Mr Keith Donaldson v The Commissioners for Her Majesty's

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Neutral Citation Number: [2016] EWCA Civ 761

Case No: A3/2015/0266

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE UPPER TRIBUNAL

(TAX AND CHANCERY CHAMBER)

FTC/98/2013

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 18/07/2016

Before:

THE MASTER OF THE ROLLS

LORD JUSTICE KITCHIN

and

LORD JUSTICE HAMBLEN

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Between:

MR KEITH DONALDSON

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THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (“HMRC”)

Appellant

Respondents

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Rebecca Murray (instructed by Bar Pro Bono Unit) for the Appellant

Richard Vallat (instructed by General Counsel and Solicitor to HM Revenue and Customs)

for the Respondents

Hearing date: 27/06/2016

Approved Judgment

Judgment Approved by the court for handing down.

Donaldson v HMRC

Master of the Rolls:

1. Schedule 55 of the Finance Act 2009 (“the Schedule”) makes provision for the

imposition by Her Majesty’s Revenue and Customs (“HMRC”) of penalties on

taxpayers for the late filing of tax returns. The date for filing a return on paper (as

opposed to online) is 31 October. If a person (P) fails to file an income tax return by

the “penalty date” (the day after the “filing date” i.e. the date by which a return is

required to be made or delivered to HMRC), para 3 of the Schedule provides that he is

liable to a penalty of £100. Para 4 provides:

“(1) P is liable to a penalty under this paragraph if (and only

if)–

(a) P's failure continues after the end of the period of 3

months beginning with the penalty date,

(b) HMRC decide that such a penalty should be payable,

and

the penalty is payable.”

2. Para 5 provides that P is liable to a penalty under that paragraph if (and only if) his

failure continues after the end of the period of 6 months beginning with the penalty

date. The penalty under this paragraph is the greater of (a) 5% of any liability to tax

which would have been shown in the return in question and (b) £300.

3. Para 18 provides:

“(1) Where P is liable for a penalty under any paragraph of this

Schedule HMRC must—

(a) assess the penalty,

(b) notify P, and

penalty is assessed”.

4. This appeal concerns the paper tax return filed by Mr Donaldson for 2010/11. He

failed to file the return by 31 October 2011. On 18 December 2011 he was sent a

computer generated reminder called an SA Reminder which stated that it was too late

to file a paper return “without having to pay a £100 late filing penalty”. It also stated

that, if he failed to file his return by 31 January 2012, “a £10 daily penalty will be

charged every day it remains outstanding. Daily penalties can be charged for a

maximum of 90 days starting from 1 February for paper tax returns”.

5. He still did not file his return. On 6 January 2012, HMRC sent another computer

generated reminder called an SA 326 D notice. This stated that he was liable for a

penalty of £100 in accordance with para 3. Like the SA Reminder, it also stated that,

if the tax return was more than 3 months late, “we will charge you a penalty of £10

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Donaldson v HMRC

for each day it remains outstanding. Daily penalties can be charged for a maximum of

90 days starting from 1 February”.

6. Mr Donaldson filed his return on 1 May 2012. He was then sent a Notice of Penalty

Assessment which informed him that he had incurred a total penalty of £1,200

comprising (i) £900 in daily penalties (pursuant to para 4); and (ii) £300 for filing the

return more than 6 months after the due date (pursuant to para 5).

7. Mr Donaldson appealed to the First-tier Tribunal (“FTT”) on the ground that he was

not liable to pay a daily penalty. Having appealed, he took no further part in the

appeal. The FTT on its own initiative considered possible arguments in his favour,

including whether the conditions in para 4(1)(b) and (c) of the Schedule were

satisfied. It held that HMRC had “decided” that a daily penalty should be payable and

that the condition in para 4(1)(b) was satisfied. But it also held that HMRC had not

given notice to Mr Donaldson specifying the date from which the penalty was

payable, so that the condition in para 4(1)(c) had not been satisfied. Accordingly, the

FTT allowed his appeal.

