PML Accounting Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 September 2015 |
| Neutral Citation | [2015] UKFTT 440 (TC) |
| Date | 10 September 2015 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Aleksander, Rebecca Newns
Mr McCloskey, tax consultant, appeared for the Appellant
Mr Khawar, an officer of HM Revenue and Customs, appeared for the Respondents
Penalties – Taxpayer information notice issued to alleged MSC Provider – Compliance with information notice – Reasonable excuse – Whether notice related to tax position of MSC Provider or of its clients – Whether third party notice should have been issued – Validity of notice – Rights of clients under European Convention on Human Rights (“the European Convention”), art. 8 – Finance Act 2008 (“FA 2008”), Sch. 36.
The First-tier Tribunal (FTT) allowed an appeal against penalties issued under Finance Act 2008 (“FA 2008”), Sch. 36, para. 39 and 40 for non-compliance with an information notice finding that the information notice was invalid having been issued under FA 2008, Sch. 36, para. 1 (as a “taxpayer” notice) instead of para. 2 or 5 (as a “third party” notice); the notice was issued to PML Accounting Ltd (PML) but sought information and documents in order to examine the tax position of PML's client companies.
PML were providers of accounting, tax and corporate services to contractors and consultants. On 26 November 2012, HMRC issued an information notice under FA 2008, Sch. 36, para. 1 in order to check whether PML's client companies were managed service companies (MSC's) and whether PML was “an MSC provider” within the Income Tax (Earnings and Pensions) Act 2003, Pt. 2, Ch. 9. The information notice was issued without prior approval of the Tribunal and requested documentation for a sample of PML's clients covering a six year period by 11 January 2013.
PML's tax agents, Hazell Minshall, appealed the information notice requesting an extension to 28 February 2013 (to which HMRC agreed) although the information was not actually delivered to HMRC until 8 March 2013 because on 28 February, the daughter of Paul Hazell (PML's sole director) had been hospitalised following an accident.
However, the documents provided to HMRC were incomplete and a list of outstanding documents was issued by HMRC on 15 March 2013. HMRC then raised an initial penalty of £300 on 20 March 2013 and then three further daily penalty notices totalling £4,260 between 24 May 2013 and 15 November 2013 for PML's continued failure to provide the missing documents. PML appealed the penalty notices to the FTT.
A number of issues were raised by the appeals in respect of which the FTT found as follows:
• PML had not complied with the information notice and that failure had continued until at least the last date to which daily penalties had been charged;
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• PML had no reasonable excuse for the failure;
– By the time of Paul Hazell's daughter's accident, PML had had over three months to collate the information and had managed to get the boxes to HMRC by 8 March 2013 notwithstanding the accident. The problem was that the boxes were incomplete and information was still missing at the date of the hearing, long after the accident. The accident could not be a reasonable excuse for the failure to produce all of the documents by the extended due date or the continuing failure to produce all of the documents. Even in Paul Hazell's absence, there were other staff of PML who could have collated the documents and information.
– Neither could the illness of Richard Hazell (the principal individual at Hazell Minshall and Paul Hazell's father) which had resulted in him collapsing in May 2013 constitute a reasonable excuse for the failure by PML to produce all of the documents. It was not Richard Hazell's illness which caused documents to be omitted from the boxes submitted to HMRC and PML would not have required the advice or assistance of Hazell Minshall to identify, collate and produce the missing documents subsequently. Even if PML had relied upon Hazell Minshall, reliance upon a third party could only constitute a reasonable excuse if PML itself took reasonable care to avoid the failure and PML could have identified, collated and produced the missing documents without the need for any advice or assistance of Hazell Minshall.
– The information documents sought by HMRC were reasonably required and PML was given a reasonable period of time in which to comply;
– However, the information notice itself was invalid. It did not comply with the requirements of FA 2008, Sch. 36, para. 1 (as a “taxpayer notice”) because it did not relate to the “tax position” of PML but instead related to the tax position of PML's clients. The information notice also interfered with the rights of PML's clients under the European Convention of Human Rights, art. 8 and was not issued “in accordance with the law” for the purposes of art. 8 as there were insufficient procedural safeguards (such as external judicial control) to ensure that the interference with the rights was adequately supervised. HMRC did not seek the prior approval of the Tribunal to issue the notice and judicial review could not provide an effective remedy as PML's clients were unaware of the notice and not in a position to bring judicial review proceedings. HMRC should have issued a third party information notice to PML under FA 2008, Sch. 36, para. 2 or 5, both of which required approval of the Tribunal and under para. 2, clients would also normally have had prior notice of the intention of HMRC to apply for the notice and the opportunity to make representations to the Tribunal.
