[2011] UKFTT 239 (TC)

TC01103

Appeal number: TC/2010/05983

Self-assessment - penalty - interest - surcharge for late payment of tax - whether insufficiency of funds a reasonable excuse - no - request for Time to Pay - whether HMRC’s failure to return call a reasonable excuse - no - appeal dismissed

FIRST-TIER TRIBUNAL

TAX

IAN JAMES CUBBERLEY Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: ANNE REDSTON (PRESIDING MEMBER)

RICHARD THOMAS (TRIBUNAL MEMBER)

Sitting in public at Field House, 15 Breams Buildings, London EC4A on 24 March 2011

The Appellant appeared in person

Helen Thorn, of HM Revenue and Customs Appeals and Reviews Unit, for the Respondents

DECISION

1. This is Mr Cubberley’s appeal against the surcharge imposed for late payment of his 2008/09 income tax. The issue in the case was whether he had a reasonable excuse for late payment.

The legislation

2. The statutory provisions relating to the imposition of surcharges are at Taxes Management Act s 59C. So far as relevant to this Appeal, they are as follows:

Surcharges on unpaid income tax and capital gains tax

(1) This section applies in relation to any income tax or capital gains tax which has become payable by a person (the taxpayer) in accordance with section 55 or 59B of this Act.

(2) Where any of the tax remains unpaid on the day following the expiry of 28 days from the due date, the taxpayer shall be liable to a surcharge equal to 5 per cent of the unpaid tax.

(3) Where any of the tax remains unpaid on the day following the expiry of 6 months from the due date, the taxpayer shall be liable to a further surcharge equal to 5 per cent of the unpaid tax.

(4)-(5) …

(6) A surcharge imposed under subsection (2) or (3) above shall carry interest at the rate applicable under section 178 of the Finance Act 1989 from the end of the period of 30 days beginning with the day on which the surcharge is imposed until payment.

(7) An appeal may be brought against the imposition of a surcharge under subsection (2) or (3) above within the period of 30 days beginning with the date on which the surcharge is imposed.

(8) Subject to subsection (9) below, the provisions of this Act relating to appeals shall have effect in relation to an appeal under subsection (7) above as they have effect in relation to an appeal against an assessment to tax.

(9) On an appeal under subsection (7) above that is notified to the tribunal section 50(6) to (8) of this Act shall not apply but the tribunal may—

(a) if it appears that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax, set aside the imposition of the surcharge; or

(b) if it does not so appear, confirm the imposition of the surcharge.

(10) Inability to pay the tax shall not be regarded as a reasonable excuse for the purposes of subsection (9) above.

(11) The Board may in their discretion—

(a) mitigate any surcharge under subsection (2) or (3) above, or

(b) stay or compound any proceedings for the recovery of any such surcharge,

and may also, after judgment, further mitigate or entirely remit the surcharge.

The evidence

3. The Tribunal was provided with a bundle of documents by HMRC. This included the correspondence between the parties; Mr Cubberley’s Self Assessment (SA) Statement of Account; a screen print of HMRC’s “Action History” in relation to Mr Cubberley (with two entries, one for 2 March and one for 11 March 2010) and a Witness Statement from Mr Watson, HMRC Assistant Officer East Kilbride. Mr Watson also gave oral evidence via a video link. Mr Cubberley provided copies of his correspondence and gave oral evidence .

The facts

4. From this evidence the Tribunal found the following facts

5. In the year to 5 April 2009, Mr Cubberley had gross annual income in excess of £100,000. In May and June 2009 he paid off some or all of his credit card debts.

6. In May 2009 Mr Cubberley became aware that his employer was facing significant financial problems as a result of difficulties with a particular construction project. The position worsened when other expected contracts did not materialise. By the autumn his position with the company was becoming untenable and he was made redundant.

7. He obtained further work but at a much lower salary. His take-home pay reduced to around 20% of its previous level. He thus experienced a steep and unexpected drop in his income. His personal position was particularly difficult because he and his wife had their first child in September.

8. During the autumn period Mr Cubberley converted the loft in his house to provide a bedroom for his son. This cost around £15,500. He was also committed to a mortgage and was finding it difficult to make the repayments. His home was in negative equity and he could not borrow against the property.

9. In January 2010 he was reminded by his former employer’s accountant that he had to pay the balance of his outstanding tax for the 2008/09 tax year, and that this payment was due on 31 January 2010. The sum in question was £19,064.

