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V7: Special circumstances

General principles

General principles

- Circumstances sufficiently special that it is right to reduce the amount of the penalty

 

"[57] Edwards ultimately confirmed that HMRC, and where appropriate the FTT, simply need to focus on the term used in the legislation. Beyond being relevant to the issue under consideration, the circumstances must be "special” – no more and no less. There is nothing special about the term “special”. Although the test HMRC used was expressed in different terms, we consider it reflected the substance of the applicable test. HMRC referred to the circumstances being “uncommon or exceptional”. Those terms, as pointed out by the FTT in Advanced Scaffolding, did not “really take the debate any further”. In other words those terms did not add anything; neither did they detract from the term “special”. In so far as HMRC referred, by reference to Hesketh, to the circumstances not being ones which amounted to a reasonable excuse, that was not relevant as HMRC had not accepted that any of the circumstances amounted to a reasonable excuse. To the extent HMRC had in mind the suggestion in Hesketh that to be special the circumstance had to render the penalty “…in whole or part significantly unfair and contrary to what Parliament must have intended when enacting the provisions” we would note that there is plainly a great deal of overlap between that and the circumstances which HMRC or the tribunal might consider to be special. The appellant does not identify in what respect this imposed a more stringent requirement." (Harrison v. HMRC [2022] UKUT 216 (TCC), Judge Raghavan and Judge Andrew Scott)

“[73] The FTT then said this at [101] and [102]:

“101.     I appreciate that care must be taken in deriving principles based on cases dealing with different legislation. However, I can see nothing in schedule 55 which evidences any intention that the phrase “special circumstances” should be given a narrow meaning.

102.       It is clear that, in enacting paragraph 16 of schedule 55, Parliament intended to give HMRC and, if HMRC’s decision is flawed, the Tribunal a wide discretion to reduce a penalty where there are circumstances which, in their view, make it right to do so. The only restriction is that the circumstances must be “special”. Whether this is interpreted as being out of the ordinary, uncommon, exceptional, abnormal, unusual, peculiar or distinctive does not really take the debate any further. What matters is whether HMRC (or, where appropriate, the Tribunal) consider that the circumstances are sufficiently special that it is right to reduce the amount of the penalty.”

[74] We respectfully agree. As the FTT went on to say at [105], special circumstances may or may not operate on the person involved but what is key is whether the circumstance is relevant to the issue under consideration.” (Edwards v HMRC [2019] UKUT 131, Nugee LJ and Judge Herrington)

- Circumstances sufficiently special that it is right to reduce the amount of the penalty

Detailed reasons not required

 

"[58] As to the allegation that HMRC’s reasons were inappropriate, in that they left Mr Harrison in the dark as to why his case on special circumstances had been rejected, we consider there was little – and Ms Montes Manzano could not identify anything specific -  that could meaningfully be said by way of additional explanation beyond explaining, as HMRC did, that they did not consider the circumstances put forward to be sufficiently special to warrant a reduction. It was clear from the communications between Mr Harrison’s representative and HMRC what the circumstances were that fell to be considered. There were none in addition to those he had put forward in respect of his case on reasonable excuse which HMRC had already rejected earlier in the review conclusion. In those circumstances it would have served little useful purpose to repeat these in the special reduction section of the review letter. HMRC appreciated the need to give the matter due consideration and did so. The consideration of whether the circumstances advanced were sufficiently special to warrant a reduction was a straightforward matter of judgment entrusted to HMRC which they duly carried out. In the particular context of this case we consider the reasons HMRC gave were adequate." (Harrison v. HMRC [2022] UKUT 216 (TCC), Judge Raghavan and Judge Andrew Scott)

Detailed reasons not required

HMRC not required to consider special circumstances before issuing penalty

 

"(1)          While “special circumstances” are not defined, the courts accept that for circumstances to be special they must be “exceptional, abnormal or unusual” (Crabtree v Hinchcliffe [1971] 3 All ER 967) or “something out of the ordinary run of events” (Clarks of Hove Ltd v Bakers Union [1979] 1 All ER 152).

(2)          HMRC's failure to consider special circumstances (or to have reached a flawed decision that special circumstances do not apply to a taxpayer) does not mean the decision to impose the penalty, in the first place, is flawed. 

(3)          Special circumstances do not have to be considered before the imposition of the penalty.  HMRC can consider whether special circumstances apply at any time up to, and during, the hearing of the appeal before the tribunal. 

(4)         The tribunal may assess whether a special circumstances decision (if any) is flawed if it is considering an appeal against the amount of a penalty assessed on a taxpayer.

