Daily tax penalties north and south
Recent Tax Tribunal decisions have cast doubt on the effectiveness of UK-wide Taxes Management Act penalty provisions and of Scottish tax legislation derived from them, as Donald Drysdale explains.
Does TMA still work?
The Taxes Management Act 1970 (‘TMA’), as its name implies, is concerned primarily with managing taxes rather than determining tax liabilities.
TMA was good law when it was made nearly 50 years ago, in a world in which taxes were administered by local Inspectors who sat behind desks using pens, paper and typewriters. They knew their taxpayers, and often lived within the communities for which they were responsible.
Times have changed. HMRC staff now work in centralised hubs, stripped of their neighbourhood knowledge. Automation has taken over. Tax administration has become increasingly process-driven, and many decisions which used to be made by human tax officers are now being taken by HMRC computers.
In these altered circumstances, it is fair to ask whether TMA still provides HMRC with the tools they need to carry out their statutory duties. And on closer examination, it is hard to avoid the conclusion that aspects of TMA are no longer fit for purpose in the 21st century.
In 2017 in the First-tier Tribunal (FTT) case of McGreevy, Judge Richard Thomas used some surprisingly strong language to describe HMRC’s stance.
In July 2015 the taxpayer, a non-UK resident living in Australia, had sold a UK dwelling that was exempt from tax as her principal private residence. She should have filed a non-resident capital gains tax (NRCGT) within 30 days of completion, but she failed to do so until August 2016.
In September 2016 HMRC issued fixed penalty notices for late filing penalties of £700 – being £100 for failure to file by the due date, £300 for failure to file by 6 months after the due date, and £300 for failure to file by 12 months after the due date. The taxpayer appealed.
The FTT accepted the taxpayer’s reasonable excuse for late filing, and cancelled the late filing penalties. It described HMRC’s arguments against this as “little short of preposterous” and “claptrap”, and noted “a serious deficiency … in common sense, proportion and an ability to consider the position of what HMRC calls its customers.”
In McGreevy, HMRC had also issued penalty notices for daily penalties of £10 per day for 90 days. The taxpayer appealed against these, and HMRC withdrew them on review – on the grounds that HMRC had changed their position on daily penalties and would no longer charge them.
The Tribunal found that the daily penalties did not comply with TMA and were therefore unlawful. HMRC had failed to notify the taxpayer timeously of the starting date for the penalties, and were unable to show that an HMRC officer had decided to impose these – as required by TMA.
Scotland’s wholly-devolved taxes are currently land and buildings transaction tax (LBTT) and Scottish landfill tax (SLfT). Administrative provisions relating to these are contained in the Revenue Scotland and Tax Powers Act 2014 (‘RSTPA’). In many respects these broadly mirror those of TMA.
This July the Upper Tribunal for Scotland (UTS) published its decisions on appeals by Revenue Scotland against two judgments of the Tax Chamber of the First-tier Tribunal for Scotland (FTTS) concerning penalties for late filing of LBTT returns.
The cases concerned Begbies Traynor (Central) LLP and Michael Robert Harrison and Sharon Ross. In each the LBTT return was filed more than six months late, incurring a fixed penalty of £100 plus daily penalties of £10 per day for 90 days.
The appeals related only to the daily penalties of £900. The fixed penalties were not in dispute as they applied automatically – requiring no decision by Revenue Scotland and no notice to the taxpayer.
By contrast, RSTPA section 161(1) allows daily penalties to be charged “if and only if” (a) the return is more than three months late, (b) Revenue Scotland decide that such a penalty should be payable, and (c) they give notice to the taxpayer specifying the date from which it is payable.
The UTS upheld the FTTS decision to cancel the daily penalties – agreeing that Revenue Scotland had failed to provide evidence of its decision to charge the penalties as required under RSTPA section 161(1)(b).
The UTS considered the chain of events envisaged in the legislation, and concluded that the three steps set out in section 161(1) had to be completed before a penalty assessment notice could be issued to the taxpayer under section 179.
It followed from this that the notice of liability under section 161(1)(c) could not be combined with the penalty assessment notice. Instead, two separate notices must be served on the taxpayer, in the right order.
In the UTS, Judge David Small acknowledged that: “…requiring two separate notices [under section 161(1)(c) and section 179] will serve no useful function in the case of many LBTT penalties for late returns and, where it is unnecessary, would be potentially confusing for the taxpayer and could involve [them] in making a redundant, additional appeal.”
Importantly, the Judge also confirmed that there was no reason to think that daily penalties are unworkable in the scheme of LBTT.
However, Revenue Scotland have acknowledged in their LBTT Technical Bulletin 5 that administrative issues in the interpretation and application of sections 161(1)(c) and 179 might require them to issue separate notices in future, with the section 161(1)(c) notice preceding the section 179 notice.
The Technical Bulletin also explains that Revenue Scotland have decided not to appeal against the UTS decisions. Subject to reviewing their administrative processes, they plan to continue to charge daily penalties but will not re-open these for cases already finalised.
Cut and paste
Revenue Scotland asked the UTS to recognise that LBTT was different from income tax, in that in most cases the tax authority did not know in advance that a taxpayer was or might be obliged to make a return.
They argued that there was no good reason why the notice of liability under section 161(1)(c) could not be combined with the penalty assessment notice under section 179. However, the provisions of RSTPA do not allow this.
Judge David Small felt that the practical difficulties faced by Revenue Scotland arose from a ‘cut and paste’ having been made from one penalty regime [in TMA] to another [in RSTPA] without all the consequences being foreseen.
He suggested that, if the difficulties are sufficiently serious, it may be that an exercise of the Scottish Ministers’ power is required under RSTPA section 181 to make regulations changing the existing penalty provisions.
It seems that no such changes are currently planned, but watch this space…
Article supplied by Taxing Words Ltd