TC09647 - [2025] UKFTT 01124 (TC)

The appellant’s argument about the use of the Gateway account, which Mr Rupp described as one of the main points in this appeal, is simply not tenable. Regulation 76(6) makes it explicit that in deciding whether there has been a contravention of a requirement in the Regulations HMRC must consider whether a taxpayer has followed any relevant guidance issued by them.

The guidance on registration and renewal issued by HMRC is relevant and is explicit in its terms (see paragraph 13 above). Had the appellant read that then he would have known about the need to check the Gateway account in the month before renewal was required. The appellant did not follow that guidance.

The fact that HMRC currently issue reminders in a different manner does not alter the fact that the appellant did not access the reminders in the prescribed manner at the relevant time.

Accordingly, we find that HMRC were right to deduce that the appellant had failed to follow the guidance referred to in Regulation 76(6) of the Regulations.

In any event, we accept Mr Gyasi’s argument that HMRC have no statutory obligation to issue reminders and only do so because of the commitment in the guidance. A prudent EAB should have known of the need to renew the registration timeously and to have done so with or without reminders.

Mr Mathews rightly said that the issue of publication would not be pursued because “that ship has sailed”. HMRC had published the details of the appellant, the amount of the penalty and the cause of the breach which was trading whilst unregistered, ie a breach of Regulation 56.

However, for the avoidance of doubt, we confirm that that decision to publish is not an appealable decision in terms of Regulation 99. Having issued a notice of penalty in terms of Regulation 83(3), HMRC do have a mandatory requirement in terms of Regulation 85(1) to publish details on their website.

In the correspondence, and indeed in HMRC’s Skeleton Argument, there is reference to whether the appellant had a reasonable excuse for the failure to re-register. As Mr Gyasi very fairly acknowledged, when we put it to him that that had no place in this penalty regime, the question is, as Regulation 76(4) specifies, whether the appellant had taken all reasonable steps and exercised all due diligence to ensure that there was compliance with the requirement to register. That is not the same as a reasonable excuse.

The appellant has always conceded that the failure was the result of an oversight. The difference between this failure to pay the renewal fee on time and the previous failures is that until 2022 such a failure did not trigger an automatic cancellation of the registration.

Mr Mathews confirmed that he did know that the appellant was required to be registered. The problem was that the appellant did not have adequate processes in place to ensure renewal. The fact is that not only was there a failure to renew by the end of September 2022 but there was a further failure at the end of September 2023. This was not one isolated omission in the period with which we are concerned.

Officer Little said that she had considered whether there should be a penalty or simply a warning letter since she was treating the matter as a first contravention of the Regulations. She explained that the long period of trading whilst unregistered was the primary reason that she had decided that a penalty should be imposed. She had decided not to issue a statement censuring the appellant. She explained how she had calculated the penalty using the Penalties Framework. As we have indicated she was a credible witness.

It was evident that she had taken into account the representations made for the appellant.

She had considered the different sub-paragraphs of Regulation 83(1) and, in fact, to the appellant’s benefit, she had ignored the previous failure to renew timeously (Regulation 83(1)(g)). She had accepted that there was no evidence that the failure to register was intentional (Regulation (83(1)(b)).

She had considered Regulation 83(1)(d), (e) and (h) to be neutral since the only profit gained by the appellant was the savings achieved in not paying the registration fees, there was no known impact on third parties and there were no known potential systemic consequences.

She explained that the supervision that HMRC undertook in relation to registered businesses included a range of internal and external system checks in order to assess the level of risk. HMRC were unable to do that in the period whilst the appellant was not on the register.

We find that:

Accordingly, we find that HMRC were correct to find that a penalty was exigible in respect of that breach of the Regulations.

We also find that the appellant did co-operate with HMRC in that the late application to register was unprompted so the 50% reduction in the penalty was appropriate. The penalty has been correctly calculated in terms of the Penalties Framework.

The remaining issue for the Tribunal, in terms of the Regulations is thus whether the amount of the penalty is “appropriate” which is to say “effective, proportionate and dissuasive” (Regulation 76(8)).