(5) The special circumstances must apply to the individual and not be general circumstances that apply to many taxpayers: Collis, at [40] and Bluu Solutions Ltd v Commissioners for Her Majesty's Revenue & Customs [2015] UKFTT 95." (Matrix Rental Limited v. HMRC [2022] UKFTT 286 (TC), Judge Manyara)

HMRC not required to consider special circumstances before issuing penalty

Disproportionate penalty may be special circumstance

 

"[138] It follows that although Barry Edwards states that proportionality cannot be a special circumstance in cases where there is no liability and a minimum penalty is levied, proportionality might, where a tax-geared penalty is levied, be a special circumstance depending on the particular facts of that case.
[139] We find therefore that the FTT was incorrect on the basis of Barry Edwards to dismiss the size of the penalties as a factor to be taken into account in determining whether special circumstances existed.(Marano v. HMRC [2023] UKUT 113 (TCC), Fancourt J and Judge Tilakapala)

“[66] We agree with Mr Ripley that the reasoning of Bosher is not applicable in relation to the question as to whether a penalty imposed pursuant to Schedule 55 to FA 2009 is disproportionate. Under paragraph 16 of that Schedule, the FTT has, in contrast to penalties imposed under s 98A TMA 1970 in respect of the CIS scheme, been given a limited power to consider whether there are special circumstances which would justify a reduction in the amount of the penalty. It is in the context of that specific jurisdiction that the question of proportionality must be considered. We did not take Mr Carey to argue to the contrary. It is therefore clear that the FTT erred by determining that it had no general power to reduce a penalty on the grounds that it is disproportionate on the basis of the reasoning of the Upper Tribunal in Bosher.

[67] We therefore turn to the question as to whether the amount of the penalty imposed in this case for failure to file self-assessment returns on time in circumstances where no tax is payable is a relevant circumstance that HMRC should have taken into account when considering whether there were special circumstances in this particular case which justified a reduction in the penalty." (Edwards v HMRC [2019] UKUT 131, Nugee LJ and Judge Herrington)

"[28] In Edwards the UT also considered the relationship between special circumstances and proportionality, and took the view that, shortly stated, if a penalty was found to be disproportionate, that would comprise special circumstances..." (Pougher v. HMRC [2022] UKFTT 86 (TC), Judge Nigel Popplewell)

Must be plainly unfair

"[40] The test is whether the penalty is "not merely harsh but plainly unfair" (see Simon Brown LJ in International Transport Roth GmbH v Home Secretary [2003] QB728 at [26])." (Pougher v. HMRC [2022] UKFTT 86 (TC), Judge Nigel Popplewell)

Penalty for late return proportionate even though no tax due

"[87] Therefore, in this particular case, HMRC’s decision as regards special circumstances was not flawed. As Mr Edwards’s contention that it was disproportionate to impose penalties concerned in circumstances where no tax was due does not amount to a special circumstance, HMRC did not fail to take into account a relevant matter in making its decision. Since that was the only basis on which Mr Edwards contended that there were special circumstances justifying a reduction in the penalty, the proportionality issue must be determined in this case in favour of HMRC." (Edwards v HMRC [2019] UKUT 131, Nugee LJ and Judge Herrington)

Disproportionate penalty may be special circumstance​

Reliance on adviser

Adviser devoting less attention due to family death

"[32]    In my view, the illness of Mr James’ father, causing Mr James to devote less time to his clients than he normally would have, was a special circumstance. I have also accepted as a fact that, due to this circumstance, Mr James did not send his clients the reminders he would ordinarily have sent prior to the time when “daily” penalties started to accrue. Although this does not, in my view, provide a reasonable excuse for the appellants’ late-filing, I nevertheless find that, if such reminders had been sent by Mr James, the appellants would in all likelihood have provided the necessary information to Mr James in time to avoid the “daily” penalties; and the reason this did not happen, was the special circumstances surrounding the appellants’ accountant and his dying father. I therefore think it right, because of these special circumstances, to reduce the “daily” penalties to nil." (Stokes v. HMRC [2020] UKFTT 357 (TC), Judge Citron)​

Reliance on adviser

Late return

Late return

- Little or no tax due​ not a special circumstance

 

"In view of what we have said about the legitimate aim of the penalty scheme, a penalty imposed in accordance with the relevant provisions of Schedule 55 FA 2009 cannot be regarded as disproportionate in circumstances where no tax is ultimately 20 found to be due. It follows that such a circumstance cannot constitute a special circumstance for the purposes of paragraph 16 of Schedule 55 FA with the consequence that it is not a relevant circumstance that HMRC must take into account when considering whether special circumstances justify a reduction in a penalty." (Edwards v. HMRC [2019] UKUT 131 (TCC), Nugee J and Judge Herrington)

"[67] Lastly, the Appellant submits that no tax liability was due. In Edwards v R &C Commrs [2019] BTC 516, the Upper Tribunal considered whether the fact that significant penalties had been levied for the late filing of returns where no tax was due was a relevant circumstance that HMRC should have taken into account when considering whether there were ‘special circumstances’ which justified a reduction in the penalties. The Upper Tribunal concluded that the penalty regime set out in Schedule 55 establishes a fair balance between the public interest in ensuring that taxpayers file their returns on time, and the financial burden that a taxpayer who does not comply with the statutory requirement will have to bear.  

