T09636 - [2025] UKFTT 01099 (TC)

The penalties charged are proportionate and the penalty regime in Schedule 55 is proportionate to its aim. The penalty regime is an administrative means of securing the production of timely returns. Its aim is to encourage compliance, not punish defaults. In Barry Edwards v HMRC [2019] UKUT 137 (TCC), the Upper Tribunal confirmed, at [85], that the Schedule 55 regime was proportionate and penalties are due even in circumstances where there is no additional tax liability:

“In our view, there is a reasonable relationship of proportionality between this legitimate aim and the penalty regime which seeks to realise it. The levels of penalty are fixed by Parliament and have an upper limit. In our view the regime establishes a fair balance between the public interest in ensuring that taxpayers file their returns on time and the financial burden that a taxpayer who does not comply with the statutory requirement will have to bear.

In view of what we have said about the legitimate aim of the penalty scheme, a penalty imposed in accordance with the relevant provisions of Sch 55 FA2009 cannot be regarded as disproportionate in circumstance where no tax is ultimately found to be due…”

The penalty regime includes provisions for reasonable excuses and special circumstance which allow mitigation in appropriate cases. Each case however is taken on its own merits. The Upper Tribunal found in Hok Ltd v HMRC [2012] UKUT 363 (TCC) that this tribunal does not have the power to discharge or adjust a fixed penalty which is properly due because it thinks it is unfair (at [36] to [58]). The decision of the Upper Tribunal creates a precedent and is binding on the tribunal in all cases where similar issues are contend that the responsibility to submit a self-assessment tax return by the due date remains with the appellant regardless of whether they have delegated that task to another person.

Special circumstances are undefined save that, under para 16(2), they do not include: the ability to pay, or the fact that a potential loss of revenue from one taxpayer is balanced by a potential over-payment by another.

The purpose of Schedule 55 is to encourage timely compliance with filing obligations such as the self-assessment tax return for income tax. In the absence of the penalty regime to encourage that compliance, it would be much more difficult to administer the tax system.

Para 16 may be applied where, in HMRC’s opinion, the taxpayer’s circumstances are such that the application of a penalty at the statutory level would not be appropriate. This may include circumstances where imposing the penalty would be contrary to the clear compliance intention of the penalty law

In Barry Edwards v HMRC, the Upper Tribunal decided at [68] to [74] that the meaning of special circumstances should not be given a restrictive interpretation. Special circumstances may include any factor which means that a decision to charge a penalty at the level determined by statute would be contrary to Parliament’s intent when the penalty regime was introduced. To be special, any particular circumstance may or may not be specific to the individual taxpayer but it must be relevant to the issue under consideration. If relevant, the circumstance must be sufficiently special such that HMRC considers it right to reduce a penalty under para 16. At [86] in Barry Edwards, it was confirmed that the Schedule 55 regime was proportionate, and penalties are therefore correctly due even in circumstances where there is no additional tax liability:

“In view of what we have said about the legitimate aim of the penalty scheme, a penalty imposed in accordance with the relevant provisions of Schedule 55 FA 2009 cannot be regarded as disproportionate in circumstances where no tax is ultimately found to be due. It follows that such a circumstance cannot constitute a special circumstance for the purposes of paragraph 16 of Schedule 55 FA with the consequence that it is not a relevant circumstance that HMRC must take into account when considering whether special circumstances justify a reduction in a penalty.”

HMRC have considered the appellant’s circumstances in light of paragraph 16(2) and submit that a special reduction is not appropriate for essentially the reasons set out above. Penalties are in place to promote efficient operation of the taxation system and are intended as a measure of fairness, so that customers who file late do not gain any advantage over those who file on time. The amount of the penalties charged is set within the legislation. HMRC has no discretion over the amount charged and must act in accordance with the legislation. By not applying legislation and as such not to have imposed the penalty would mean that HMRC was not adhering to its own legal obligations. Accordingly, HMRC have considered the circumstances described by the appellant (as set out above in her submissions) and submit that penalties of the type charged in this case is directly appropriate in order to encourage future compliance with their filing obligations.

Where a person appeals against the amount of a penalty, para 22(2) and (3) of Schedule 55 provide the tribunal with the power to substitute HMRC’s decision with another decision that HMRC had the power to make. The tribunal may rely on para 16 but only if they think HMRC’s decision was “flawed when considered in the light of the principles applicable in proceedings for judicial review”.

The principles referred to as applicable in proceedings for judicial review include ensuring (a) that the decision maker has taken into account all relevant factors, (b) the decision maker has not taken into account any irrelevant factors, and (c) the decision is one that a reasonable decision maker having regard to the available evidence could make.

The decision not to reduce the penalties under para 16 was not flawed but, if the tribunal disagrees, it is further submitted that there are no special circumstances which would require the tribunal to reduce the penalties.