burden of Proof Robustness: The decision reinforces that HMRC cannot rely solely on generic policy statements or assumptions of receipt. Concrete evidence must substantiate the fulfillment of statutory conditions for penalties.
• Clarification on Reasonable Excuse: The tribunal's interpretation that a reasonable excuse must pertain to the initial failure to file emphasizes the need for taxpayers to provide justifications for their first instance of non-compliance rather than subsequent delays.
• Precedential Value: This case serves as a precedent for how tribunals may interpret the application of daily and extended penalties, particularly concerning the necessity of explicit notifications and the substantiation of taxpayers' defenses.

Practitioners and taxpayers should note the heightened scrutiny on HMRC's procedural adherence and the emphasis placed on documented evidence when contesting penalties.

Complex Concepts Simplified

Schedule 55 of the Finance Act 2009

Schedule 55 outlines the penalties applicable for failures related to self-assessment tax returns. It specifies fixed penalties for late submissions and provides conditions under which daily and extended penalties can be imposed.

Paragraphs 4(1)(b) and 4(1)(c) of Schedule 55

- Paragraph 4(1)(b): Grants HMRC the authority to impose penalties for late tax returns based on a policy decision that targets negligent or willfully late filings.
- Paragraph 4(1)(c): Mandates that HMRC must notify the taxpayer in writing, specifying the start date from which daily penalties will accrue if the failure to file persists beyond three months.

Reasonable Excuse

A "reasonable excuse" is a legally recognized justification that can exempt a taxpayer from incurring penalties for late tax return submissions. This might include unexpected events or circumstances beyond the taxpayer's control that hinder timely compliance.

Special Circumstances

"Special circumstances" refer to unique or mitigating factors that HMRC may consider to reduce or waive imposed penalties. These are evaluated on a case-by-case basis and are not automatically granted based on general policy.

Conclusion

The judgment in Sudall v. Revenue and Customs underscores the critical importance of procedural accuracy and substantive evidence in the enforcement of tax penalties. While HMRC's policy to charge daily penalties for late submissions is upheld in principle, its application is contingent upon strict compliance with statutory notification requirements.

For taxpayers, the case highlights the necessity of maintaining meticulous records of tax return submissions and promptly addressing any discrepancies or issues with HMRC. From a legal practitioner's perspective, it serves as a reminder to ensure that all procedural steps are thoroughly documented when advising clients or contesting penalties on their behalf.

Overall, the decision reinforces the balance between HMRC's enforcement mechanisms and taxpayers' rights to fair and justified treatment, fostering a more accountable and transparent administrative process in tax compliance.