ATED return penalty drastically reduced due to HMRC errors but others may not be so lucky

Fri 02 Dec 2016

Chartridge Developments Ltd (Chartridge), [2016] UKFTT 766 (TC), has had penalties for failure to submit its ATED returns on time significantly reduced due to errors on the part of HMRC but other companies may not be so lucky. The case highlights the importance of having robust systems to ensure that all compliance obligations are met – but for HMRC’s errors the company, which had no actual ATED liability, would have had to pay £6,780: in the event the penalty was reduced to £160.
ATED applies to an “enveloped dwelling”, i.e. one that is owned, completely or partly, by any of the following holding vehicles:
• company (regardless of residence);
• partnership where one of the partners is a company; or
• collective investment vehicle, e.g. a unit trust or an open ended investment company.
Companies owning any UK-sited residential dwellings worth over £500k are liable for ATED unless the property qualifies for relief as:
• let on a commercial basis to a third party;
• open to the public for at least 28 days a year;
• being developed for resale by a property developer;
• owned by a property trader as the stock of the business for the sole purpose of resale;
• repossessed by a financial institution as a result of its business of lending money;
• used by a trading or property letting business as living accommodation for qualifying employees;
• a farmhouse occupied by a farm worker or a former long-serving farm worker;
• owned by a registered provider of social housing;
• a flat made available to a caretaker employed by a tenant-run management company where there are at least two other flats contained in the building whose tenants are members of the management company and the management company owns or will own the freehold of the premises; or
• a dwelling acquired under a regulated home reversion plan by an authorised plan provider.
Chartridge was within the ATED rules but HMRC accepted that it qualified for relief as a property developer: the problem was that the relief must be claimed in all cases. The claim must be made on the prescribed return form and failure to submit even a nil-return makes the company liable for a penalty unless it has a reasonable excuse.
Returns were required for both 2013/14 and 2014/15 in respect of five properties and HMRC issued penalty notices in respect of all five. The penalties were significant because a separate return/claim was required for each property, and for each return the penalties chargeable were:
• £100 fixed;
• daily penalties of £10 per day for up to 90 days for continuing failures;
• a further £300 once the return is over six months late; and
• another £300 once the return is over 12 months late.
(NB the over six/over 12 month penalties are the minimum: if £300 is less than 5% of the tax due, on each occasion the penalty is 5% of the tax due.)
Chartridge appealed against the penalties on the grounds that:
• the penalty notices were invalid in that all but one showed incorrect dates;
• Chartridge had a reasonable excuse for not submitting the returns; and
• HMRC should have reduced the penalties because of the special circumstances of the case.
HMRC’s penalty notices showed incorrect dates but some were still valid
There is a specific statutory provision (Taxes Management Act 1970 s 114) that allows an HMRC assessment or determination to still be valid if the notice of determination or assessment contains errors but is sufficiently accurate to identify accurately the person charged and it substantially and effectively complies with the requirements of the charging legislation. In essence, if HMRC’s decision to charge the penalty is wrong, it can be challenged but if they make errors in the paperwork that are not too serious, the penalty will stand.
It can be difficult to decide whether HMRC’s decision is wrong solely on the basis of information in a penalty notice but if the notice states the wrong due date for delivery of a return, or incorrectly states the date from which a penalty may be charged, e.g. 90 days from the date by which the ATED return was required to be submitted, that may indicate that HMRC had misinterpreted the law and so the penalty would be invalid. HMRC correctly stated the deadline date for submitting an ATED return in relation to only one of the five properties concerned and that was the only penalty that the FTT ruled to be valid.
Employee default not a reasonable excuse
The directors of Chartridge had been fully aware of their responsibility to submit returns and delegated responsibility for this to a trusted senior employee who failed to prepare and submit the returns (and subsequently left the company). However, reliance on another person, which can include an employee, does not provide a reasonable excuse unless the person takes reasonable care to avoid the failure. The FTT ruled that in this case it was not reasonable to give the task to one employee, even a senior one, and leave him to get on with it without checking that the work was actually done. The directors alleged that they had received oral assurance from the employee that the ATED returns had been submitted on time but no corroborating evidence was produced.
Therefore if a person relies on another person it must be reasonable to do so and since Chartridge had not taken reasonable care to avoid failure it was not reasonable to rely on that one employee.
No special reduction
Finance Act 2009 Sch. 55 Para. 16 gives HMRC the power to reduce a penalty if they judge there to be special circumstances. “Special circumstances” is not defined otherwise than by the exclusion of inability to pay or that the taxpayer’s liability may be balanced by the availability of a repayment to another taxpayer. Whilst this is potentially generous, it depends on the generosity of HMRC in exercising their discretion. As such it is an administrative power which means that if HMRC do not choose to exercise it the only basis for challenge is through judicial review.
Judicial review only applies to the way in which HMRC go about the job of applying the law: administrative principles require them to consider whether special circumstances apply. At first HMRC stated that no special circumstances were considered to apply because Chartridge had not put any forward. The Judge opined that if HMRC had left it at that their decision would have been flawed. However, HMRC subsequently gave further consideration to special circumstances in their statement of case to the FTT. In that statement they set out their view that to justify a special reduction “the circumstances either have to be uncommon or exceptional or the penalty resulting from the correct application of the law has to produce a result that is contrary to the clear compliance intention of that penalty law” and HMRC concluded that they had not identified any such circumstances. The Judge confirmed that HMRC did not have to give any more justification or explanation but Chartridge’s representatives also argued that HMRC had considered special reduction too late and should have considered it earlier. The Judge rejected this argument after analysing a number of cases, concluding that Para. 16 does not include any requirement that HMRC should consider a special reduction at the time of imposing the penalty, pointing out that any requirement to consider the point at a particular time would unreasonably restrict HMRC’s freedom to consider it at any time up to and including just before an appeal came before the tribunal; i.e. HMRC had to be able to consider a special reduction at any time.