10. Mr Cubberley called HMRC on telephone number 0845 3667824. He informed them he could not pay the full amount of tax owed and explained that he had lost his job and was living largely on his savings. He asked for a Time To Pay arrangement. He was told that he would be called back by HMRC. He did not make a note of the name of the person to whom he spoke, and HMRC have no record of the call. However, we believed Mr Cubberley’s evidence that he did telephone HMRC, and we also find that he explained his position and was told that he would be contacted.

11. However, he received no call from HMRC. On 11 March 2010 he received a letter dated 2 March from HMRC’s Debt Management Department threatening recovery action for the outstanding sum.

12. At 12.40 on the same day Mr Cubberley called HMRC using the number given on the letter, and spoke to Mr Watson. The content and length of this call is disputed and we discuss it further below.

13. Mr Cubberley subsequently obtained a loan from a specialist lender at 9.68% interest in order to pay the outstanding amount, which he did on 23 March 2010.

14. On 13 April 2010 Mr Cubberley received a surcharge notice dated 3 April 2010, for £953.20, being 5% of the amount unpaid on 28 February 2010. That is the subject of this appeal.

The telephone call on 11 March

15. Mr Watson gave evidence before us that he had no recollection of the call between him and Mr Cubberley, and that he thus assumed that the call had been “very brief due to the lack of information”. He had made a note on Mr Cubberley’s “Action History” sheet which said:

“TP [taxpayer] hardship, tp isn’t earning enough to pay the mortgage at the moment and can’t offer any pyt at present. WLAI”

16. Mr. Watson was asked by the Tribunal what the abbreviation “WLAI” stood for. He said it stood for “Warning of Legal Action Issued”. We assume this refers to action to collect the outstanding income tax.

17. Mr Cubberley had confirmed with BT that the call had lasted 10 minutes and 32 seconds. He also told us that he was not kept on hold for more than a very short time. We accept his evidence. We thus find as a fact that the conversation with Mr Watson lasted around ten minutes.

18. Mr Cubberley told us that he explained his financial position to Mr Watson who had told him that he “should have put enough aside to pay my tax”, that he had been “living above his means” and that he should obtain a bank loan or “ask a family member for the money”.

19. In response to questioning, Mr Watson said that these phrases formed part of “an advisory list of things that could be asked” provided to him by HMRC. We again accept Mr Cubberley’s evidence and find as a fact that these comments were made by Mr Watson.

20. Mr Watson had provided a written Witness Statement to the parties and the Tribunal in advance of the hearing. This Statement makes no mention of the fact that the phrases quoted by Mr Cubberley form part of the HMRC script; in it, Mr Watson simply denies any recollection of the conversation. Mr Cubberley went to some considerable effort to secure Mr Watson’s attendance at the hearing. Had he not done so, this evidence would not have been available to us. We are grateful to Mr Cubberley for ensuring that Mr Watson gave evidence in person.

21. Mr Cubberley also said that he complained to Mr Watson that he found his attitude “insulting and condescending” and wanted to speak to another member of staff. As a result, he says, Mr Watson’s attitude changed and he was promised that “no further action would be taken” and that he would be contacted by another department. Again we accept Mr Cubberley’s evidence and find as a fact that these promises were made by Mr Watson.

The parties’ submissions

22. Mr Cubberley submitted that HMRC had promised to call him back in January with a view to organising a Time to Pay arrangement and had failed to do so.

23. Furthermore, Mr Watson had promised that “no further action” would be taken, and Mr Cubberley was thus shocked to receive the surcharge notice.

24. Mr Cubberley also said that he was in financial difficulties at the time and had made “every effort and possible communication to sort out this matter”. He had also taken out a loan at a very high interest rate in order to settle the debt. He asked that the surcharge be set aside.

25. In HMRC’s written submissions, they say that:

(1) Mr Cubberley self-calculated the tax liability and filed online and thus knew how much tax was due and when it was to be paid;

(2) he had been registered for SA since 1996 and was experienced with that system;

(3) the responsibility for paying tax rests “firmly on the taxpayer’s shoulders to fulfil their obligations completely.”

26. Before us, Ms Thorn added the further submissions that under TMA s 59C, inability to pay the tax is not a reasonable excuse. Furthermore, Mr Cubberley could have borrowed money earlier and paid the tax on time. He thus did not have a reasonable excuse and she asked that the surcharge be confirmed.

