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When determining whether there are 'special circumstances' account can be taken of early payments and voluntary disclosure by the taxpayer

26 July 2023. Published by Harry Smith, Senior Associate

In Marano v HMRC [2023] UKUT 113 (TCC), the Upper Tribunal (UT) held that when determining whether there are 'special circumstances' justifying the reduction of a penalty, account can be taken of early payments and disclosure made by the taxpayer.


Mr Peter Marano (the taxpayer) had been issued with a discovery assessment and a series of penalties issued pursuant to Schedule 55, Finance Act 2009 (Schedule 55), for failure to file a self-assessment tax return for the year 2012/13.

The penalties included two substantial tax-geared penalties (for continuing default in filing 6 and 12 months after the penalty date), issued pursuant to paragraphs 5 and 6, Schedule 55.  By the time the penalties were issued the taxpayer had belatedly filed his tax return, which enabled HMRC to calculate and issue a discovery assessment, based on a taxable capital gain which the taxpayer's accountants had previously disclosed to HMRC and which the taxpayer had voluntarily paid during the 2012/13 year.

The penalty assessments (in the aggregate sum of £574,422) did not take account of this voluntary prepayment (or of other payments made on account of the taxpayer's 2012/13 liability, in the sum of £29,993.69, made under section 59A, Taxes Management Act 1970 (TMA)) in calculating the tax-geared penalty of 5% of the discovery assessment.

The taxpayer appealed the penalty assessments to the First-tier Tribunal (FTT), which dismissed his appeal.  Permission to appeal to the UT was granted by the UT.

The grounds of appeal raised the following four issues for determination:

1. whether a valid notice to file a tax return had been issued to the taxpayer by an officer of HMRC (pursuant to section 8, TMA) and whether penalty assessments had validly been issued under Schedule 55;

2. whether penalty notices issued on 3 March 2015 and 14 March 2017, had been properly given to the taxpayer as they had not been served personally or left or sent by post to his usual or last-known place of residence or business;

3. whether the tax-geared penalties should be determined by reference to the amount of tax that would have been due had an accurate return been filed on the filing date, or on the amount of liability to tax that would have been shown for the year in question in the return (i.e. whether or not a payment on account or prepayment should be taken into account in determining the penalty; the FTT had determined that it should not); and

4. whether, if the FTT had been correct to hold that a prepayment should not be taken into account when calculating tax-geared penalties, there were nonetheless 'special circumstances', for the purpose of paragraph 16, Schedule 55, justifying the reduction of the penalty.

UT decision

The appeal was allowed.

On the first ground, the UT (after extensive consideration of the process by which the assessments had been issued) noted that section 103, Finance Act 2020, which provided that anything capable of being done by an officer of HMRC by virtue of a function conferred by or under an enactment relating to taxation, may be done by HMRC (whether by means involving the use of a computer or otherwise), had retrospective effect.  The question of whether an automated notice to file a tax return had been issued by an officer of HMRC was therefore moot and the appeal on this ground was dismissed.  However, had it not been for the new legislation, the FTT's dismissal of the taxpayer's appeal on this ground would not have stood, as there had been insufficient evidence to support the inference that an officer of HMRC had been sufficiently involved. 

On the second ground, the UT concluded that the taxpayer had been notified of the penalty notices (albeit partly by indirect transmission of correspondence from HMRC) within the meaning and for the purpose of paragraph 18, Schedule 55.  The statutory purpose of notification had been achieved.  The appeal on this ground was dismissed.

In relation to the third ground, the UT noted that paragraph 5(2), Schedule 55, allowed for a penalty of 5% of any liability to tax 'which would have been shown in the return'.  That, in the view of the UT, meant that payments on account of tax would not have been shown and therefore did not fall to be deducted from the sum by reference to which the penalty was to be calculated.  The appeal on this ground therefore failed.

However, with regard to the fourth ground of appeal, the UT held that the FTT had erred.  Although early payment of a tax liability was not relevant to the quantification of a tax-geared penalty for late filing, it did not mean that it was also not relevant to the question of whether there was some special circumstances justifying a reduction.  The UT considered that the FTT had misinterpreted case law in arriving at its conclusion that this was not a relevant factor.  The FTT had not taken account of the proportionality of the penalty to the amount outstanding, and had also disregarded the fact that HMRC had been made aware of the quantum of the capital gain long before the tax return was due.  While these factors would not justify rescinding the penalty totally, they might justify a reduction; the appropriate weight (if any) to be given was a matter for HMRC, or the FTT to decide.

The UT therefore allowed the appeal on this ground and remitted the case to the FTT with directions for fresh consideration, by a new panel, of the question of whether special circumstances existed that would justify the reduction of the penalty for the purpose of paragraph 16, Schedule 55.


In allowing the appeal on ground 4, the UT considered three issues: (i) early notification of the gain by the taxpayer; (ii) voluntary payment on account; and (iii) whether the penalty was disproportionate and confirmed that such factors could constitute special circumstances for the purpose of paragraph 16, Schedule 55, justifying a reduction in the penalties which had been issued by HMRC.

The UT's broad approach in construing the term 'special circumstances' (according to its natural meaning) confirms the wide scope of HMRC's ability to reduce penalties under Schedule 55 and will be welcomed by taxpayers.

The decision can be viewed here.