Special circumstances justifying penalty reductions

The Upper Tribunal has held that the FTT was wrong not to reject as irrelevant a notification and prepayment of tax, as well as the size of the penalty imposed, in determining whether there were special circumstances that might justify a reduction of a tax geared penalty: Marano v HMRC [2023] UKUT 113. As a result, the Upper Tribunal has remitted the matter to a differently constituted FTT to reconsider the question whether the penalties should be reduced on the basis of the existence of "special circumstances".

Background

The case concerns the imposition of a tax geared penalties of over £500,000 on Mr Marano in respect of his failure to deliver a tax return for the tax year 2012/2013. The penalties were imposed by HMRC under FA 2009 Sch 55 paras 5 and 6 and were based on two 5% penalties in relation to a discovery assessment of over £5.5m. The assessment for 2012/2013 was based on a taxable capital gain which Mr Marano's accountants had previously disclosed to HMRC and tax on which Mr Marano had in fact voluntarily paid during the 2012/2013 tax year (in addition to payments of tax on account of some £30,000) so that it could be claimed as a credit against his US tax liabilities.

Mr Marano appealed against the assessment and penalties imposed on him on a number of grounds, all of which were rejected by the FTT. He then appealed to the UT.

Decision of the Upper Tribunal

Mr Marano appealed on a number of separate grounds. In particular, he appealed against the penalty assessments on the basis that

• the tax-geared penalty had not taken into account his prepayment of the tax due; and
• the FTT had incorrectly rejected the arguments that the notification of his liability, his prepayment and the size of the penalty were "special circumstances" within the meaning of Sch 55 para 16 justifying a reduction in the amount of penalty.

Schedule 55 para 5 provides for a tax-geared penalty for a failure to deliver a self-assessment return of "5% of any liability to tax which would have been shown in the return". Mr Marano argued that, in computing the level of penalty, his prepayment of tax in 2012/2013 should have been taken into account. The Upper Tribunal rejected that argument. Para 5 requires an analysis of what would have appeared on a hypothetical return submitted on the correct filing date for the tax year in question. An amount "shown in a return" is not, necessarily, the same as an amount of tax due and payable. This conclusion was consistent with the purpose of para 5 to penalise failure to make a return on time. Given this purpose, it was not surprising that the tax-geared penalty is based on amounts that would have been shown in the return. In any event, the wording contrasted with other penalty provisions such as those in Schedule 56 penalising failure to pay on time and computing the penalty by reference to amounts "unpaid". Accordingly, the Upper Tribunal agreed with the FTT that HMRC had been correct to base the tax-geared penalty under para 5 on the amount of tax that would have been shown in the return (irrespective of any actual prepayment).

Schedule 55 para 16 permits a penalty to be reduced where "special circumstances" exist. The FTT had decided that the fact that Mr Marano had made known the tax liability to HMRC and had paid it in 2012/2013 was not a "special circumstance" within the meaning of para 16, largely on the basis that the penalty was for late filing and whether or not the person had paid the related tax was not relevant. The Upper Tribunal has held that the FTT made an error of law in this respect.

The FTT had relied on the decision in Edwards v HMRC [2019] UKUT 131 where it was held that the fact that there was no tax liability was not a special circumstance. However, that was a case that focussed on the proportionality of the penalty imposed in the context of a penalty of the statutory minimum. The early declaration and payment of tax due is a distinct matter from the question of the proportionality of the penalty and the FTT were in error in dismissing these factors as irrelevant. Equally, the FTT were in error when deciding that the fact the tax payment was made in order to obtain a US tax benefit was not sufficient to justify treating it as irrelevant. "The motive for payment is of no consequence to HMRC and does not alter the fact that early payment was made."

In addition, the UT held that the proportionality of the size of the penalty was also a factor incorrectly dismissed by the FTT as a potential "special circumstance". Again, however, the FTT had relied heavily on the decision in Edwards, a case dealing not with a tax-geared penalty but involving the imposition of a minimum penalty. As such, the FTT had been wrong to consider that proportionality could not be a relevant factor when dealing with a tax-geared penalty.

As a result, the UT has held that the FTT erred in law and has set aside their decision on this issue. However, the UT declined the invitation to remake the decision but instead to remit it back to the FTT. In doing so, the UT has remitted the issue to be determined before a new panel, "not in any way a criticism of the original FTT panel, but... simply to avoid any concern that a dispassionate observer would consider the panel to be subconsciously influenced by its earlier decision". The UT was, however, at pains to point out that whilst it was satisfied that had these factors been taken into account there might have been a different decision, "it is entirely possible that might reach the same decision as originally reached by the FTT".

Comment

Whilst the decision to impose a penalty for failure to submit a self-assessment return in the circumstances of this case are understandable, given the failure over a number of years, the reluctance of HMRC and the FTT to take into account the fact that the taxpayer had (through his accountants) made HMRC aware of the tax due and actually paid the tax during the tax year in setting the penalty level seems harsh to say the least. The Upper Tribunal has at least brought some common sense to bear on the issue, without however itself deciding whether any actual reduction in the penalty charge would be appropriate in the circumstances.