The imposition of penalties by HM Revenue and Customs (HMRC) for non-compliance with statutory obligations such as filing tax returns or paying tax unfortunately seems to be becoming an increasingly common occurrence.
It would be understandable to assume that HMRC’s systems and procedures satisfy the requirements for (say) the issue of valid penalty notices when tax returns are filed late. However, a number of tribunal cases have identified flaws in HMRC’s administration of penalties, resulting in successful taxpayer appeals against penalties for late tax returns.
Where’s the proof?
For example, in Qureshi v Revenue and Customs  115 (TC), HMRC imposed penalties on the taxpayer for the alleged late filing of tax returns for 2013/14 and 2014/15. The taxpayer appealed, having written to HMRC in January 2017 and July 2017 stating that she had not received any notices requiring her to file tax returns. The First-tier Tribunal pointed out to the HMRC officer at the appeal hearing that it was incumbent upon HMRC to prove that a notice to file (as required by TMA 1970, s 8) had been sent to the taxpayer. However, the officer instead informed the tribunal that “HMRC has an understanding with the courts and tribunals” on such evidential matters.
The tribunal judge seemed rather unimpressed. He made it clear that HMRC, as a litigant, held no privileged position. The burden of proof in a penalty case rested upon HMRC to prove every factual matter said to justify the imposition of the penalty. The officer referred to HMRC’s bundle of documents and told the tribunal that because a document headed ‘Return Summary’ contained an entry ‘Return Issued Date’ and alongside it appeared ‘12/6/14’, it could conclude that a notice to file “must have been” sent on that date. She also informed the tribunal that a ‘Return Summary’ page would only come into existence if HMRC had sent out a notice to file. She added that any notice to file “would have been” sent to such address for the appellant as HMRC then held on file.
However, the tribunal held that HMRC’s production of these documents was not adequate to allow the tribunal to infer that any notice to file was in fact posted by HMRC with the postage prepaid, and was properly addressed to the taxpayer. In the circumstances, the tribunal found that it had not been proved, on the balance of probabilities, that the necessary notices to file were sent by HMRC to the taxpayer. The taxpayer’s appeal was allowed.
The same tribunal judge reached similar decisions in Loial v Revenue and Customs  UKFTT 138 (TC) and Galiara v Revenue and Customs  UKFTT 190 (TC), in successful taxpayer appeals against penalties for the late filing of tax returns. By contrast, the taxpayer lost his appeal in Olalekan v Revenue and Customs  UKFTT, in which the tribunal (with a different judge than in the above cases) found that the taxpayer was not a credible witness and accepted that HMRC had sent tax returns to the correct address (following a consideration of the law on the serving of documents by post as it applies in Scotland).
However, although the taxpayer’s appeal in Qureshi (and also Loial and Galiara) was successful, the tribunal hinted that the outcome may have been different if HMRC had taken a different approach.
The tribunal acknowledged that in large organisations with automated processes (such as HMRC) it may not be possible to prove that someone placed a filing notice in an envelope on a specific date, correctly addressed it and sent it through the Royal Mail. The courts and tribunals therefore admit ‘evidence of system’. The tribunal pointed out that if this evidence is sufficiently detailed and cogent, it may well be sufficient to discharge the burden of proving that the notice was sent in the ordinary course of the way in which the particular business or organisation operates its systems for the dispatch of such material. HMRC provided no ‘evidence of system’ in Qureshi. However, the tribunal subsequently did so in Pritt v Revenue and Customs  UKFTT 578 (TC) and the taxpayer’s appeal was dismissed.
In any event, First-tier Tribunal decisions do not set binding precedents, although they can be persuasive in similar cases.
Interestingly, unlike the taxpayer in Qureshi, in Galiara the taxpayer did not seek to argue that he had not received notices to file his tax returns, yet the tribunal allowed the appeals of both taxpayers on a similar basis. The good news for taxpayers is that these (and other) cases indicate that the tribunal is not afraid to challenge HMRC about its administrative procedures, such as the making of assessments and delivery of notices to the taxpayer, and whether they comply with statutory requirements. This may provide taxpayers with welcome (and possibly unexpected) help in appeals before the tribunal in some cases.
The above article was first published in Business Tax Insider (August 2018) (www.taxinsider.co.uk).