[68] Accordingly, the Upper Tribunal determined that the mere fact that a taxpayer has no tax to pay does not render a penalty imposed under Schedule 55 for failure to file a return on time disproportionate and, as a consequence, is not a relevant circumstance that HMRC must take into account when considering whether special circumstances justify a reduction in a penalty." (Matrix Rental Limited v. HMRC [2022] UKFTT 286 (TC), Judge Manyarara)

- Little or no tax due​ not a special circumstance

- Early payment of tax is a relevant factor

 

"[121] In refusing permission to appeal on this point, the FTT emphasised that the penalties were for late filing and so the question of payment or non-payment was irrelevant. Although it is clear that the penalties are for late filing and so the payment of tax is (as we have held) irrelevant to the quantification of the penalty under paras 5 and 6, it does not follow that it is irrelevant to a different issue, namely the question of whether special circumstances exist to justify a discretionary reduction of that penalty under para 16. The relevance of early payment of the tax due must be considered in the light of the fact that the penalty is imposed for late or non-filing of the return, but that does not mean that the FTT should have refused to take it into account at all.
[122] We note also the additional reason given by the FTT for dismissing early payment as a factor, which is that Mr Marano only paid the tax early in order to obtain a US tax benefit. We cannot determine what weight was put on this fact by the FTT. We agree, however, with Mr Gordon that this fact cannot be sufficient to justify dismissing early payment as a factor if it is otherwise relevant. The motive for early payment is of no consequence to HMRC and does not alter the fact that early payment was made.
[123] What weight is to be given to such a factor in determining whether special circumstances justify a penalty reduction is for HMRC or the FTT to decide. It clearly cannot justify rescinding the penalty, otherwise Sched 55 would have no effect separate from Sched 56, but what if any reduction is appropriate is a matter for properly exercised discretion." 
(Marano v. HMRC [2023] UKUT 113 (TCC), Fancourt J and Judge Tilakapala)

- Early payment of tax is a relevant factor

- HMRC's awareness of quantum of tax long before tax return due is relevant factor

 

"[124] The FTT refused to take this factor into account on the basis that it was not raised during the hearing, and on the basis that:
"The penalty is for failing to file a return; merely informing HMRC of a liability by letter before the issuance of a return is not a special circumstance which would justify reducing a penalty imposed because the taxpayer subsequently fails to file the return" [31]

[125] We accept Mr Gordon's contention that this factor was raised in the original hearing and is not new. This is clear in extracted paragraphs from Mr Gordon's skeleton argument before the FTT, in which he asked the FTT to recognise that HMRC were expressly told about the CGT liability in December 2012 but failed to take that information into account.
[126] For the same reasons given in relation to the FTT's dismissal of the early payment of tax as a factor, we consider that the FTT was wrong to dismiss this fact in its entirety as being irrelevant, particularly as notification was followed by full payment." (Marano v. HMRC [2023] UKUT 113 (TCC), Fancourt J and Judge Tilakapala)

- HMRC's awareness of quantum of tax long before tax return due is relevant factor

Penalty contrary to compliance intention

 

"[86]  I agree with HMRC that one of the situations in which it is appropriate to reduce penalties as a result of special circumstances is where imposing the full amount of the penalty would be contrary to the compliance intention of the penalty provisions.

[87] In this case, the clear purpose of schedule 55 is to encourage taxpayers to submit their tax returns on time.  This is the case whether or not the taxpayer has any tax liability as it enables HMRC to confirm whether the right amount of tax has been paid.

[88] However, there is limited benefit in encouraging taxpayers to file tax returns in circumstances where no tax return is normally needed.  This is of course the reason why a taxpayer is not normally required to notify HMRC of any liability to tax if their only income is employment income from which tax is deducted under the PAYE system (see s 7 Taxes Management Act 1970).

[89]  Bearing all of this in mind, it is in my view appropriate for the penalties which have been charged for the tax years ended 5 April 2015 and 5 April 2016 to be reduced by 90% to reflect the fact that Mr McNaughton would not normally be required to file self-assessment tax returns for those years.  He should still have to pay some penalty as he was told by HMRC that he needed to file a tax return and yet still failed to do so and to reinforce the fact that an individual who has been required to file a tax return should ordinarily expect to do so." (McNaughton v. HMRC [2020] UKFTT 332 (TC) , Judge Vos)

Penalty contrary to compliance intention

Tribunal can only reconsider if HMRC's decision re special circumstances is flawed

 

"[100] B&M’s contention that ‘the penalty assessment was flawed’ is therefore not particularly helpful. The requirement for the Tribunal discretion to be engaged under paragraph 19(2) is that HMRC’s decision as to whether there are special circumstances is flawed, rather than that the original decision-making process was flawed.

[101] The penalty explanation letter stated that HMRC did not consider that there were any special circumstances which would merit a reduce in the penalty. B&M did not identify any flaw with that decision as to whether there were special circumstances and, considering the evidence before me, I do not consider that HMRC’s conclusion that there were no special circumstances is flawed.

[102] If the information provided by the appellant as to why they have a reasonable excuse does not establish on appeal to this Tribunal that they do have a reasonable excuse, a failure by HMRC to consider some of that information does not provide the Tribunal with a reason for reducing the penalty on the basis of special circumstances."(B&M Retail Limited v. HMRC [2023] UKFTT 34 (TC), Judge Fairpo)

Tribunal can only reconsider if HMRC's decision re special circumstances is flawed
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