If I submitted my tax return late I would generally have to pay a penalty. The size of the penalty would depend on how late my return was submitted. Penalties are, following a change in the law some years ago, still charged for late returns even if no tax is due or all has been paid. Unwelcome as penalties are, most people would accept that in principle some form of penalty is due when people do not meet their tax obligations. People who make the effort to comply would justifiably feel aggrieved if there were no sanctions on those who deliberately ignored their responsibilities. But when should the principle give way to a more pragmatic response? The tax legislation does allow HMRC not to impose a penalty (or for a tribunal to remove a penalty imposed by HMRC). It sets out two different possibilities. The first is where there is a ‘reasonable excuse’ for the late filing. The second is where there are ‘special circumstances’. These are separate tests, although they may sometimes overlap.
For a long time most of the penalty appeal cases looked at the reasonable excuse test but increasingly tribunals are also considering whether there are special circumstances. HMRC certainly acknowledge in their own guidance that there can be special circumstances. This specifies two types of circumstances. The first is where they are uncommon or exceptional; the second is where ‘the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law’. In a recent decision a tribunal criticised HMRC for only taking the first of these into account.
The context was a late submission of a partnership return. Under self-assessment a partnership itself does not pay any tax – that is done by the individual partners. The partners have to include their share of partnership profits on their own returns but the partnership also has to submit a return, even though that return does not lead to any tax being payable by the partnership itself.
In this case there was some confusion about exactly what had been sent to HMRC and when, so a late filing penalty was raised. The tribunal found that on the facts there was a reasonable excuse, but it is what it said about special circumstances which is of wider interest. It quoted the guidance manual referred to above and said that HMRC had failed to take into account the second of the tests (i.e. the result is contrary to the compliance intention). The judge said that the compliance intention of the penalty regime was to encourage timely submission of the amounts on which partners are to be assessed to income tax. The partners had provided all of that information on their individual tax returns within the time limit. On that basis the late submission of the partnership return had no impact and therefore under HMRC’s own guidance the imposition of a penalty would be contrary to the compliance intention of the law. As a result the penalty was cancelled.
This is one of a number of cases recently where the mechanics of the partnership compliance rules have been questioned by a tribunal. If HMRC already has all of the information about a partnership from the individual returns of the partners why should it need a partnership return, and in particular, why should there be penalties for non-submission of a return which gives HMRC no additional information? For large partnerships, the return does fulfil a useful role but decisions such as this do call into question whether there is really any need for a separate partnership return for small partnerships, such as those involving husband and wife or only two or three partners.
As we have pointed out many times in tax brief, some of the fundamental building blocks of self-assessment – which have been with us for 20 years now – are showing considerable signs of strain.
For more information please contact Andrew Hubbard or your usual RSM contact.