HMRC v HOK Ltd - FTC/81/2011

Factual and Procedural Background

This appeal concerns penalties imposed on a company ("the Company") by the appellants ("HMRC") for the late submission of an employer's year-end return (P35). The Company admitted the lateness and absence of a reasonable excuse but contended that HMRC’s failure to send a prompt reminder was unfair and should limit the penalties payable. The First-tier Tribunal partially allowed the appeal, reducing the penalties from five months to one month on grounds of fairness. HMRC appealed this decision to the Upper Tribunal, challenging the jurisdiction of the First-tier Tribunal to discharge penalties on grounds of unfairness.

The First-tier Tribunal had found that HMRC's practice of delaying penalty notices until four months after the due date was unfair and not in good conscience, resulting in excessive penalties. HMRC’s appeal challenges both the jurisdictional basis for that finding and the factual conclusion.

Legal Issues Presented

1. Whether the First-tier Tribunal has jurisdiction to discharge or reduce penalties for late submission of employer year-end returns on grounds of fairness beyond the statutory criteria of lateness and reasonable excuse.
2. Whether HMRC’s failure to send a prompt reminder to the Company before issuing penalties was unfair and sustainable as a basis for reducing penalties.
3. Whether the penalties imposed on the Company were properly due under the applicable statutory framework.

Arguments of the Parties

HMRC's Arguments

• The First-tier Tribunal’s jurisdiction is strictly statutory and limited to determining whether a penalty was incurred and if a reasonable excuse exists; it does not include a general discretion to discharge penalties on grounds of fairness.
• The statutory penalty regime under the Taxes Management Act 1970 (TMA) prescribes fixed penalties for late returns, which the Tribunal must apply as correct or appropriate.
• HMRC’s practice of issuing penalty notices months after the filing deadline is justified by the need to verify the accuracy and completeness of returns, and there is no statutory obligation to send reminders or early penalty notices.
• The Company received an initial notice warning of its obligation and the consequences of failure, and the absence of a reminder does not affect the legal obligation to file on time.
• Changes to HMRC’s practice to send earlier reminders and penalty letters from 2012 onwards do not imply that the previous practice was unfair or unlawful.
• The penalty scheme is clear, fixed, and designed to encourage compliance, with a reasonable excuse as the only statutory defense.
• Judicial review is the appropriate remedy for complaints about administrative unfairness, not appeal to the First-tier Tribunal.

Company's Arguments

• The Company acknowledged the lateness but argued it believed no return was required as its sole employee had ceased employment mid-year.
• The Company contended that HMRC’s failure to send a timely reminder until four months after the deadline was unfair and caused unnecessary penalties.
• The Company relied on HMRC’s subsequent change in practice to argue that the lack of earlier reminders demonstrated unfairness in the previous system.

Table of Precedents Cited

Court's Reasoning and Analysis

The Upper Tribunal began by examining the statutory framework governing the imposition and appeal of penalties for late submission of employer year-end returns. The Taxes Management Act 1970 (TMA) and related regulations prescribe fixed monthly penalties for each month or part month of delay, with no statutory provision granting the First-tier Tribunal a discretion to reduce or discharge penalties on grounds of fairness.

The Tribunal emphasized that the First-tier Tribunal is a creature of statute with jurisdiction strictly conferred by Parliament. Section 100B of the TMA limits the Tribunal’s powers on appeal to setting aside penalties not incurred or adjusting penalties incorrectly imposed. It does not empower the Tribunal to substitute its own view of fairness or to mitigate penalties beyond the statutory scheme.

The Court reviewed case law establishing that administrative fairness challenges to the conduct of public bodies, where no statutory appeal route exists, must be pursued by judicial review, a jurisdiction not conferred on the First-tier Tribunal. The Tribunal cited authorities confirming that tribunals created by statute have no inherent supervisory jurisdiction and cannot review the exercise of discretion by HMRC officers beyond statutory limits.

The Upper Tribunal considered the First-tier Tribunal’s reasoning that HMRC’s delay in issuing penalty notices was unfair and unconscionable. It found that the First-tier Tribunal had no jurisdiction to make such a finding or to discharge penalties on that basis. It noted the absence of evidence supporting the First-tier Tribunal’s assumption that HMRC deliberately delayed penalty notices, and that HMRC had not been given an opportunity to respond to such allegations before the First-tier Tribunal.

The Court distinguished the application of common law principles within the scope of statutory jurisdiction (e.g., as in Oxfam) from the exercise of a supervisory judicial review function, concluding that the latter is not available to the First-tier Tribunal. It rejected the attempt to create a distinction between judicial review and application of common law principles to justify the First-tier Tribunal’s decision.

Consequently, the Upper Tribunal held that the First-tier Tribunal acted in excess of jurisdiction by discharging penalties on grounds of fairness and quashed its decision. It restored all five penalties as due under the statutory scheme.

The Upper Tribunal declined to make a definitive finding on the fairness of HMRC’s earlier practice, noting limited evidence and the absence of cross-examination. It observed that changes in HMRC’s practice to send earlier reminders do not necessarily imply the prior practice was unfair.

Holding and Implications

The appeal is allowed. The Upper Tribunal quashed the First-tier Tribunal’s decision to discharge four of the five penalties and restored all five penalties as due.

The direct effect is that the Company remains liable for the full amount of penalties prescribed by statute for late submission of its employer year-end return. The decision clarifies that the First-tier Tribunal’s jurisdiction on penalty appeals is limited to applying the statutory scheme and does not extend to considerations of fairness or supervisory review of HMRC’s administrative conduct.

No new precedent was established beyond confirming the limits of the First-tier Tribunal’s jurisdiction and the proper route for challenging administrative fairness issues is judicial review in the High Court.