Trustees of the Paul Hogarth Life Interest Trust 2008
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 September 2018 |
| Neutral Citation | [2018] UKFTT 595 (TC) |
| Date | 20 September 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0595 (TC)
Judge Richard Thomas
Income tax – Penalties under FA 2009, Sch. 55 for failure to deliver a return – Whether trustees of an interest-in-possession trust mandating all income to life tenant and making no chargeable gains can be served a valid notice to file under TMA 1970, s. 8A – No – In the alternative was there a reasonable excuse or special circumstances – Appeal allowed and penalties cancelled.
The First-Tier Tribunal (“FTT”) held that an interest-in-possession trust (“IIP trust”) under which all the income was mandated to the life tenant could not be served a valid notice to file a tax return under TMA 1970, s. 8A. Consequently, penalties under FA 2009, Sch. 55 for failure to make such a return were invalid.
If, in the alternative, the notice was validly served, there was a reasonable excuse for the initial penalty and failures by HMRC to satisfy the conditions for imposing the daily penalty and the six-month penalty. Failing that, in the Tribunal's view, there were special circumstances sufficient to reduce the penalties to nil.
The appellant was an IIP trust, under which income is paid directly to the life tenant and is not received by the trustees. HMRC had issued a notice under TMA 1970, s. 8A(1) on the trustees to file a tax return for 2010–11. The trustees believed their accountants had filed the return, but that was not the case and the return (a “nil” return) was eventually filed in September 2012 by new accountants. In the meantime, HMRC imposed an initial penalty under FA 2009, Sch. 55, para. 3 of £100 for failure to file the return on time, daily penalties of £900 under FA 2009, Sch. 55, para. 4 for failure continuing after three months, and a further penalty of £300 under FA 2009, Sch. 55, para. 5 for failure continuing after six months. Following a review by HMRC upholding the penalties, an appeal was made to the Tribunal.
Although the appellant had not raised the point, the Tribunal judge felt compelled to follow Hart (HMIT) v Briscoe (1977) 52 TC 53 and consider whether the notice to file had been validly served under TMA 1970, s. 8A(1). He noted that HMRC had to give the notice to a “relevant trustee”. TMA 1970, s. 7(9) defines “relevant trustees” with respect to income as the persons who are trustees when the income arises and any persons who subsequently become trustees, and with respect to chargeable gains as the persons who were trustees in the year of assessment in which the gains accrue and any persons who subsequently become trustees. Since no chargeable gains had accrued and no income had arisen to the trustees in the year in question, the sensible result was to construe TMA 1970, s. 7(9) and TMA 1970, s. 8A(1) such that a notice to file could not be given to trustees of an IIP trust in which all income was mandated to the life tenant and no chargeable gains had accrued. Since the notice to file a return given under TMA 1970, s. 8A(1) was invalid, it followed that no penalties could be imposed for failure to file such a return.
In the event that he was wrong on this point, the Tribunal judge went on to consider other grounds for modifying or cancelling the penalties. With respect to the initial penalty, he considered that the trustees' reliance on a reputable and major firm of accountants was a reasonable excuse but that the reasonable excuse ceased once a reasonable time had elapsed after receipt of the first penalty notice. However, with respect to the daily penalties, following Duncan [2017] TC 05817, HMRC had not shown, in the absence of HMRC's SA reminder or SA 326D (as cited by the Court of Appeal in Donaldson v R & C Commrs [2016] BTC 28) that they had given a notice to the relevant trustees specifying the date from which the penalties were payable, as required by FA 2009, Sch. 55, para. 4(1)(c). The daily penalties therefore fell to be cancelled. With respect to the six-month penalty, it had been issued automatically before the return had been received without the necessary determination under FA 2009, Sch. 55, para. 24(2)(a) of the amount of the tax due or payable (nil in this case) to the best of HMRC's information and belief, thereby (following Hansard [2018] TC 06522) invalidating that penalty also.
In any event, the judge would have reduced the penalties to nil under FA 2009, Sch. 55, para. 16 on account of special circumstances, in respect of which HMRC's decision that there were none had been flawed.
