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Computers No Substitute for Humans

Late filing penalty overturned due to lack of human touch

A company had a late filing penalty quashed because the penalty notice had not been issued by a real person.

In the recent First-Tier Tribunal case of Khan Properties Ltd v HMRC, the company was due to file its Corporation Tax return for the accounting period ended 30th March 2016 by 31st March 2017 but filed it 1 ½ months later on 16th May 2017. This triggered the issue of a late filing penalty of £100 by HMRC, which the company promptly appealed.

HMRC did not accept that the company had a reasonable excuse for not filing its return on time, so the appeal progressed to the tax tribunal and joined the ranks of a large number of cases involving similar penalties this year.

Khan Properties’ grounds for appeal were:

  1. This was the first ever late return by the company;
  2. The tax was paid on time so the delay caused no loss of revenue to HMRC; and
  3. The delay was partly caused by HMRC “suddenly withdrawing” their Corporation Tax filing software for 2016 and it took time to make alternative arrangements.

The burden of proof was HMRC’s and therefore the department had to show that the penalty had been validly assessed but, rather surprisingly, they failed to address this issue.

The penalty notice had been issued to Khan Properties by HMRC, CT Services, Corporation Tax Services, but no name of any officer appeared on it. Despite this, HMRC’s letter stated:

“I attach a formal notice of penalty determination I have made…”

Section 100 of the Taxes Management Act 1970 sets out the determination of penalties by an officer of HMRC and subsection 1 states an officer:

“…may make a determination imposing a penalty under any provision of the Taxes Acts and setting it at such amount as, in his opinion, is correct or appropriate.”

In the judge’s view this required a real person from HMRC to decide to impose the penalty and give instructions which may be executed by a computer. In this case there was no evidence of any decision-making by an HMRC officer. Despite the letter accompanying the penalty notice referring to “I”, it had not been issued by a person but generated automatically by the computer.

Interestingly, in social security matters a decision can be taken by a computer as the Social Security Act 1998 provides the necessary authority. There is, however, no equivalent provision in tax legislation.

The judge cancelled the penalty because there was no valid determination of the penalty. However, if this was wrong, the company still had a reasonable excuse for late filing because it was the first time their accountant had failed to file the corporation tax return, on their behalf, on time. Khan Properties would therefore have had no doubt that the trust they had placed in their agent to file their returns was in any way misplaced and would have given them no cause to become involved in checking that the accountants had done their job.

Any contractors facing similar penalties for late filing should take time to read the Revenue correspondence to check for sign of life, and where there is no visible human involvement, appeal citing this case.

By Andy Vessey

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