8. HMRC appealed to the Upper Tribunal (“UT”). Again Mr Donaldson was not

represented and took no part in the appeal. He did not cross-appeal or serve a

respondent’s notice in order to argue that the condition in para 4(1)(b) had not been

satisfied. The UT appointed an amicus curiae to ensure that “all relevant issues were

fully ventilated”. The UT itself identified as a relevant issue the question of whether

the condition in para 4(1)(b) had been met. At para 5 of its decision, the UT stated

that, because Mr Donaldson had not cross-appealed on the question of whether the

condition in para 4(1)(b) had been met, it was not necessary or appropriate to

determine this point. At para 38, the UT noted that HMRC’s notice of penalty

assessment failed to state the period in respect of which Mr Donaldson had been

assessed as required by para 18(1)(c). It said, however, that “this point is not…before

us and we shall not address it further”.

9. The UT decided that the condition in para 4(1)(c) was met and on that ground allowed

HMRC’s appeal. Mr Donaldson applied to the UT for permission to appeal against

the decision of the UT not only on the para 4(1)(c) point, but also on both the para

4(1)(b) point and on the para 18(1)(c) point. He now has permission to appeal on all

three points.

Paragraph 4(1)(b)

10. The HMRC case is that it had taken a decision within the meaning of para 4(1) (b)

either (i) by taking the high policy decision that it took in June 2010 that all Ps who

were at least 3 months late in filing their returns would be liable to a daily penalty or

(ii) by its computer, programmed in accordance with that decision, automatically

issuing a penalty notice.

11. Ms Murray, who appears pro bono on behalf of Mr Donaldson, submits that neither of

these amounts to a “decision” within the meaning of para 4(1)(b). She advances three

reasons. First, the words “such a penalty” in para 4(1)(b) are a reference back to the

opening words of para 4(1) so that sub-para (b) means “HMRC decide that a penalty

under this paragraph should be payable by P”. The condition is referring to a penalty

decision taken by HMRC with reference to a particular P.

Judgment Approved by the court for handing down.

Donaldson v HMRC

12. Secondly, Parliament intended that HMRC should exercise its judgment with regard

to a particular P in the light of the circumstances applicable to him, so as to decide

whether he “should” be liable to a penalty. Thus, the HMRC must decide whether P is

liable to a daily penalty and, if so, the date from which it should begin to run, which

date must be specified in the notice.

13. Thirdly, the structure of paragraph 4(1) indicates that the three conditions must be

successively met, in chronological order, so that the decision in (b) must be taken only

after P has failed to submit his return for the relevant period. The policy decision

relied on by HMRC was taken years earlier and therefore cannot satisfy condition (b).

14. I start by saying that I agree with the observation made at para 43 of the decision of

the UT:

“We do not think it could have been within the contemplation

of the draftsman that HMRC should be required to make a

decision on a taxpayer-by-taxpayer basis, since he must have

been aware that it would be impractical to exercise a discretion

(meaning a discretion exercised in respect of each taxpayer

individually, rather than in relation to defaulting taxpayers as a

body) in that way. Rather, we think, this provision too

contemplates what HMRC have in fact done, that is decide in

advance that all taxpayers who default for more than three

months should suffer daily penalties. In other words, what was

contemplated was that the discretion conferred by the provision

should be capable of being exercised in respect of all taxpayers

who default for the requisite period, or none; and if that is so

the purpose of the notice is to inform taxpayers who are in

danger of incurring daily penalties that HMRC have decided to

impose them.

15. It seems to me that it is inherently unlikely that Parliament intended that HMRC

should be required to make a decision by exercising a discretion on an individual

taxpayer-by-taxpayer basis. Parliament has addressed the issue of the individual

circumstances of P by providing at para 23 that:

“(1) Liability to a penalty under any paragraph of this Schedule

does not arise in relation to a failure to make a return if P

satisfies HMRC or (on appeal) the First-tier Tribunal or Upper

Tribunal that there is a reasonable excuse for the failure.

(2) For the purposes of sub-paragraph (1)—

(a) an insufficiency of funds is not a reasonable excuse,

unless attributable to events outside P's control,

(b) where P relies on any other person to do anything, that

is not a reasonable excuse unless P took reasonable care

to avoid the failure, and

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excuse has ceased, P is to be treated as having

continued to have the excuse if the failure is remedied

without unreasonable delay after the excuse ceased.”

16. With these considerations in mind, I can now deal with Ms Murray’s three reasons.

As regards her first reason, I do not consider that the words “such a penalty” shed any

light on whether or not a decision can be a generic decision applicable to all taxpayers

where the condition in para 4(1)(a) is satisfied, or whether it can only be an individual

decision made by reference to the particular circumstances of P. In my view, Ms

Murray places on the words “such a penalty” a weight that they cannot bear. At most,

they are consistent with a decision under para 4(1)(b) being an individual decision

taken having regard to the circumstances of the particular taxpayer. As a matter of

language, however, they do not compel such an interpretation which, for the reasons I

have given, it is inherently unlikely that Parliament intended.

