Sch 55 Late Payment penalty rules continue to confuse

In Peter Marano v HMRC [2023] UKUT 113, the Upper Tribunal (UT) found that the First Tier Tribunal (FTT) had failed to consider both notification of a capital gain and also the date when tax was paid and when deciding whether any 'special circumstances' could mitigate Late Payment penalties under Sch 55 FA 2009. 

• Mr Marano failed to file a Self Assessment tax return for the tax year 2012-13 and was later subject to a Discovery Assessment of £5,744,219, which was upheld on appeal by the FTT.
• HMRC had been informed of a capital gain and the tax due that had arisen in the year but no tax return was filed. The tax was paid in 2012-13.
• A return was finally submitted in 2017, by which time tax-geared Late filing penalties had been issued, for a delay of more than six months and a delay of more than 12 months.
• An appeal against the penalties was dismissed on the basis that they were correctly issued and that pre-paid tax was not to be taken into account when calculating the amount of penalty imposed.
• Mr Marano appealed against the penalties to the UT on the following grounds:
  • There was insufficient evidence that the penalties were authorised by an HMRC officer.
  • There was improper notification of the penalties.
  • The tax-geared penalties should have taken into account the tax already paid.
  • The FTT failed to consider relevant factors when deciding whether there were special circumstances that justified a reduction in the penalties.

The UT dismissed the first three grounds of appeal:

• With regard to the authorisation of an officer, the retrospective effect of s.103 Finance Act 2020 (FA 2020) has an effect in these circumstances. The effect being that any legislation requiring authorisation by an officer can be read to mean 'HMRC in general' and will also include automated or electronically communicated decisions.
• In terms of notification, Sch 55 requires the taxpayer to be made aware that the penalty has been issued and the period to which it relates. It was accepted that Mr Marano was made aware of the notices through his accountants and so the notification was valid. The argument that sending the notice to the address of his Limited Liability Partnership (LLP) did not amount to personal notification was also dismissed.
• The amount upon which late filing penalties are assessed is the amount 'shown in the return'. This is the hypothetical return that should have been filed. This is a different to the wording of Sch 56 for late payment penalties, which refers to the amount of tax 'unpaid'. The two Schedules are seeking to penalise different things and so the wording is not to be confused. On this basis, Sch 55 tax-geared penalties should be based on the amount of the tax liability for the year before any paid amounts of tax are deducted.

Ground no. 4 focused on whether the payment of tax in 2012-13 was a Special circumstance that should have been taken into account. The UT found that the FTT had erred in law in dismissing this ground.

• The basis for the FTT's decision was flawed as early payment of the tax was a factor that needed to be considered.
• The case the FTT used to justify the dismissal was incorrectly used. Barry Edwards v HMRC [2019] UKUT 131 focused on the proportionality of the penalty to the liability, not whether the payment itself was a special circumstance.
• Separately, the proportionality of the penalty was a factor that the FTT should have considered.
• The fact that HMRC were made aware of the gain before the return became due was also a relevant factor that the FTT did not consider.

On this basis, the UT decided that the decision of the FTT needed to be remade and the case has been sent back to the FTT for rehearing.

Useful guides on this topic

Discovery assessment and time limits
What are the steps in making an appeal? What should your appeal cover? What does recent case law say on this topic?

How to appeal a tax penalty
What are the steps in making an appeal? What should your appeal cover? What does recent case law say on this topic?

Grounds for Appeal: HMRC error
When can an error, mistake or procedural flaw made by HMRC provide a valid ground for making an appeal?

Late filing penalties
Late returns can be subject to a mix of fixed and tax-geared penalties. What penalties apply for late filing? Which penalty will apply and when? 

External links

Peter Marano v HMRC [2020] TC7685

Peter Marano v HMRC [2023] UKUT 113