Case Report: Reallocation of Payments did not Give Rise to Late Payment Penalties

Context

• This case considers late payment penalties and surcharges that relate to periods of self-assessment liability where, at the time of the trigger points for the penalties and surcharges, the relevant tax had been paid, but where the paid funds were subsequently reallocated to apply to different periods.
• The appellant entered into a series of avoidance schemes that were found to be ineffective, such that substantial additional tax was due.
• The quantum of the amount due (including interest etc) was not finalised until 2023 and, as part of this settlement, the appellant’s advisors wrote to HMRC to discuss reallocation of payments already made to address incorrect allocations that had been made.
• The payments were reallocated. However, HMRC then wrote to the appellant notifying him of the following penalties:
  • Late payment penalties in relation to tax years 2020/21 and 2021/22 amounting to £202,205; and
  • Late payment surcharges in relation to the tax years 2008/09 and 2009/10 amounting to £611,673.92.
• The appellant had strictly made the payments all on time. The issue has arisen as, due to the reallocations requested by the appellant, amounts were showing as unpaid at the relevant trigger dates.

Legislation

• HMRC have the power to assess and notify late payment penalties under Sch. 56, FA 2009
• Broadly, where an amount of income tax due under self-assessment (payable by 31 January following the relevant tax year) is unpaid by the date falling:
  • 30 days after it is due, a 5% late payment penalty is due.
  • 5 months after the penalty date, a further 5% late payment penalty is due.
  • 11 months after the penalty date, a further 5% late payment penalty is due.
• Late payment surcharges are the precursor to late payment penalties and applied to late paid income tax and capital gains tax for the 2009/10 tax year and previous.
• Similar provisions applied, with effect that if an amount of tax remains unpaid:
  • 28 days from the due date, a 5% surcharge was applied.
  • 6 months from the due date, a further 5% surcharge was applied.

Discussion

• The appellant’s view is that no penalties or surcharges can apply as the legislation requires a consideration of whether an amount of tax is outstanding at specific snapshots of time.
• On the other hand, HMRC argue that the legislation can be read purposively to allow for surcharges and penalties to be applied retrospectively after the reallocations had been put into place.
• It was common ground that the appellant had made all payments before the relevant trigger dates such that, if not for the reallocation, no penalties or surcharges would have been due.
• The statutory language in relation to the surcharges reads “where any of the tax remains unpaid on the day […]” and the statutory language in relation to the penalties repeatedly uses the phrase “is unpaid” in relation to a specific point in time.
• The appellant argues the legislation indicates this requires consideration by reference to a particular date. Conversely, HMRC argue the language in both cases allows for an interpretation including “showing as unpaid” on the relevant date, i.e. when looking back after the reallocations.
• The appellant cited the case of Thomson (Inspector of Taxes) v Minzly, [2002] STC 450 (“Minzly”) wherein it was established that the failure to pay tax has to be tested at a particular moment in time.
• Pursuant to Minzly, the FTT did not consider that the statutory language shows any ambiguity. One must consider whether the tax “remains unpaid” on the relevant day or whether the appellant has “failed to pay” the tax by the particular date.
• The FTT held that the literal interpretation does not allow for HMRC’s interpretation that requires a retrospective look back after the reallocation.
• As such, the FTT held that the assessments were not validly issued as there was no late payment on the penalty trigger dates.
• As such, the FTT upheld the appeal and the taxpayer won.

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