17. The second reason adds nothing to the first. As for the third reason I accept the

submission of Mr Vallat that the order in which the three conditions are set out does

not show that Parliament intended that they should be chronological. Other than the

order in which the three conditions are set out, there is no support for this submission.

There are no words such as “then” or “after” to indicate a specific sequence; and there

is nothing in the structure of para 4(1)(b) to support it either. The UT said at para 42

that, although at first reading para 4(1) suggests a chronological sequence, closer

examination shows that the draftsman had gone no further than to make the three

requirements cumulative. I agree.

18. In my judgment, a generic policy decision of the kind taken by HMRC in June 2010 is

a decision which satisfies the requirement of para 4(1)(b). I do not, therefore, need to

deal with Mr Vallat’s alternative submission that para 4(1)(b) is satisfied by HMRC’s

computer, programmed in accordance with that policy decision, automatically issuing

a penalty notice. I must confess to having considerable doubts as to whether it is

correct.

Paragraph 4(1)(c)

19. Ms Murray submits that neither the SA Reminder document nor the SA 326D

document is a “notice” within the meaning of para 4(1)(c) First, she relies on the

chronological point that the SA Reminder was sent to Mr Donaldson long before the

condition in para 4(1)(a) was met. I have already rejected this argument and say no

more about it.

20. Secondly, Ms Murray submits that the requirement to give notice specifying the date

from which the penalty is payable must be understood in the light of the discretion

given to HMRC to specify the date. Having exercised that discretion as respects the

particular P, she submits that HMRC must then notify him as to how that discretion

has been exercised. The two documents relied on by HMRC merely inform the

recipient that he might be liable to a penalty and identify the earliest date from which

the penalty might run. The language of para 4(1)(c) does not permit the giving of a

conditional or contingent notice. It requires notice to be given to P that a penalty is

payable by him. No such notice can be given unless and until P’s failure to submit a

return has continued beyond the three month period.

Judgment Approved by the court for handing down.

Donaldson v HMRC

21. I cannot accept these submissions. First, to the extent that they depend on

establishing the existence of a discretion, I have already rejected them. Secondly, the

notices did not “merely” inform Mr Donaldson that he “might” be liable to a penalty.

They both stated in terms that he would be liable to a £10 daily penalty for every day

after 31 January 2012 that the return was not filed: “a £10 daily penalty will be

charged” (SA Reminder); and “if your tax return is more than three months late we

will charge you a penalty of £10 for each day it remains outstanding” (SA 326

Notice). Thirdly, I reject the submission that para 4(1)(c) does not permit a notice to

be given until P becomes liable for a penalty i.e. in advance of a failure to file the

return after the end of the three month period. There is nothing in the language of

sub-para (c) which restricts the timing of the giving of a notice in this way. Ms

Murray has not suggested any reason why Parliament would have intended to do this.

All that HMRC is required to do is to inform P that it has decided that, if he continues

to fail to file his return after the end of the three month period, he will be liable for a

daily penalty of £10 for each day that the failure continues during the following 90

day period. Sub-para (c) requires notice to be given specifying the date from which

penalty “is” payable. That can be done in advance of any default by P. It is a fair and

sensible provision.

22. These reasons for rejecting Ms Murray’s submissions are not, in substance, different

from those given by the UT.

Paragraph 18(1)(c)

23. Ms Murray submits that the notice of the penalty assessment given by HMRC to Mr

Donaldson did not state “the period in respect of which the penalty is assessed” as

required by para 18(1)(c). It failed to state any period at all. The notice should have

stated both the number of days in respect of which the penalty was assessed and the

start and end dates of the period. The notice enabled Mr Donaldson to work out the

number of days (90), but it did not state that number, nor did it state the period.

24. Mr Vallat’s primary submission is that the “period in respect of which the penalty is

assessed” is the tax year to which the assessment relates (in this case 2011/12). This

was stated in the notice. He points out that para 18 applies for the assessment of all

penalties under the Schedule. There are no introductory words such as “where

appropriate” which might suggest that a period need only be specified for some

penalties. In some instances (for example, penalties payable pursuant to paras 3 and

8), the only possible “period in respect of which the penalty relates” is the tax year or

other period to which the penalty relates.

