News Tax 22nd May 2019

Upper Tribunal Rules Schedule 55 Self-Assessment Penalty Regime is Proportionate

Joshua Carey successfully appeared on behalf of HMRC in Barry Edwards -v- The Commissioners for HM Revenue and Customs [2019] UKUT 131 (TCC) where it considered (per Nugee J and UTJ Herrington) two issues:

  1. Whether the FTT erred in finding there was sufficient evidence that a Notice to File had been issued to Mr Edwards (“the Appellant”) (“the Notice to File issue”); and
  2. Whether the Sch 55 Penalties that had been imposed were proportionate given that no tax was ultimately due to the Revenue (“the Proportionality issue”).

Preliminary Issue

The Revenue took a preliminary point that the Appellant did not have permission to appeal the Notice to File issue, and that it should not be granted. It was said that permission to appeal should be refused on the issue because:

  1. The Notice to File issue was not pleaded in the Notice of Appeal as required pursuant to r20(1)(f) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009; and
  2. The FTT found that the Notice to File had been issued and those findings of fact were not perverse.

The Notice to File Issue

The Upper Tribunal found that the Revenue had not objected to the issue being raised before the FTT which it ought to have done if it was taken by surprise. It was further said that Article 6 attached to the penalty and therefore once the Appeal had been filed, it was a requirement that the Revenue prove all aspects of the case which included that the Notice to File had been issued.

The Upper Tribunal moved on to consider whether the FTT had evidence before it that the Notice to File had been issued. It was critical of the FTT’s decision and noted that it would have “been better” if the FTT had made specific findings of fact about the Self-Assessment Notes rather than making general findings. However, it was clear that the FTT had all the evidence in its mind when it arrived at its conclusion that the Appellant was issued the Notice to File.

The Proportionality Issue

The Upper Tribunal started by acknowledging that the Revenue had not considered the level of the penalty in light of the tax due and that the Appellant suggested this was a material matter which ought to have been taken into account. It also acknowledged that neither the Revenue nor the FTT had considered whether this could result in a “special reduction”.

The Tribunal posed the question it had to ask itself as follows:

“… whether the amount of the penalty imposed in this case for failure to file self-assessment returns on time in circumstances where no tax is payable is a relevant circumstance that HMRC should have taken into account when considering whether there were special circumstances in this particular case which justified a reduction in the penalty.”

It considered a number of FTT authorities about what “special circumstance” meant and the reliance that FTT’s place on Crabtree -v- Hinchliffe (Inspector of Taxes) [1972] AC 707. At paragraph 73 of the Judgment, it expressly adopted what had been said by Judge Robin Vos in Advanced Scaffolding (Bristol) Limited -v- The Commissioners for HM Revenue and Customs [2018] UKFTT 744 (TC) at [101] – [102]:

101. I appreciate that care must be taken in deriving principles based on cases dealing with different legislation.  However, I can see nothing in schedule 55 which evidences any intention that the phrase “special circumstances” should be given a narrow meaning.

  1. It is clear that, in enacting paragraph 16 of schedule 55, Parliament intended to give HMRC and, if HMRC’s decision is flawed, the Tribunal a wide discretion to reduce a penalty where there are circumstances which, in their view, make it right to do so.  The only restriction is that the circumstances must be “special”.  Whether this is interpreted as meaning out of the ordinary, uncommon, exceptional, abnormal, unusual, peculiar or distinctive does not really take the debate any further.  What matters is whether HMRC (or, where appropriate, the Tribunal) consider that the circumstances are sufficiently special that it is right to reduce the amount of the penalty.”

The Upper Tribunal went on to accept one further surprising matter from Advanced Scaffolding which was that “special circumstances” may or may not operate on the person involved but what was key was whether the circumstance was relevant to the issue under consideration.

Finally, it turned to proportionality. It referred back to the previous Upper Tribunal decision of HMRC -v- Total Technology (Engineering) Limited [2012] UKUT 418 (TCC) which in turn referred to International Transport Roth GmbH -v- Home Secretary [2003] QB 728. It accepted the principles derived from those cases in full. The Upper Tribunal relevantly found as follows:

