Morgan & Anor v Revenue & Customs

Factual and Procedural Background

This opinion concerns two appeals against penalties imposed under Schedule 55 of the Finance Act 2009 for late filing of self-assessment tax returns for the tax year 2010/11. The Appellants, hereinafter referred to as Appellant A and Appellant B, were assessed fixed penalties for late filing, daily penalties accruing for continued failure to file beyond three months, and in the case of Appellant B, an additional penalty for filing more than six months late.

The appeals were initially scheduled separately but were joined for rehearing due to overlapping legal issues concerning the imposition of daily penalties under the new regime. Appellant A’s appeal concerned only the daily penalties, as he accepted the fixed penalty. Appellant B appealed all penalties including the fixed penalty, daily penalties, and the six-month penalty. Evidence was given by an officer of the tax authority and by Appellant A; Appellant B did not attend the rehearing but had submitted evidence in his Notice of Appeal form.

The core dispute was whether the daily penalties were properly imposed in accordance with the statutory requirements, specifically whether the tax authority had made a valid decision to impose such penalties and given proper notice specifying the date from which the penalties were payable. The tribunal also considered issues of reasonable excuse and special circumstances raised by the Appellants.

Legal Issues Presented

1. Whether the statutory requirement that the tax authority "decide" to impose daily penalties under paragraph 4(1)(b) of Schedule 55 was satisfied by a high-level policy decision and automated computer assessments.
2. Whether the tax authority gave valid notice to the taxpayers specifying the date from which daily penalties would be payable under paragraph 4(1)(c) of Schedule 55.
3. Whether the Appellants had a reasonable excuse for late filing under paragraph 23 of Schedule 55.
4. Whether there were special circumstances under paragraph 16 of Schedule 55 warranting reduction or cancellation of penalties.
5. Whether the penalties for late filing and six-month late filing imposed on Appellant B were properly assessed and whether reasonable excuse or special circumstances applied.

Arguments of the Parties

Appellant A's Arguments

• Denied receiving certain warning letters from the tax authority’s Debt Management and Banking section which specifically warned against filing paper returns due to daily penalties.
• Asserted that he would have filed online to avoid daily penalties had he been properly informed.
• Argued that the notices provided by the tax authority did not constitute valid statutory notice specifying the date from which daily penalties were payable.
• Claimed a reasonable excuse was not established, but special circumstances existed due to misleading advice from the tax authority and an invitation to file paper returns.

Appellant B's Arguments

• Relied on the failure of his accountant to file returns on time, alleging reliance on the agent.
• Did not provide explanation for delay in remedying the failure after learning of the agent’s failure.
• Denied reasonable excuse, as he did not take reasonable care to avoid the failure.
• Asserted that the tax authority’s letters properly warned him about daily penalties.
• Did not claim special circumstances sufficient to reduce penalties.

Tax Authority's Arguments

• Asserted that a high-level policy decision by the tax authority to impose daily penalties on all taxpayers meeting certain criteria satisfied the statutory requirement of a decision under paragraph 4(1)(b).
• Maintained that automated computer-generated assessments and notices constituted valid assessments and decisions.
• Argued that the notices sent (the Self Assessment Reminder and the penalty notice SA326D) amounted to statutory notice specifying the date from which daily penalties would be payable.
• Contended that reliance on an agent does not constitute a reasonable excuse unless reasonable care was taken by the taxpayer.
• Denied that failure to give warnings or misleading advice amounted to special circumstances in general.

Table of Precedents Cited

Court's Reasoning and Analysis

The tribunal first examined whether the statutory requirement that HMRC "decide" to impose daily penalties was met. It accepted the tax authority's evidence that a high-level policy decision was taken around June 2010 to impose daily penalties on all taxpayers more than three months late. The tribunal concluded that such a high-level decision, implemented by computer programming to issue automatic penalty assessments, satisfied the statutory requirement of a decision under paragraph 4(1)(b). One judge dissented, arguing that the decision must be by an individual officer applying their mind to the individual case, and that a blanket policy decision was insufficient.

Next, the tribunal considered whether valid notice was given under paragraph 4(1)(c). The tax authority relied on two documents: the Self Assessment Reminder and the penalty notice SA326D. The tribunal found that neither document amounted to valid statutory notice specifying the date from which daily penalties were payable. Both notices contained ambiguous language, lacked prominence, and did not clearly inform taxpayers that daily penalties would be charged from specific dates depending on filing method. The tribunal emphasized that the purpose of the notice requirement is to give taxpayers clear, prospective warning to encourage compliance. As such, the notices failed to meet the statutory standard.

Because valid notice was not given, the daily penalties could not be lawfully imposed, resulting in the appeals against daily penalties being allowed.

On the question of reasonable excuse, the tribunal found that neither Appellant had a reasonable excuse for the initial failure to file by the due date. Appellant A admitted a relaxed attitude to filing and provided no causative excuse; Appellant B’s reliance on an agent was not reasonable given his failure to take reasonable care to avoid the default.

Regarding special circumstances, the tribunal found that Appellant A had special circumstances. Despite being in default and aware of it, Appellant A was misled by HMRC’s telephone advice and received a letter inviting him to file paper returns, which was contrary to his interests because paper filing triggered daily penalties. This combination of misleading advice and invitation to file paper returns was sufficient to constitute special circumstances warranting reduction of daily penalties to zero. By contrast, Appellant B’s circumstances did not amount to special circumstances, as he was properly warned by HMRC and failed to take timely action after learning of his agent’s failure.

The tribunal also addressed procedural issues regarding HMRC’s consideration of special circumstances. It recognized that HMRC’s automated penalty assessments do not involve prior consideration of special circumstances, but concluded that this does not render decisions flawed if special circumstances are considered during review or upon notification of appeal. In Appellant A’s case, a review was undertaken but special circumstances were not considered, rendering that decision flawed and allowing the tribunal to substitute its own decision. In Appellant B’s case, no review was requested and HMRC considered special circumstances only after notification of appeal, which was deemed timely and not flawed.

Holding and Implications

The tribunal allowed the appeals against the daily penalties for both Appellant A and Appellant B on the basis that valid statutory notice specifying the date from which the daily penalties were payable was not given by the tax authority as required by paragraph 4(1)(c) of Schedule 55.

For Appellant A, the tribunal further found special circumstances justifying the reduction of any daily penalties to zero.

For Appellant B, the tribunal dismissed appeals against the fixed penalty and six-month penalty for late filing, finding no reasonable excuse or special circumstances to justify relief.

The decision clarifies that a high-level policy decision by the tax authority combined with automated assessment may satisfy the statutory requirement for a "decision" to impose daily penalties, but that the statutory requirement for clear, unambiguous notice specifying the penalty start date is strictly construed and must be met for penalties to be validly imposed.

No new precedent was set on the meaning of "reasonable excuse," but the decision reiterates that reliance on an agent is not a reasonable excuse unless reasonable care was taken. It also confirms that special circumstances may arise where a taxpayer is misled by the tax authority or invited to take actions detrimental to their interests.