At first glance, particularly for those who do not specialise in tax investigations, the case of I Majid v HMRC [2024]UKFTT 491 (TC) may appear to have a strange outcome. Even the Tribunal Judge commented that the explanations given by the taxpayer were ‘in part incredible … and in part contradictory’, so the fact that his appeal against the failure to notify penalties imposed by HMRC succeeded emphasises the importance of ensuring procedure has been followed.
The background to the case is that Mr Majid failed to notify chargeability in respect of rental income received. HMRC imposed penalties under FA 2008 Sch 41, a number of which were appealed and were the subject of this hearing. HMRC accepted that the burden of proof was on them to show that the penalties were correctly calculated and issued, at which point that burden moves to the taxpayer to demonstrate a reasonable excuse for failing to notify. And as the judge correctly pointed out in the judgment, HMRC’s burden must be discharged regardless of whether the taxpayer challenges the validity of the penalty assessment (Burgess and Brimheath v HMRC [2015 UKUT 578 (TCC)). Simply put, if HMRC cannot demonstrate that the penalties were correctly calculated and issued, then whether or not the taxpayer had a reasonable excuse becomes a moot point.
HMRC initially sought to rely on the witness statement of the officer who had undertaken what was termed a ‘Behaviour Audit Trail’ (BAT) phone call with the taxpayers agent. This witness statement described the BAT call as a discussion as to how and why the failure occurred to inform the appropriate level of penalty that should be levied. At the end of the call, the officer expressed the view that the failure was non-deliberate, which the agent agreed with, and advised that the penalties would be calculated accordingly. However, prior to the hearing, HMRC applied to the tribunal to replace this witness statement with one from another officer who had only become involved in the case at a later date. The reason given for this was that the original officer was no longer available to give evidence. However, the second witness statement contained little of the detail of the first, and importantly did not refer to the basis on which the penalties were calculated to arrive at the final amount.
The tribunal was not provided with any meeting notes or records in relation to the BAT phone call, with HMRC stating that it was their policy that these were private and never disclosed. Furthermore, it was also HMRC policy that where the BAT meeting has an ‘agreed’ outcome, then how the final percentage of penalty was arrived at is not recorded on the penalty notification issued to the taxpayer. No statutory reference allowing for such an omission could be given by the presenting officer when invited by the judge.
When the deficiencies of the new witness statement were pointed out during the case, it was suggested by HMRC’s representative that these would be addressed through oral evidence from the witness. However, a witness statement is taken as the witness’s evidence in chief and introducing new points not included in the statement amounts to introducing new evidence. The taxpayer would not be able to challenge this new evidence given he was not present at the hearing nor represented. Whilst the taxpayer, by not being present, had effectively decided not to challenge any evidence by way of cross examination, that was not the same as him agreeing that new evidence could be introduced. The judge therefore decided that the tribunal was neither prepared to accept the introduction of the additional oral evidence, nor adjourn the case to allow a new witness statement to be prepared.
Even if the new evidence had been allowed, the judge considered that whilst it may have explained how the penalty was arrived at, it could not overcome the fact that such details were not provided to the taxpayer on the penalty notification. In the tribunal’s view, such detail is fundamental to the validity of the notice given that such penalties are considered criminal in nature under the Convention on Human Rights (being that they are tax geared and not in a fixed amount).
Ultimately, the judge considered this was enough to ensure that HMRC had not satisfied the burden of proof that the penalties had been correctly issued, and the appeal was therefore allowed.
In a postscript note to the decision, the judge noted that HMRC considered that such an outcome gives an unfair advantage to those who do not have or cannot show a reasonable excuse. The judge notes, quite rightly, that any unfairness (if that is what it is) arises from a policy decision by HMRC to not provide information that it otherwise should. Whether that advantage is unfair would be a matter of some debate.
At first glance, particularly for those who do not specialise in tax investigations, the case of I Majid v HMRC [2024]UKFTT 491 (TC) may appear to have a strange outcome. Even the Tribunal Judge commented that the explanations given by the taxpayer were ‘in part incredible … and in part contradictory’, so the fact that his appeal against the failure to notify penalties imposed by HMRC succeeded emphasises the importance of ensuring procedure has been followed.
The background to the case is that Mr Majid failed to notify chargeability in respect of rental income received. HMRC imposed penalties under FA 2008 Sch 41, a number of which were appealed and were the subject of this hearing. HMRC accepted that the burden of proof was on them to show that the penalties were correctly calculated and issued, at which point that burden moves to the taxpayer to demonstrate a reasonable excuse for failing to notify. And as the judge correctly pointed out in the judgment, HMRC’s burden must be discharged regardless of whether the taxpayer challenges the validity of the penalty assessment (Burgess and Brimheath v HMRC [2015 UKUT 578 (TCC)). Simply put, if HMRC cannot demonstrate that the penalties were correctly calculated and issued, then whether or not the taxpayer had a reasonable excuse becomes a moot point.
HMRC initially sought to rely on the witness statement of the officer who had undertaken what was termed a ‘Behaviour Audit Trail’ (BAT) phone call with the taxpayers agent. This witness statement described the BAT call as a discussion as to how and why the failure occurred to inform the appropriate level of penalty that should be levied. At the end of the call, the officer expressed the view that the failure was non-deliberate, which the agent agreed with, and advised that the penalties would be calculated accordingly. However, prior to the hearing, HMRC applied to the tribunal to replace this witness statement with one from another officer who had only become involved in the case at a later date. The reason given for this was that the original officer was no longer available to give evidence. However, the second witness statement contained little of the detail of the first, and importantly did not refer to the basis on which the penalties were calculated to arrive at the final amount.
The tribunal was not provided with any meeting notes or records in relation to the BAT phone call, with HMRC stating that it was their policy that these were private and never disclosed. Furthermore, it was also HMRC policy that where the BAT meeting has an ‘agreed’ outcome, then how the final percentage of penalty was arrived at is not recorded on the penalty notification issued to the taxpayer. No statutory reference allowing for such an omission could be given by the presenting officer when invited by the judge.
When the deficiencies of the new witness statement were pointed out during the case, it was suggested by HMRC’s representative that these would be addressed through oral evidence from the witness. However, a witness statement is taken as the witness’s evidence in chief and introducing new points not included in the statement amounts to introducing new evidence. The taxpayer would not be able to challenge this new evidence given he was not present at the hearing nor represented. Whilst the taxpayer, by not being present, had effectively decided not to challenge any evidence by way of cross examination, that was not the same as him agreeing that new evidence could be introduced. The judge therefore decided that the tribunal was neither prepared to accept the introduction of the additional oral evidence, nor adjourn the case to allow a new witness statement to be prepared.
Even if the new evidence had been allowed, the judge considered that whilst it may have explained how the penalty was arrived at, it could not overcome the fact that such details were not provided to the taxpayer on the penalty notification. In the tribunal’s view, such detail is fundamental to the validity of the notice given that such penalties are considered criminal in nature under the Convention on Human Rights (being that they are tax geared and not in a fixed amount).
Ultimately, the judge considered this was enough to ensure that HMRC had not satisfied the burden of proof that the penalties had been correctly issued, and the appeal was therefore allowed.
In a postscript note to the decision, the judge noted that HMRC considered that such an outcome gives an unfair advantage to those who do not have or cannot show a reasonable excuse. The judge notes, quite rightly, that any unfairness (if that is what it is) arises from a policy decision by HMRC to not provide information that it otherwise should. Whether that advantage is unfair would be a matter of some debate.
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