25. I do not accept Mr Vallat’s submission. It is true that in some contexts the phrase

“period in respect of which the penalty is assessed” is the relevant tax year. But in the

context of a daily penalty, I consider that the most natural interpretation of the phrase

is that it refers to the period over which the penalty has been incurred. It would have

been surprising if Parliament had not intended that HMRC should notify P how a

daily penalty has been calculated i.e. over what period he has incurred the penalty.

He needs that information to enable him to decide whether to challenge the

assessment of the penalty.

26. The next question is whether the notice of assessment in this case did state the period

in respect of which the daily penalty was assessed. It undoubtedly did not state the

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Donaldson v HMRC

start or the end dates of the period. It stated that Mr Donaldson was liable for the

maximum penalty of £900 calculated at the rate of £10 per day for a maximum of 90

days. It also referred him to para 4 of the Schedule. In my view, this was not

sufficient to satisfy the requirements of para 18(1)(c). The notice did not identify the

three month period. Referring him to para 4 of the Schedule (as the notice did) did

not enable him to work out (still less by doing so did the notice state) to which three

month period it was referring. As I have said at para 8 above, this seems to have been

the view of the UT. The notice should have specified the three month period, at least

by stating when it started. It should not be a cause for surprise that Parliament

intended that the taxpayer should be told not only the amount of the daily penalty, but

how it has been calculated i.e. the start and end date of the three month period.

27. It is, therefore, necessary to consider Mr Vallat’s alternative argument that the failure

to state the period over which the penalty was incurred does not of itself invalidate the

assessment because, despite the defect, the notice was in substance and effect in

conformity with para 18 or accorded to its intent and meaning within section 114(1)

of the Taxes Management Act 1970 (“TMA”) Section 114(1) of TMA provides:

“An assessment or determination, warrant or other proceeding

which purports to be made in pursuance of any provision of the

Taxes Acts shall not be quashed, or deemed to be void or

voidable, for want of form, or be affected by reason of a

mistake, defect or omission therein, if the same is in substance

and effect in conformity with or according to the intent and

meaning of the Taxes Acts, and if the person or property

charged or intended to be charged or affected thereby is

designated therein according to common intent and

understanding.”

28. Ms Murray submits that the failure of the notice of assessment to state the period is

not saved by section 114(1) because the notice did not state any period at all. In my

view, that is not a sufficient answer to the section 114(1) argument. Section 114(1) is

expressed in wide terms. It captures a notice “affected by reason of a mistake, defect

or omission therein” (emphasis added). Thus, the mere fact that the notice omitted to

state the period cannot be determinative. An omission to state the period is saved by

section 114(1) if the notice is “in substance and effect in conformity with or according

to the intent and meaning of the Taxes Acts”. In Pipe v Revenue and Customs

Commissioners [2008] STC 1911 at para 51, Henderson J said that a mistake may be

too fundamental or gross to fall within the scope of the subsection. I agree. The same

applies to omissions.

29. In my view, the failure to state the period in the notice of assessment in the present

case falls within the scope of section 114(1). Although the period was not stated, it

could be worked out without difficulty. The notice identified the tax year as 2010-11.

Mr Donaldson had been told that, if he filed a paper return (as he did), the filing date

was 31 October 2011. The SA Reminder document informed him that, since he had

not filed his return by the filing date, he had incurred a penalty of £100. It also

informed him that, if he did not file his return by 31 January 2012, he would be

charged a £10 daily penalty for every day the return was outstanding. This

information was reflected in the notice of assessment. Mr Donaldson could have been

in no doubt as to the period over which he had incurred a liability for daily penalty.

Judgment Approved by the court for handing down.

Donaldson v HMRC

He knew that the start date for the period of daily penalty was 1 February 2012 and

the notice of assessment told him that the end date of the period was 90 days later.

The omission of the period from the notice was, therefore, one of form and not

substance. Mr Donaldson was not misled or confused by the omission. The effect of

section 114(1) is that the omission does not affect the validity of the notice. I do not,

therefore, need to consider the further argument advanced by Mr Vallat based on

section 114(2) of TMA.

Conclusion

30. For all these reasons, I would dismiss this appeal.

Lord Justice Kitchin:

31. I agree.

Lord Justice Hamblen:

32. I also agree.