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Daily Penalties: HMRC’s Daily Penalties Regime Comes Unstuck

At DNS we do everything we can to avoid any of our clients falling foul of HMRC’s strict penalty regime relating to late filing and late payments of Self Assessment tax returns. We thought we’d share this story of the tax payer winning over the tax authorities, though. It involves a recent tribunal co-decision relating to two cases where the taxpayer had fallen foul of HMRC’s penalty regime, appealed, and won!

The penalty regime in a nutshell

Initially, if a SA tax return is not sent in by the deadline, a penalty of £100 is imposed. After three months, HMRC can impose a daily penalty of £10 per day for up to 90 days after the notice has been served. The penalties don’t stop there; read more about penalties on our blog http://www.dnsassociates.co.uk/blog/category/penalties

How are the penalties imposed?

With regard to daily penalties, HMRC has to "decide" whether to impose them. But if, as we learn, the penalties are generated by a computer, how then, you might well ask, could it be said that there was any decision properly made?

Prior to the implementation of FA 2009, the decision to impose a penalty or not was decided at senior level, guided by the general HMRC policy to impose daily penalties when the taxpayer defaulted. HMRC’s computer system was programmed to impose the same kind of logic; HMRC argued that to do otherwise would have meant up to a million individual decisions, which, clearly, would have been unworkable.

However, in this case, the tribunal looked historically at the finance bill (to s13 Interpretation Act 1978) to decide whether or not the penalties, in this instance, were lawful. This Act allows for the use of anticipatory powers where it will assist in the implementation of an act. The tribunal then decided that to impose daily penalties HMRC must give a date from when they apply [para 4 (1) c Sch 55].

They looked close at HMRC’s SA tax return and reminder, which states, "If we still haven’t received your online tax return by 30 April (31 January if you’re filing a paper one) a £10 daily penalty will be charged every day it remains outstanding. Daily penalties can be charged for a maximum of 90 days, starting from 1 February for paper tax returns or 1 May for online tax returns."

Due to this wording, the tribunal felt that the statutory requirement of s13 IA 1978 was not met, as it merely indicated that HMRC could impose daily penalties and did not give a clear date as to when the penalty would be imposed. That two dates were merely mentioned was not adequate, the vagueness of the wording was not acceptable.

Thus the appeal on the daily penalties was allowed.

HMRC uses the procedure regularly, some argue too regularly, albeit that a computer generates the paperwork. In light of this case can we expect to see further challenges by taxpayers before HMRC gets the offending paragraph rewritten?

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