– As the information notice was invalid, no penalties could arise for non-compliance.
– Finally, the FTT confirmed that as the validity of the information notice was fundamental to the question of the lawfulness of the penalties under appeal and it was not necessary for PML to make a late appeal against the information notice itself in order to raise the issue of its validity.
The appeal therefore succeeded.
PML were accountancy service providers whose corporate clients were suspected by HMRC as being managed service companies. An information notice was issued to PML and then penalties for non-compliance which PML appealed. The FTT found that the information notice was invalid because it was issued under FA 2008, Sch. 36, para. 1 as a “taxpayer notice” whereas PML was not the “taxpayer” in question (the taxpayers in question were PML's clients) and instead, HMRC should have been issued a third party notice to PML under Sch. 36, para. 2 or 5. Accordingly, as the information notice was invalid, there could be no penalties for non-compliance and the appeal was allowed.
[1] This is an appeal by PML Accounting Limited (“PML”) against penalty notices issued under Schedule 36, Finance Act 2008 for failure to comply with an information notice dated 26 November 2012 (“the Information Notice”). On 20 March 2013 HMRC issued an initial penalty notice for £300. On 24 May 2013 HMRC issued a penalty notice for daily penalties of £20 per day for 44 days (20 March 2013 to 2 May 2013), totalling £880. On 17 June 2013 HMRC issued a penalty notice for daily penalties of £30 per day for 36 days (3 May 2013 to 7 June 2013), totalling £1080. On 15 November 2013 HMRC issued a penalty notice for daily penalties of £20 per day for 115 days (8 June 2013 to 30 September 2013) totalling £2300. The penalties amount to £4560 in total.
[2] Mr McCloskey represented PML and Mr Khawar represented HMRC at the hearing of the appeal. A bundle of documents was presented at the hearing, but no witness statements were presented to the Tribunal at, or in advance of, the hearing, nor did anyone give oral evidence. After the hearing we gave directions permitting PML to submit additional written evidence relating to the accident suffered by Mr Paul Hazell's daughter, and the illness of Mr Richard Hazell, and giving HMRC the opportunity to respond to such evidence. We also directed that the parties should provide written submissions relating to various issues of law raised during the course of the hearing.
[3] We received witness statements from Mr Paul Hazell and from Mr Richard Hazell following the hearing in accordance with our directions. These were not challenged by HMRC.
[4] We also received submissions received from the parties, but these were far from adequate, and did not consider in sufficient depth (if at all) the various issues on which the parties were directed to make submissions, nor did they address many of the cases of which the Tribunal was aware that would be relevant to the issues in this appeal. The Tribunal therefore initially issued this decision in draft, and invited the parties to make representations in respect of the draft before the decision was finalised. This final decision notice takes account of the representations made by the parties following the issue of the draft decision.
[5] There is set out in an appendix to this decision:
1) Extracts from Part V, Taxes Management Act 1970 (“TMA”) dealing with the conduct of appeals
2) Extracts from Chapter 9, Part 2, and Part 11 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”), relating to “managed service companies” (“MSCs”)
3) Regulations 97B and 97C of the Income Tax (Pay as You Earn) Regulations 2003 (SI 2003/2682) (“PAYE Regulations”) relating to the transfer of tax liabilities relating to MSCs
4) Extracts from Schedule 36 Finance Act 2008 (“Schedule 36”) relating to information notices and penalties for failure to comply with such notices.
5) Extracts from the Human Rights Act 1998 (“HRA”) and the schedule to the Act (which sets out certain provisions of the European Convention on Human Rights (“the European Convention”)).
[6] The MSC legislation was enacted to address the tax position of individuals who provided their services to clients through individual service companies, rather than as employees.
[7] For a company to be an MSC, it must satisfy each of the four conditions set out in section 61B(1) ITEPA. In summary, these are that:
1) The...
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