Penalty Notices
27. Mr A and Ms B complain that HMRC took 17 months to conclude that it had not sent out letters regarding penalties, as required under Section 69D (2) of the Value Added Tax Act 1994.
28. As we saw in the Background, HMRC confirmed in late September 2022 that the PLN’s of 1 June 2021 had not been sent. It explained that there was an error in its system that meant the letters did not process correctly when they were created.
29. Our Principles of Good Administration state, ‘public bodies should behave helpfully, dealing with people promptly, within reasonable timescales and within any published time limits.’
30. The VATA 69d (2) says:
Before giving the officer a decision notice HMRC must:
inform the officer that they are considering doing so, and afford the officer the opportunity to make representations about whether a decision notice should be given or the portion that should be specified.
31. When Mr A and Ms B’s representative wrote to HMRC to challenge the penalties in August 2021, the issue was referred to its Solicitors Office and Legal Services (SOLS) department.
32. SOLS asked for representations from the directors (in line with ARTG4230). It was told in early October 2021 that neither director had been informed the penalties would be applied and so had no opportunity to challenge them. This highlighted that they had not received the June 2021 letter, and so was the point when they became aware of the letters. The July 2021 letter did not ask for representations. This is also the first point when HMRC were informed the directors had not received the June letters.
33. The SOLS review was undertaken by a member of a specialist team who had not been involved in the original decision and was independent of the directorate involved. Agent Update Issue 75 goes on to explain the review procedure and says:‘The review officer will decide if the decision is legally and technically correct consistent with HMRC’s policy, and consistent with HMRC’s Litigation and Settlement Strategy. The review officer will not normally contact the caseworker or discuss the case with them. But they may contact the caseworker to understand the decision better, to locate documents or to clarify evidence.’
34. In response, in mid- December 2021, the review officer wrote to the representative saying he was satisfied HMRC had met its statutory requirement with regard to VATA. The response also said a copy of the June 2021 letters were enclosed and HMRC was satisfied it had met its statutory requirement. We note HMRC did not attach a copy of the letters, and a request had to be made for these.
35. The review officer came to their conclusion by speaking with the member of staff who created the letters and checking the date of creation on the HMRC database. What they failed to do was check the part of the system that showed documents sent for mailing. Had they done so, they would have seen that the two letters did not appear on that system.
36. The HMRC Appeals reviews and tribunals guidance says:The purpose of the review is primarily to review the decision, after considering all the relevant facts or evidence
37. Given the directors said neither received the letter, it is our view that the emphasis should have been on checking the letters were sent (a relevant fact) rather than simply checking they were created. This was a missed opportunity to identify the original error, and this is a failing on the part of HMRC.
38. In the letter from SOLS, the reviewer advised that if the directors did not agree with his decision, they could ask for an independent tribunal to decide the matter. They were told they would need to write to the Tribunal within 30 days of the date of the letter.
39. The directors did so in mid- January 2022 and while this was in process the directors contacted HMRC once more to explain they had not received the 1 June letters. This prompted another review by HMRC which began in early April 2022 and ran in tandem with the tribunal process.
40. In May 2022, the solicitors representing HMRC in the tribunal case contacted the directors’ legal representative to say that they offered to withdraw the penalties, and allow the s.69D appeals on the basis that:
“1. The Commissioners accept that the letter 1 June 2021 was not received by Mrs B and Mr A (respectively); and 2. The Appellants do not pursue their costs against the Commissioners for the penalty appeals”.
41. So, while it took a further five months to complete the review and conclude the June 2021 letters had not been sent to the directors in June 2021, we find that the offer to withdraw the penalties in early May 2022 was the point at which Mr A and Ms B were aware HMRC accepted the letters were not received. We revisit this in our impact section.
42. As showed above, it took 10 months for HMRC to accept it did not send the June 2021 letter and to rectify the issue. While this is not the 17 months as claimed by Mr A and Ms B, we still consider 10 months is not a reasonable timescale. This means HMRC did not act in line with our Principles and is therefore a failing. We consider the impact of this later in our report.