There is no dispute that the penalty is effective and dissuasive.

Although both parties had identified the issue of proportionality we heard very limited argument on the point.

In his Skeleton Argument Mr Gyasi confined himself to stating that:

“The Tribunal is not bound by HMRC’s penalty framework but should have regard to it to ensure justice between the parties, as established in N Bevan Ltd [2016] at paragraph 23. HMRC submits that the penalty is consistent with the framework and proportionate to the breach’s duration and the Appellant’s failure to act despite HMRC’s guidance.

The Respondents therefore disagree with the Appellant’s statement that the Penalty is disproportionate…”.

N Bevan Limited v HMRC [2016] UKFTT 674 (TC) (“Bevan”)dealt with a different type of breach and different Regulations so is not wholly in point. However, Bevan is correct in stating that the Tribunal should pay due regard to HMRC’s policy in the framework “when carrying out our overriding objective of doing justice between the parties”. As Bevan states at paragraph 23, where a breach has been established, the Tribunal has “full power to decide for itself afresh…what level of penalty would be appropriate in light of all of the evidence and circumstances before it” and then either accept HMRC’s figure or depart from it in any respect.

To an extent, the appellant simply argues that the penalty is just not fair. HMRC, as an arm of Government, should be helping smaller businesses and they had relied on HMRC to warn and help them. As a small business the size of the penalty is very large.

Mr Rupp conceded that his knowledge of the law in this field was limited, and we confirmed that in terms of Rule 2 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (as amended) (“the Rules”) our obligation was to enable full participation and we would assist in addressing the law. We saw no advantage in asking for written submissions on proportionality.

This is a specialist Tribunal and there is considerable jurisprudence on the subject of proportionality in terms of domestic law.

The starting point is that a penalty would only be seen as disproportionate if it interfered with the appellant’s rights under Article 1 of the First Protocol (“A1P1”) to the European Convention for the Protection of Human Rights and Fundamental Freedoms. The right to protection of property is afforded by A1P1 which provides that:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of the state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

In Edwards v HMRC [2019] UKUT 131 (TCC) (“Edwards”) the Upper Tribunal considered A1P1 and proportionality narrating at paragraphs 78 to 80 and 82 that:

“78.

A1P1 does, as it states clearly, permit the state to enforce laws to secure the payment of taxes or penalties. It is well established however that any interference with property which is justified on those grounds must satisfy the requirement of proportionality, that is that there is a reasonable relationship of proportionality between the means employed and the aim sought to be realised.

79.

The Upper Tribunal has previously considered the question of proportionality in the context of the VAT default surcharge regime in HMRC v Total Technology (Engineering) Limited [2012] UKUT 418 (TCC). In that case the Upper Tribunal referred at [11] to what Simon Brown LJ had said in International Transport Roth GmbH v Home Secretary [2003] QB 728 at [26], setting out the test for assessing proportionality in the context of a scheme which imposed significant penalties on lorry drivers and haulage companies who intentionally or negligently allowed clandestine immigrant entry into the United Kingdom as follows:

“…. it seems to me that ultimately one single question arises for determination by the court: is the scheme not merely harsh but plainly unfair so that, however effectively that unfairness may assist in achieving the social goal, it simply cannot be permitted? In addressing this question I for my part would recognise a wide discretion in the Secretary of State in his task of devising a suitable scheme, and a high degree of deference due by the court to Parliament when it comes to determining its legality. Our law is now replete with dicta at the very highest level commending the courts to show such deference.”

80.

The Upper Tribunal made further observations on Simon Brown LJ’s judgment at [53] to [55] as follows:

“53.

It is, however, important also to read what Simon Brown LJ said about proportionality later in his judgment. He referred at [51] to the speech of Lord Steyn in R (Daly) v SoS for the Home Department [2001] 2 AC 532 at [27], referring to the three-stage test adopted by the Privy Council in De Freitas v Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing [1999] 1 AC 69 in relation to determining whether a limitation (by an act, rule or decision) is arbitrary or excessive: “whether: (i) the legislative objective is sufficiently important to justify limiting a fundamental right; (ii) the measures designed to meet the legislative objective are rationally connected to it; and (iii) the means used to impair the right or freedom are no more than is necessary to accomplish the objective”.

