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Rai - Tribunal quashes penalties for non-payment of PPNs and criticises HMRC's 'nitpicking pedantry'

26 June 2017

In Rai v HMRC [2017] UKFTT 0467 (TC), the First-tier Tribunal (FTT) was critical of HMRC's conduct and cancelled assessments to penalties which it had issued for failure to pay on time amounts demanded in partner payment notices (PPNs), as the statutory payment period had not expired.


In the tax year 2007/08, Dr Balvinder Rai (the taxpayer) entered into a tax mitigation scheme and became a partner in Invicta Film Partnership No 43 LLP (the partnership). HMRC gave notice in 2009 and 2010, that it intended to enquire into the partnership's tax returns for 2008, 2009 and 2010, under section 12AC(1), Taxes Management Act 1970. 

On 3 May 2016, HMRC issued three PPNs, under Part 4, Chapter 3 and Schedule 32, Finance Act (FA) 2014, to the taxpayer. 

Under the accelerated payment regime, HMRC can issue a PPN where certain conditions are satisfied. Where the sum referred to in a PPN is unpaid by the due payment date, HMRC can impose penalties for non-payment under section 226, FA 2014. 

There is no right of appeal to an independent tribunal against a PPN. However, a recipient of a PPN may make written representations to HMRC (paragraph 5, Schedule 32, FA 2014) within 90 days of the day the notice is given. On receipt of such representations, HMRC must either confirm, amend or withdraw the notice. Should a notice be upheld by HMRC, the payment deadline is extended by 30 days from the date of notification of HMRC's determination. 

Within the statutory time frame for making written representations, the taxpayer's accountants wrote to HMRC on 1 August 2016, purporting to make representations under paragraph 5, Schedule 32, FA 2014.  In a letter dated 24 August 2016, HMRC refused to accept the taxpayer's representations, claiming that it was unable to treat the letter as containing 'valid' representations because the taxpayer had not objected to the PPNs on the grounds that one or more of Conditions A, B, or C had not been met and/or to the amount specified in the notices. HMRC subsequently issued three assessments to penalties under section 226, FA 2014, for non-payment of the sums claimed in the PPNs within the statutory time frame. The taxpayer appealed against the assessments. 

FTT's decision 

The FTT first considered whether what was given to the taxpayer was a PPN, that is was given by virtue of paragraph 3(2)(a), Schedule 32, FA 2014 and that its content was that required by paragraph 4 of that Schedule.

The FTT concluded that the PPNs satisfied all the statutory requirements as to form and content. 

The further and key question for the FTT to determine was whether the PPN amounts were unpaid at the end of the relevant payment period.

Under paragraph 6(5), Schedule 32, FA 2014 (imported into section 226 by paragraph 7(c), Schedule 32), the end of the payment period is different according to whether representations are made under paragraph 5, Schedule 32, or not.

The taxpayer claimed that he had made representations and had not yet been notified of HMRC's determination in relation thereto.

The FTT was of the view that the accountant's letter of 1 August 2016 was not  as clear as it might have been, but its thrust was obvious. The FTT therefore found that the taxpayer had made written representations within the time limit for doing so, which objected to the amount of the PPNs and that HMRC had not determined whether a different amount ought to have been specified. HMRC had not notified the taxpayer of the confirmed or amended amount, as required by paragraph 5(4)(b), Schedule 32. It followed that the payment period had not ended and the taxpayer had not failed to pay the unpaid amount by the end of that period and therefore no penalty was due.

The taxpayer's appeal was allowed and the FTT cancelled the penalties pursuant to paragraph 15, Schedule 56, FA 2009.

The FTT was critical of HMRC's conduct in this case. The judge accused HMRC of "nitpicking pedantry" in claiming that the accountant's letter did not make representations objecting to the amount referred to in the PPNs and thought HMRC were "looking for any possible hook on which to hang a refusal to accept representations made close to the end of the permitted period of 90 days".

As there is no appeal against a PPN, representations are the closest substitute for an appeal. HMRC are enjoined by its own manual to regard as an appeal anything which might conceivably be one and yet here, where there is a substitute for an appeal which does not provide the same rights as an appeal, HMRC adopted the opposite approach.  

Not only did HMRC not treat the taxpayer's representations as representations, it also informed the taxpayer that the legislation requires him to inform it why the amounts shown in the notices are not correct, what he thought the correct amounts were and why. This is not what the legislation says and the judge commented that: 

"HMRC are therefore setting their own rules about what should be in representations. This is not the way they should act.

It is to be hoped that HMRC will heed the judge's comments.

 A copy of the decision can be found here.

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