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HMRC is lodging an appeal against the recent decision of the First Tier Tax Tribunal (FTT) concerning late P35 penalties in HOK Limited v HMRC [2011] UKFTT (TC01286).

The case will be heard by the Upper Tax Tribunal is of great interest to advisers and employers because Tribunal Judge Geraint Jones QC was highly critical of HMRC's deliberate practice of delaying in sending out late P35 penalty notices. He ruled such practice unfair.

The effect of HMRC's practice is that the first time an employer realises that they have failed to submit their annual PAYE P35 return is after when a penalty has escalated to £400 or £500. HOK Limited had their penalty reduced back to £100 by Judge Jones. Who said in judgment:

"We appreciate that HMRC takes the stance that it is the responsibility of the taxpayer to make the necessary filing and that it is its stance that it has no obligation to issue any reminder. However, we have no doubt that any right thinking member of society would consider that to be unfair and falling very far below the standard of fair dealing and conscionable conduct to be expected of an organ of the State."

"There can be no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months so that, in effect, a minimum penalty of £500 will be levied unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing."

"HMRC is an organ of the State. It is no function of the State to use the penalty system as a cash generating scheme."

"It has long been part of the common law of this country that organs of the State must act fairly and in good conscience with its citizens. In our judgement there is nothing fair or reasonable in setting a computer system so that it does not generate a penalty notice until four months have gone by from the date of default, thereby ensuring that a penalty of not less than £500 will be due. We are in no doubt that the computer system could easily be set to generate a single £100 penalty notice immediately after the 19 May in each year. That is the course that a fair organ of the State, acting in good conscience towards the citizens of the State, would adopt."

HMRC officials have repeatedly assured the public that penalties are not a revenue raiser. Few professionals believe this. John Whiting, Tax Policy Director of the CIOT sounded sceptical about HMRC's assurances when he talked to Paul Lewis about this point on Radio 4's Money Box programme last week.

Judge Jones made a similar finding in HMD Response International v HMRC  [2011] (TC01322).