Tribunal refuses to allow HMRC to rely upon section 114 TMA to cure its mistakes

In Chartridge Developments Limited v Revenue and Customs Commissioners [2016] UKFTT 766, the First-tier Tribunal (FTT) allowed (in part) the taxpayer's appeal against penalties imposed for late filing of annual tax on enveloped dwellings (ATED) returns under section 161(3), Finance Act 2013, and refused to allow HMRC to rely upon section 114 Taxes Management Act 1970 (TMA).

Background

ATED provides for an annual charge on UK residential properties over a certain value which are held by companies, partnerships or collective investment schemes. 

Chartridge Developments Limited (Chartridge) is a property development company.  As it owns UK residential property, it is, within the charge to ATED, however, one of the exemptions from ATED is where the property is held by a property development company. 

Chartridge did not submit ATED returns for the period ending 31 March 2014 and 31 March 2015, until 7 August 2015, which was after the due dates for filing the ATED returns. 

HMRC was of the view that Chartridge had been careless in failing to submit returns on time and therefore charged late filing penalties pursuant to Schedule 55, Finance Act 2009 (Schedule 55). Schedule 55 provides for an automatic fixed penalty and a discretionary, daily penalty for returns filed more than 3 months after the filing date.  If a taxpayer is liable to a penalty, HMRC must assess and notify the penalty. The penalty notice must state the period of assessment for the penalty and, in the case of daily penalties, the start date (which must be at least three months from the filing date).

The total amount of penalties charged by HMRC was £3,200 for the ATED period ended 31 March 2014 and £3,580 for the ATED period ended 31 March 2015. 

Chartridge appealed against the penalties on the following  grounds:

(1)  The penalty notices were defective as they referred to incorrect dates.

(2)  It had a reasonable excuse for filing the returns late.

(3)  HMRC should have allowed a reduction for special circumstances.

The penalties in four of the five penalty notices issued were based on incorrect filing dates (due to HMRC misunderstanding the ATED transitional provisions). This affected the start dates for the daily penalties.

HMRC accepted that some of the dates in the penalty notices were incorrect, however, it argued that the penalty notices were saved by section 114(1) TMA, which provides, in summary, that an assessment or determination shall not be invalidated by reason of a mistake as long as it still conforms to the relevant Taxes Act in substance and effect and if the person intended to be charged understands it.

FTT's decision

In relation to the validity of the penalty notices, the FTT held that while minor calculation errors in penalty notices could be cured by section 114, TMA, provided the filing date was correctly stated, errors in penalty notices caused by incorrect filing dates could not. In the view of the FTT, this was a gross error which was likely to mislead the taxpayer.  With regard to these invalid penalty notices, Chartridge's appeal was allowed.

This left one valid penalty notice and the issue was whether Chartridge's reliance on its accountant had constituted a reasonable excuse for the purposes of paragraph 23(1), Schedule 55. The FTT noted that paragraph 23(2)(b) made it clear that reliance on another person could not be a reasonable excuse, unless the taxpayer had taken reasonable care to avoid the failure. Chartridge had not established that it had taken such reasonable care. The FTT also found that there were no special circumstances justifying a reduction of the penalty. In particular, the fact that ATED was a new tax did not constitute a special circumstance, since Chartridge accepted that it had known about its obligations. Chartridge's appeal in relation to the one valid notice was dismissed.

Comment

Regular readers of our weekly tax blog will recall that in July 2016, we discussed the FTT's decision in Mabbutt v HMRC [2016] UK FTT 0306 (TC) (a copy of our blog can be found here). In that case, HMRC unsuccessfully attempted to rely upon section 114 TMA to cure a defect in a notice of intention to enquire which it had issued to the taxpayer concerned.

This case provides further guidance and analysis on the scope of section 114 and the types of mistakes by HMRC which the section is capable of curing. 

A copy of the decision can be found here.