Decision

27. Under TMA s 59C(9)(a) the Tribunal may set aside the surcharge if Mr Cubberley had a reasonable excuse for the late payment of his 2009/10 balancing payment. We considered three possible reasonable excuse defences: insufficiency of funds, reliance on the call made in January, and reliance on the call made to Mr Watson.

Insufficiency of funds

28. Although HMRC are right to say that statute precludes insufficiency of funds being a reasonable excuse, Steptoe v R&C Commrs [1992] STC 527 (“Steptoe”) is authority for finding that the cause of that insufficiency may constitute such an excuse. Although that decision was in a VAT context, this Tribunal has accepted that the same approach should be taken to direct taxes - see for example the recent decision of Sir Stephen Oliver QC in Stephen Mutch v Revenue & Customs Commissioners [2009] UKFTT 288(TC).

29. The Steptoe approach requires the Tribunal to take for comparison a person in a similar situation to that of the actual taxpayer who is relying on the reasonable excuse defence. The Tribunal must then ask itself, with that comparable person in mind, whether, notwithstanding that person’s exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become payable on the particular dates, those factors would not have avoided the insufficiency of funds which led to the failures.

30. In 2008/09 Mr Cubberley had an income of well over £100,000. From May 2009 he was aware that his employer was in difficulties. In that month, or the next, he paid off some or all of his credit card bills. In the autumn he was made redundant but still spent £15,500 converting the attic. He knew that the market for government contracts had dried up, and that employment prospects were bleak.

31. While we have considerable sympathy for his financial predicament, and for his understandable wish to provide a bedroom for his son, we also find that the test in Steptoe is not met. Mr Cubberley had a tax bill as a result of his high earnings in the previous year. The amount was known to him, and not a surprise. A person of reasonable foresight would have ensured that sufficient money had been held back to pay the tax. In particular, that person would have avoided discretionary spending, such as the loft conversion. Thus we find that insufficiency of funds in the Steptoe sense is not a reasonable excuse.

The call on 20 January

32. While we accept Mr Cubberley’s evidence as to the existence and content of the call to HMRC, we do not go so far as to agree that HMRC’s failure to call him back provides a reasonable excuse.

33. Because there was no further contact with HMRC, Mr Cubberley did not have a Time to Pay agreement by 31 January, when his tax was due, or by 28 February, the trigger point for the surcharge.

34. The obligation to pay his tax rested with Mr Cubberley. It was his responsibility, not HMRC’s, to make enquiries about a Time to Pay agreement and to follow up when the call was not returned. We find that it would have been reasonable for him to make a follow up call and that HMRC’s failure to call him about a Time to Pay agreement is not a reasonable excuse.

The call on 11 March

35. We agree with Mr Cubberley that he was promised that “no further action would be taken” and understand that he was then shocked to receive a surcharge notice. However, this call took place after the trigger date for the surcharge notice (28 February). It was too late to prevent the surcharge taking effect.

36. We thus find that the call of 11 March does not provide Mr Cubberley with a reasonable excuse for not paying the surcharge.

37. Under TMA s 59C(11) HMRC have power to mitigate the surcharge, and we thus considered whether Mr Watson’s promise that “no further action would be taken” was an undertaking that no surcharge was payable. Had this been the case, Mr Cubberley may well have had a legitimate expectation that the promise be kept. Whether this Tribunal has the jurisdiction to consider legitimate expectations is currently unclear (see Sales J in Oxfam v HMRC [2009] EWHC 3078 (Ch) at [68]).

38. We note, however, that neither party sought to argue that surcharges were mentioned in the conversation; furthermore the call was in the context of recovery action by HMRC’s debt management office.

39. From this we conclude that Mr Watson’s promise was that HMRC would not proceed further with recovery action; it did not relate to surcharges. Mr Cubberley thus did not have a legitimate expectation that no surcharge would be levied. We acknowledge, however, that this distinction was not understood by Mr Cubberley.

Concluding comment

40. We found Mr Cubberley to be an honest and straightforward witness who was angry at the way he had been treated. Although we have dismissed his appeal, we agree that he tried to resolve the position in advance, and that had HMRC called him back in January, a Time to Pay agreement might well have been put in place and this appeal would probably have been unnecessary.

41. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

First-tier Tribunal (Tax)