HMRC: Responsible for the 2016 leap year?
By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)
20 April 2018
One of the oddest questions recently addressed by a tax tribunal was whether HMRC was responsible for 2016 being a leap year. While this might seem to be moving into the realms of fantasy, Philip McNeill shows that it has a very practical application to corporation tax penalties in a digital world.
Late filing penalties, accounting periods and liability for Corporation tax
The core issue in Bells Financial Services Ltd (Bells Financial Services Ltd TC06326 [2018] UKFTT 0048 (TC)) was the validity of an accounting period which ran from 1 March 2015 to 28 February 2016, when February 2016 had 29 days.
Was this an acceptable accounting period for corporation tax? And was HMRC correct in saying that the company would need to file a return for a single day, 29 February 2016, if its accounting period ended on the 28 February, and face penalties if it didn’t?
Furthermore, would HMRC’s online filing system be at fault, and potentially any late filing penalties invalid, if its system was programmed only to accept accounts to 29 February in a leap year?
What is a company accounting period?
Section 9 Corporation Tax Act 2010 (CTA 2010) says that an accounting period starts immediately after the end of the previous accounting period, and section 10 states that it finishes 12 months later, or on the accounting date of the company (if earlier).
Filing a corporation tax return
The rules governing the filing corporation tax returns are in schedule 18 of Finance Act 1998 (FA 1998). These state that (paragraph 5(2)) ‘if an accounting period of the company ended during (or at the end of) the specified period, a return is required for that accounting period.’
Where there is more than one accounting period, a separate company tax return is required for each of them.
The leap year mismatch
HMRC issued to the appellant company a notice to file for the period 1 March 2015 to 29 February 2016, but the company had prepared accounts for the period 1 March 2015 to 28 February 2016. Did they need to file a return for a single day? What if HMRC’s systems prevented them filing to 28 February?
Digital scramble
The tribunal confirmed that the law requires corporation tax filing to match the accounting period. If the accounting period ended on 28 February 2016, then those are the figures required. There is no additional one-day accounting period to round up the month.
On the question of HMRC’s systems being programmed only to accept submissions to the month end, Judge Thomas’ comments make very interesting reading:
‘If it is true that HMRC’s software would not accept a filing for the correct accounting period, then I have no hesitation in holding that the appellant had a reasonable excuse for not filing on time. Such an excuse would last until HMRC reprogrammed its system to accept a valid return.’
So, programming which accidentally misinterprets the tax law provides an ongoing let out clause.
People against machines
When added to his comments in Khan Properties (Khan Properties Ltd TC06225 [2017] UKFTT 830 (TC)) that ‘a determination [for penalties] under s 100 [TMA 1970] must be made by an officer of HMRC, that is a human being’ it becomes clear that digital taxation has its limits. A computerised, automated response may be insufficient to comply with the law.
The company late filing penalties were cancelled…
And the leap year question
And who was responsible for there being 29 days in February 2016? In the words of Judge Thomas:
‘I do accept however that HMRC cannot take responsibility for 2016 being a leap year. The responsibility for that lies with the emperor Augustus Caesar who in AD4 had the Julian calendar recalibrated to make leap years every four years starting with AD8.’
This article originally appeared in CA Tax - April 2018.