This is the latest of a run of recent Tribunal decisions in which late-filing penalties have been cancelled on the grounds that the notice to file a return, which is a pre-requisite for imposition of the penalties, was not valid. See, for example, Chalmers [2018] TC 06729, where the invalid notice purported to be under TMA 1970, s. 8. See also O'Neill [2016] UKFTT 866 (TC), Goldsmith [2018] TC 06284 and Crawford [2018] TC 06594. HMRC has been granted leave to appeal in Goldsmith. See also Lennon [2018] TC 06453, Wood [2018] TC 06339 and Smith [2018] TC 06639.
One suspects that if this trend continues, HMRC may seek to make technical amendments to the law to avoid defeats in these types of circumstances.
Here, the decision as to validity rested on the absence of relevant trustees, since the income had been mandated to the life tenant. There may possibly be grounds of appeal in that TMA 1970, s. 7(9) defines “relevant trustees” by reference to income that arises. There is no doubt that income arose, although it was not received by the trustees.
[1] This was an appeal by the trustees of the Paul Hogarth life interest trust 2008 (“the appellant”) against assessments to penalties under Schedule 55 Finance Act 2009 for the failure to deliver a return for the tax year 2010–11 by the due date. The trust is an interest in possession trust (“IIP”) where the income is, by mandate of the trustees, paid directly to the life tenant, and is not received by the trustees.
[2] HMRC records show that a notice to file an income tax return for the tax year 2010–11 was issued on 6 April 2011 to what is described on those records as the “Paul Hogarth life interest trust 2008”. That notice would have required the recipient to deliver the return by 31 October 2011 if filed in paper form or by 31 January 2012 if filed electronically (“the due date”).
[3] On 14 February 2012 HMRC records show that they issued a notice of the assessment of a penalty of £100 because of a failure to file the return by the due date.
[4] HMRC records show that on 7 August 2012 they issued a notice of the assessment of a penalty of £900 because of a failure to file the return by a date 3 months after the due date and for 90 days after that and a notice of assessment of a penalty of £300 because of a failure to file the return by a date 6 months after the due date.
[5] The return was delivered electronically on 5 September 2012.
[6] On 3 October 2012 the appellant, through their agents Forbes Dawson LLP, appealed to HMRC against the penalties.
[7] On 19 October 2012 HMRC rejected the appeals as they said that the appellant had shown no reasonable excuse for the failure to file on time. They were told that HMRC's view was that:
a reasonable excuse will only apply (sic) when an exceptional event beyond your control has prevented you from sending your return in on time. Each case is considered on its facts.
[8] HMRC informed the appellants that they could have a review or notify the appeal to the Tribunal.
[9] On 24 October 2012 the appellant's agents accepted the offer of a review, and sent in a copy of a letter dated the same day which they had sent to the officer who wrote to them on 19 October.
[10] On 6 December 2012 HMRC wrote to the appellant with the conclusion of the review. The conclusion was that the penalties were upheld.
[11] On 4 January 2013 the appellant notified their appeals to the Tribunal. On 7 March 2013, at the request of HMRC, the Tribunal stayed this appeal behind an appeal to the Upper Tribunal from the decision of this Tribunal in the case of R & C Commrs v Donaldson [2014] BTC 531 (“Donaldson”). The stay was renewed and then directions of 5 September 2013 stayed this appeal until 60 days after the issue of the Upper Tribunal decision in Donaldson. That decision was issued on 2 December 2014.
[12] On 16 May 2018 the tribunal wrote to the agents and to HMRC to say that Donaldson was now final and this appeal would proceed. There is nothing in the papers I have which show what if anything happened 60 days after 2 December 2014 when the stay directed on 5 September 2013 expired.
[13] Paragraph 1 Schedule 55 Finance Act (“FA”) 2009 provides for penalties to be imposed:
1–(1) A penalty is payable by a person (“P”) where P fails to make or deliver a return, or to deliver any other document, specified in the Table below on or before the filing date.
…
(4) In this Schedule–
“filing date”, in relation to a return or other document, means the date by which it is required to be made or delivered to HMRC;
…
Tax to which return etc relates
Return or other document
2
Income tax or capital gains tax
18–(1) Where P is liable for a penalty under any paragraph of this Schedule HMRC must–
- assess the penalty,
- notify P, and
- state in the notice the period in respect of which the penalty is assessed.
…
(3) An assessment of a penalty under any paragraph of this Schedule–
- is to be treated for procedural purposes in the same way as an assessment to tax (except in respect of a matter expressly provided for by this Schedule),
- may be enforced as if it were an assessment to tax, and
- may be combined with an assessment to tax.
20–(1) P may appeal...
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