SP v HMRC

A tribunal deciding an appeal against a tax-credit penalty must exercise its own discretion over both liability and amount. It may use HMRC guidance as a starting point, but must determine the underlying facts, including the relevant income or overpayment, and must not follow HMRC’s calculation slavishly.

The tribunal must assess whether the claimant acted reasonably, negligently or fraudulently. It must then consider aggravating and mitigating factors, apply the principle that the maximum penalty is for the worst cases, and give adequate reasons at every stage.

The claimant appealed against a First-tier Tribunal decision upholding an HMRC penalty of £1,360 for an allegedly negligent incorrect statement concerning income used in calculating child tax credit.

The First-tier Tribunal treated the discrepancy between the income declared and later accepted figures as establishing negligence. It did not examine whether the claimant had acted reasonably, determine the evidential basis of the income figures, or explain the penalty amount.

The appeal raised whether the tribunal had properly decided negligence and whether an appeal against a penalty included its amount as well as its imposition.

1. Appeal allowed. The First-tier Tribunal made errors of law by giving inadequate reasons, failing to establish the factual basis for its negligence finding, and failing to address the proper exercise of discretion as to the penalty.

2. Under Tax Credits Act 2002, section 31(1), the power to impose a penalty involves discretion both as to whether to impose one and as to its amount. An appeal against the decision imposing a penalty necessarily encompasses both issues. The First-tier Tribunal stands in HMRC’s shoes and must exercise its own judgment.

3. Before applying a penalty, the tribunal must make findings on the underlying income and any overpayment, and must ensure that the incorrect statement relates to the period for which the penalty is considered. It should distinguish a report of past income from a prediction of future income.

4. The tribunal must determine whether the claimant acted innocently or reasonably, negligently through lack of due care, or fraudulently. An incorrect statement alone does not establish negligence.

5. HMRC may properly issue penalty guidance, and the tribunal may properly take it as a starting point. It must nevertheless consider mitigating and aggravating factors, reserve the statutory maximum for the worst cases, and give reasons for each conclusion.

6. The decision was set aside under section 12(2)(b)(i) of the Tribunals, Courts and Enforcement Act 2007 and remitted for a fresh hearing before a differently constituted First-tier Tribunal.

• Upper Tribunal (Administrative Appeals Chamber): Allowed the claimant’s appeal, set aside the First-tier Tribunal’s decision, and remitted the matter for a fresh hearing.

• First-tier Tribunal, Social Entitlement Chamber: On 26 September 2014, confirmed HMRC’s decision to impose a £1,360 tax-credit penalty.