“84. However, we were referred to HMRC’s guidance on the Schedule 55 FA 2009 penalty regime, as it relates to late filing penalties. It is clear from that guidance that the aim behind the Schedule 55 penalty regime is to penalise taxpayers who fail to comply with their obligations once a notice to file is issued and to incentivise them to comply with future notifications that they must file a tax return (and pay any tax due) on time. In our view, a penalty regime which seeks to incentivise taxpayers to comply with a requirement to file a return is a legitimate aim, regardless of whether it is subsequently determined that any tax is due. The purpose of the requirement to complete a tax return is so that HMRC is in a position to ascertain whether tax is due from a particular taxpayer. If the taxpayer does not comply with the requirement to file a return, then HMRC is clearly not going to be in a position to ascertain easily whether tax is in fact due. A taxpayer who does not think he should be within the self-assessment regime when he receives a notice to file because as a matter of course he will have no further tax to pay should enter into a dialogue with HMRC with a view to being removed from the requirement to file rather than take no action in response to the notice. That is precisely what ultimately happened in this case.

85. In our view, there is a reasonable relationship of proportionality between this legitimate aim and the penalty regime which seeks to realise it. The levels of penalty are fixed by Parliament and have an upper limit. In our view the regime establishes a fair balance between the public interest in ensuring that taxpayers file their returns on time and the financial burden that a taxpayer who does not comply with the statutory requirement will have to bear.

86. In view of what we have said about the legitimate aim of the penalty scheme, a penalty imposed in accordance with the relevant provisions of Schedule 55 FA 2009 cannot be regarded as disproportionate in circumstances where no tax is ultimately found to be due. It follows that such a circumstance cannot constitute a special circumstance for the purposes of paragraph 16 of Schedule 55 FA with the consequence that it is not a relevant circumstance that HMRC must take into account when considering whether special circumstances justify a reduction in a penalty.


The Upper Tribunal’s judgment is a thorough one but is unlikely to give taxpayers much comfort. The level of penalties imposed, and the fairness of those penalties where taxpayers have been incorrectly sent a Notice to File, or in fact owe no tax at all have all but become of little significance. This doesn’t change a taxpayer’s ability to argue that they have a reasonable excuse for the non-payment of tax, or the late filing of their self-assessments, but that is a different question.

However, it is not all bad news for taxpayers. The door has now been thrown wide open by the Upper Tribunal on the Notice to File issue. In arriving at its decision the Upper Tribunal adopted what was said in Qureshi -v- The Commissioners for HM Revenue and Customs [2018] UKFTT 0115 (TC) and specifically that the Revenue should be producing evidence of system. It is thought by the author that this might include:

  1. Where address information for the Notice to File is obtained from;
  2. Who that is usually obtained by;
  3. How the Notice to File is printed;
  4. What the process is for documents being placed into an envelope (i.e. is there a team or individual that would typically do it); and
  5. The usual process for sending (i.e. is there a post room that would facilitate the sending by Royal Mail, or some other process).

Finally, there is one aspect that the Upper Tribunal has applied a significant gloss to. That is what the Revenue are required to prove in any individual case. It was said that because a penalty attracts Article 6 rights, the Revenue bear the burden of proof. It then went on to say that one of those matters is whether the Notice to File was issued. It placed specific reliance on what was said in Perrin -v- The Commissioners for HM Revenue and Customs [2018] UKUT 156 (TCC) about what the Revenue must prove, including the Notice to File being issued as a precondition to the penalty arising.

There are two important matters that arise from these findings:

  1. The observations made in Perrin were entirely obiter dictum. The only question before the Upper Tribunal in Perrin was whether the test for “reasonable excuse” was subjective or objective. This is not addressed by the Upper Tribunal in the Edwards appeal at all; and
  2. Simply stating that the Revenue bears the burden of proof on all issues does not, in any way, deal with the question that confronted the Upper Tribunal in this case. If a taxpayer does not raise the issue of whether they received the Notice to File in their Notice of Appeal (as required of them by r20(1)(f) of the Rules) then why should a party (taxpayer or Revenue) have to prove something that is not in dispute. Of course, if the issue was raised (even tangentially) the Revenue would bear the burden of proving it to the civil standard.

In respect of the second issue, in the author’s view, the Upper Tribunal has created an added and unnecessary burden on the parties and FTT. The parties will be required to evidence and argue matters which are irrelevant to the proceedings (there not being any dispute between the parties) which will only serve to increase the length and complexity of hearings. This is particularly undesirable where taxpayers who appeal self-assessment penalties are largely unrepresented. It will be time that tells whether this has any material impact on Revenue’s approach to future penalty cases.

Joshua was instructed by Gillian Clissold and Sarah Mills. He accepts instructions from both taxpayers and HMRC in all areas of tax litigation.


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