Ditton – HMRC cannot issue daily late filing penalties retrospectively

In D & G Ditton Ltd v HMRC [2021] UKFTT 489 (TC), the First-tier Tribunal (FTT) held that daily late filing penalties, where notice was given by HMRC to the taxpayer after the period in respect of which the penalties were issued, were void; confirming that late filing penalties cannot be issued to taxpayers retrospectively.

Background 

D & G Thames Ditton Ltd (the Appellant), purchased a property in Thames Ditton for £650,000 on 10 October 2014. 

On 1 April 2016, the threshold value for properties coming within the scope of the Annual Tax on Enveloped Dwellings (ATED) legislation was reduced from £1 million to £500,000. As a consequence of this lowering of the threshold, the Appellant was required to submit an ATED return each year. The filing date for the ATED return for the year ending 31 March 2019, was 30 April 2018. The Appellant was unaware of its obligation to file an ATED return and did not file its return until 21 March 2019, which was 325 days late. 

In December 2019 and January 2020, HMRC issued late filing penalties to the Appellant as follows: £100 for the initial failure to file the return, pursuant to paragraph 3, Schedule 55, Finance Act 2009 (Penalty 1); £900 in daily penalties calculated at £10 per day for 90 days, pursuant to paragraph 4, Schedule 55, Finance Act 2009 (Penalty 2); and £300 as the return still remained outstanding after a period of 6 months beginning with the penalty date, pursuant to paragraph 5, Schedule 55, Finance Act 2009 (Penalty 3) (together, the Penalties).

The Appellant appealed the Penalties to the FTT. 

FTT's decision 

The appeal was allowed in part. 

The key issues for the FTT to consider were: 

(i) whether the Penalties were correctly issued by HMRC; and if so, 

(ii) whether the Appellant had a reasonable excuse for the late filing of its ATED return and whether it was received without any unreasonable delay once any reasonable excuse (if any) had ceased. 

The burden of proof (on the balance of probabilities) was on HMRC to establish that the Penalties were correctly calculated and imposed and assuming that they were, the burden of proof then shifted to the Appellant to demonstrate that it had a reasonable excuse for the late filing of its ATED return.  

The Appellant relied on the following grounds of appeal:

(i)    it was unaware of the requirement to file an ATED return; 

(ii)   there was no liability to tax in any event; and 

(iii) the Appellant had made a significant contribution to the UK economy and HMRC should therefore show some leniency. 

The FTT concluded that Penalties 1 and 3 had been correctly issued to the Appellant and met the conditions set out in Schedule 55, Finance Act 2009. Penalty 1 was a fixed penalty for the initial failure and was automatic when the return was not filed by the relevant deadline. Penalty 3 was also automatic and was imposed if the return still remained outstanding after a period of 6 months beginning with the penalty date. In the view of the FTT, none of the reasons relied upon  by the Appellant for the late filing of its ATED return constituted a reasonable excuse and therefore it concluded that both Penalties 1 and 3 were properly charged to the Appellant.

With regard to Penalty 2, the FTT concluded that it had not been correctly issued as the condition in paragraph 4(1)(c) of Schedule 55 had not been met; HMRC had not given the Appellant notice specifying the date from which the penalty was payable. 

In the view of the FTT, HMRC’s notices of 9 December 2018 and 23 January 2020, notifying the Appellant of Penalty 1 and that daily penalties had been imposed, could not be construed as having given the requisite notice under paragraph 4(1)(c), as the notices could not be given retrospectively. The purpose of paragraph 4(1)(c) is to ensure that the taxpayer has been given due notice allowing him to take remedial action at any time during the daily penalty period. In this case, the Appellant was not afforded that opportunity and therefore the requisite notice was not given to the Appellant by HMRC. The FTT therefore cancelled Penalty 2.

Comment

This is no doubt a welcome decision for those taxpayers who find themselves in a similar position to that of the Appellant. The decision provides confirmation that daily late filing penalties cannot be issued by HMRC to taxpayers retrospectively. This issue was also addressed in the recent case of Heacham Holidays Ltd v HMRC  [2020] UKFTT 406 (TC) in which the FTT discharged the daily penalties imposed on the taxpayer as they were also issued retrospectively by HMRC without notice.

The decision can be viewed here.