54.

Then, at [52] Simon Brown LJ said this:

“It is further implicit in the concept of proportionality, however, that not merely must the impairment of the individual’s rights be no more than necessary for the attainment of the public policy objective sought, but also that it must not impose an excessive burden on the individual concerned.”

55.

He went on to cite from James at [50]:

“Not only must a measure depriving a person of his property pursue, on the facts as well as in principle, a legitimate aim ‘in the public interest’, but there must also be a reasonable relationship of proportionality between the means employed and the aim sought to be realised. This latter requirement was expressed in other terms in the Sporrong and Lönnroth judgment by the notion of the ‘fair balance’ that must be struck between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights. The requisite balance will not be found if the person concerned has had to bear ‘an individual and excessive’ burden.”

adding that that principle seemed to him to be of the first importance.”

The Upper Tribunal then stated that:

“82.

In our view, the principles identified in Total Technology are equally applicable in this case. In considering whether the imposition of a significant penalty for failure to file a return in circumstances where no tax is due infringes the taxpayer’s A1P1 rights it is necessary to determine the aim of the penalty regime, and whether the aim is a legitimate aim in the public interest. It is then necessary to determine whether there is a reasonable relationship of proportionality between the means employed and the aim sought to be realised, ascertained by establishing whether there is a fair balance struck between the public interest and the requirements of the protection of individual’s fundamental rights.”

Although we are considering registration and trading whilst unregistered rather than filing a return, that is the approach that we should adopt since the penalty in this instance is undoubtedly significant from the appellant’s perspective.

Lastly, in terms of binding authorities, we observe that in HMRC v Trinity Mirror Group PLC [2015] UKUT 421 (TCC) the Upper Tribunal stated at paragraph 15 that:

“15.

A wide discretion is conferred on the Government and Parliament in devising a suitable scheme for penalties, and a high degree of deference is due by courts and tribunals when determining its legality. The state has a wide margin of appreciation, so wide as to allow the imposition of taxes, contributions and penalties unless the legislature’s assessment of what is necessary is devoid of reasonable foundation: see Gasus Dosier-und Fördertechnik GmbH v Netherlands (1995) 20 EHRR 403, [1995] ECHR 15375/89, ECt HR, at [60]. A court or tribunal must be astute not to substitute its own view of what is fair for the penalty which Parliament has imposed”.

and at paragraphs 62 and 63 that

“62.

In our judgment, it is not appropriate for the courts or tribunals to seek to set any maximum penalty, or range of maximum penalties. That would in effect be to legislate….

63.

The correct approach is to determine whether the penalty goes beyond what is strictly necessary for the objectives pursued by the ... regime, as discussed … and whether the penalty is so disproportionate to the gravity of the infringement that it becomes an obstacle to the achievement of the underlying aim of the [legislation]. To those tests we would add that derived from Roth in the context of a challenge under the Convention to certain penalties, namely “is the scheme not merely harsh but plainly unfair, so that, however effectively that unfairness may assist in achieving the social goal, it simply cannot be permitted?”

What then is the aim of the Regulations? That is self-evident, not only from the nomenclature of the Regulations themselves but also from the regular press publicity emanating from HMRC. They routinely point out that HMRC supervises tens of thousands of businesses across the UK under Money Laundering Regulations and helps these firms protect themselves from criminals who seek to launder cash or finance terrorism. The branch of HMRC which handles Money Laundering is called the Economic Crime Supervision team because that is what they do.

Although it deals with different issues, we observe that the Upper Tribunal in HMRC v Jackson Grundy Limited [2017] UKUT 180 (TCC), when discussing the imposition of penalties under the Money Laundering Regulations 2007, found as fact that:

“6.

Estate agencies are among the businesses required to maintain appropriate procedures pursuant to the Regulations to assist in the combating of money-laundering, investment in real estate being seen both as an investment that those involved in criminal activity might make with ‘dirty money’ and also a possible method of transposing ‘dirty money’ into ‘clean money’ by investing the ‘dirty money’ in real estate which is subsequently disposed of….”.

