This case concerns an appeal by Mr Peter Marano against tax penalties imposed by HM Revenue & Customs (HMRC) under Schedule 55 of the Finance Act 2009 for failure to submit a self-assessment tax return for the 2012-13 tax year. 

The First-tier Tribunal (FTT) upheld the penalties, which included two large “tax-geared” penalties of 5% each of the tax liability, totalling £574,422. Mr Marano appealed to the Upper Tribunal on several grounds. 

The Upper Tribunal dismissed the appeal on most grounds but partially allowed the appeal on one ground – the failure of the FTT to properly consider relevant factors when deciding if there were “special circumstances” justifying a reduction in the penalties.

We analyze the key issues and decisions in the case, provide commentary from a tax advisor’s perspective, and cover any other relevant tax information.

The Appeal 

Mr Marano appealed the FTT decision on four main grounds:

1. Insufficient evidence that the tax return notice and penalty notices were authorized by an HMRC officer, as required by legislation. 
2. The penalty notices were not properly notified to Mr Marano under the statutory requirements.
3. The tax-geared penalties should have taken into account the tax Mr Marano had already paid voluntarily.
4. The FTT failed to consider relevant factors in deciding whether there were “special circumstances” justifying a reduction in the penalties.

Ground 1 – Authorization of Notices

The first ground concerned whether there was sufficient evidence that an HMRC officer had authorized the notice requiring Mr Marano to file a return, as well as the subsequent penalty notices when he failed to do so. 

The applicable legislation at the time required the involvement of an officer of HMRC in issuing such notices. The FTT decided officer authorization could be inferred from the evidence, which showed the computerized system issued the notices and recorded doing so. 

The Upper Tribunal disagreed with the FTT’s finding, holding the evidence was insufficient to prove officer involvement in light of Mr Marano’s challenge. 

However, the Upper Tribunal upheld the notices as valid based on retrospective legislation, section 103 of the Finance Act 2020, which removed the requirement to prove officer authorization for HMRC notices. The Upper Tribunal held section 103 validates notices issued by HMRC’s systems without requiring proof of officer involvement.

Commentary:

• The FTT should not have inferred officer authorization without specific evidence, but the new legislation makes this ground of appeal moot.
• Section 103 resolves previous uncertainty around fully automated HMRC notices and provides helpful clarity.

Ground 2 – Service of Penalty Notices 

The second ground concerned whether the two tax-geared penalty notices from 2015 and 2017 were properly served on Mr Marano under the statutory requirements.

The notices were sent to the registered office address of a limited liability partnership Mr Marano was a member of, not his personal address. 

The FTT decided the notices were validly served under company law service provisions, as modified by regulation for LLPs. The Upper Tribunal rejected this reasoning but upheld service as Mr Marano had indirectly received the notices.

Commentary:

• The Company Act service provisions do not seem to be the appropriate route for tax notices, so the Upper Tribunal’s reasoning seems more aligned with the legislation’s intent.
• Again, the focus is whether the taxpayer received notification, not technical compliance with service requirements.

Ground 3 – Accounting for Tax Already Paid

The third ground was whether the tax-geared penalties should have been reduced to account for tax Mr Marano had already paid voluntarily before the filing deadline. 

The FTT held the penalties were correctly based on the full tax liability, regardless of any early payments. The Upper Tribunal agreed with the FTT’s interpretation that the calculation depends on the tax liability shown in the return, not subsequent adjustments like early payments.

Commentary: 

• This upholds the deterrent intent of late filing penalties – early tax payments do not offset liability for filing compliance failures.
• The decision provides helpful clarity on interpreting the penalty calculation provisions.

Ground 4 – Reductions for Special Circumstances

The fourth ground concerned whether the FTT failed to properly consider relevant factors in deciding if “special circumstances” justified reducing the penalties.

The Upper Tribunal found the FTT erred in not considering

1. Mr Marano’s early voluntary payment,
2. HMRC being informed early of the tax liability, and
3. the size of the penalties in determining whether special circumstances for reduction existed. 

The Upper Tribunal remitted this issue to a new FTT panel to redetermine whether special circumstances justify penalty reductions.

Commentary:

• FTTs should carefully consider all potential special circumstances, not dismiss factors as automatically irrelevant. 
• Early payment and notification of liability could warrant at least some penalty reductions.
• The proportionality of tax-geared penalties should be considered case-by-case in determining special circumstances.

Implications for Taxpayers

This case provides some helpful guidance for taxpayers facing failures to comply with filing obligations:

• Early voluntary payments do not reduce tax-geared late filing penalties – the focus is on filing compliance.
• However, early payment and notification to HMRC may warrant penalty reductions for “special circumstances”, determined case-by-case.
• Section 103 FA 2020 has retrospectively validated automated HMRC notices, removing the need to prove officer authorization. 
• Taxpayers must still ensure they receive and act upon HMRC notices to minimize penalties. Relying on potential service defects is unlikely to succeed, given the focus on notification in substance.

The case also highlights the rigidity of the penalty regime for filing failures, with late filing penalties applying even where no tax is ultimately due. This reinforces the need for taxpayers to prioritize filing obligations and ensure they have robust controls and procedures to avoid compliance failures.

Wider Issues and Developments

Stepping back, this case exemplifies the ongoing strict stance taken by HMRC and the courts regarding tax compliance failures in recent years as part of wider efforts to tackle the UK tax gap. 

Developments such as increased penalties and new corporate criminal offences for enablers of tax evasion reflect an environment focused on enforcing compliance.

This strict approach can seem heavy-handed, as evident in this case with large automatic penalties. However, improving the UK’s poor tax avoidance and evasion record requires robust compliance incentives.

Ensuring penalties are not disproportionate does require discretion, care and nuance by HMRC and in appeal decisions. But ultimately, most taxpayers accept the need for strong disincentives for non-compliance. Clear penalty frameworks, aligned with policy intents, as in this case, help support voluntary compliance.

Conclusion: In summary, this case provides:

• helpful clarity on interpreting late filing penalty rules
• the validation of automated HMRC notices
• evaluating special circumstances for potential penalty reductions

The overall trend towards stricter enforcement of filing obligations seems set to continue. This case exemplifies taxpayers’ difficulties in appealing penalties absent clear unfairness or disproportionality.

For Tax Investigations, tax resolution or appeals, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.