In terms of Regulation 56(5), when unregistered, an EAB is not entitled to carry on in business with the consequential effect that in carrying on trading there is a further breach of the Regulations. If a business that is required to be registered in terms of the Regulations is not registered and continues to trade then HMRC cannot supervise their activities. That is a risk and a not inconsiderable risk.

It is also self-evident that it is clearly in the public interest to have regulation of businesses handling comparatively large sums of money, of potentially unknown derivation, where those businesses are not otherwise regulated.

Whilst we note that the appellant states that they complied with the money laundering legislation, in terms of completing AML checks etc whilst they were unregistered, that misses the point of the legislation because HMRC, the supervisory authority, were unable to monitor the position and assess the risks.

The heading of the Penalties Framework makes the mischief to which the penalties are directed explicit as it reads: “…financial penalties framework: type 2 (trading whilst unregistered)”. At all times the appellant has focussed on the failure to register and views that as an administrative oversight. HMRC have focussed on the length of time that the appellant traded whilst unregistered. We find that HMRC are correct in taking the view that the gravity of the failure to register is the length of time that the appellant continued to trade whilst unregistered.

We find that the legislative objective in imposing penalties for failures to register as an EAB and then continuing to trade is sufficiently important to justify limiting the fundamental right in A1P1 and the imposition of penalties is rationally connected to that.

HMRC is a creature of statute and its powers are set out in statute either expressly or by implication. The power to impose a penalty is at Regulation 76. Parliament did not choose to stipulate the quantum of any penalty, merely stating that it should be appropriate and therefore effective, proportionate and dissuasive. The Penalties Framework is in the public domain and readily accessible.

The issues for the Tribunal then are whether the Penalties Framework:

The Penalties Framework is the civil sanction but, as can be seen, there are also criminal sanctions and so the penalties are at the lower end of the spectrum. As far as the penalties themselves are concerned there are the six bands and an upper cap. As HMRC’s press publicity demonstrates, there continue to be multiple breaches annually and large sums are collected in penalties.

As we have narrated at paragraph 21 above, the penalty calculation is only the starting point and the decision maker must then consider whether the penalty is appropriate in all the circumstances of the case and adjust the penalty appropriately.

Because there continue to be multiple breaches of the Regulations, to an extent it is arguable that the Penalties Framework, or regime, only partially accomplishes the legislative objective which is (a) registration by all relevant businesses, and (b) in the absence of registration the prohibition on continuing to trade.

We find that the framework has checks and balances and does not do more than is necessary to attempt to accomplish the legislative object.

Of course, the appellant argues that the penalty, albeit reduced to £13,350 and then to £10,100, is an excessive burden. However, we must consider why it is high. The framework states that the starting penalty will be the lower of the figure at steps one and two and of course step three only comes in to play if there is a period of failure in registration for more than a year. The appellant’s gross profit falls into the fourth of the six bands when its financial strength (Regulation 83(3)) is evaluated and that would have been disregarded (thereby reducing the penalty) if the period of non-registration had not been so long.

The appellant is the author of its own misfortune in that to be unregistered for longer than the required annual period of registration is not a minor breach and it is that which has led to the size of the penalty which is not the maximum possible.

We understand that the appellant considers the penalty to be harsh but the appellant’s financial strength, or not, given the decrease in turnover in the period, has been taken into account and the appellant is not at the lower end of the spectrum as it is in the fourth band. When considering the balance to be struck between the demands of the general interest of the community and the appellant itself we do not find this penalty to be “an individual and excessive burden”.

Lastly, is the Penalties Framework so unfair that it simply cannot be permitted? We have already indicated that it contains a number of checks and balances. There is considerable flexibility.

It is a very high threshold to say that it simply cannot be permitted. Looking at the Penalties Framework as a whole we cannot find that it is so unfair that it cannot be permitted.

In summary, we find that the Penalties Framework is proportionate and that Officer Little applied those principles when issuing the penalty. In all the circumstances of this case, we find that the penalty is appropriate within the meaning of that word in the legislation.