43. The AO, in its report, stated that the member of staff who created the letters should have checked they were issued correctly. We established that a PDF version of the letters will be saved to the case file. We sought clarification from HMRC as to the responsibilities of someone in that role and it told us:
‘We have reviewed all our Customer Compliance guidance including Handbooks and Standard Working Instructions and can confirm that there is no mandatory instruction or recommendation to caseworkers to undertake further checks once letters have been sent to Central Print.’
44. We have found that given there is no expectation that the caseworker would check the PDF’s are added to the case file, there is no evidence of a failing on the part of the staff member.
Letter creation
45. The directors also complain that HMRC has not provided compelling evidence to show that those letters were created on 1 June 2021, as it later advised, and in late December 2021 as they say the metadata suggests.
46. In HMRC’s March 2023 complaint response, it explained that when a letter is uploaded from an electronic folder, the metadata shows the date of upload as the date of creation.
47. We asked HMRC to provide evidence of the creation of the two letters. It gave us screenshots of the document list on the HMRC system for Mr A and Ms B’s company. Within that it expanded on two entries to show two penalty notices were created on 1 June 2021 at 09:59.
48. HMRC told us that a historical entry cannot be created after the event and given we see multiple ‘viewing’ entries after that date (where someone has opened and viewed the document) we have no reason to doubt the veracity of their statement.
49. This is in line with our Principles of Good Administration where it says organisations should be open and accountable and this includes:
‘Public bodies should create and maintain reliable and usable records as evidence of their activities.’
50. HMRC has also told us that recent changes to the National Penalties Processing System (NPPS) will now show when a letter has been created and when it was issued to bulk mailing. We note this will improve transparency in the process and address the possibility of similar failings occurring in the future.
51. We can appreciate that the metadata entry would have added doubt and frustration to what was already a stressful time for both directors. While this is understandable, based on the evidence, we see no reason to doubt the documents were created on 1 June 2021 and do not uphold this aspect of the complaint.
Impact
52. We found HMRC took too long to identify the 1 June 2021 letters were not sent to Mr A and Ms B. When we identify a failing, we look to see if this had an impact on the complainant. We also look to see if the organisation complained about has taken any steps to put this impact right or if more should be done.
53. We asked Mr A and Ms B to tell us what the impact was on them for being personally responsible for the penalties over this period.
54. Mr A told us that the repercussions of the penalty letter have been profound, impacting virtually every aspect of his life, including his mental and physical health, his marriage, and his relationships with family and friends. He explained that the shock of receiving the ‘demand for payment within 30 days’ of such an enormous sum was staggering and caused him to experience panic attacks, feelings of isolation and insomnia. He became fearful for his family’s future and felt overwhelmed with guilt, leading to him considering taking his own life at several points in time. He also experienced migraines which he found incapacitating.
55. Ms B told us that she became extremely upset when she received the penalty notice, and it was a huge shock. She felt isolated and experienced significant anxiety and panic attacks. She was prescribed anti-depressants and sought non-medicinal therapy including counselling to help her cope with the stress of the situation. She explained that the constant worry, in addition to some marital issues, led to her drinking alcohol much more frequently that previously, which was out of character and led to her feeling more isolated. She told us that revisiting the period to tell us about the impact has reignited those feelings of anxiety, which had such a tremendous impact on her and her family.
56. Both parties have told us that the penalties were disproportionate to the Company profit level and their income as directors of the company, hence the shock and stress they experienced.
57. The evidence shows that Mr A and Ms B informed HMRC in early October 2021 that they had not received the 1 June 2021 letter. This is the date from which we consider HMRC became aware it needed to investigate that claim. It did so and incorrectly concluded the letters had been sent. We find that when SOLS wrote to the directors’ representatives in mid-December 2021 this is the point at which the error could have been identified and the impact addressed.
58. We have seen that they have taken the only action available to them to challenge the penalties given HMRC failed to identify the letters were never sent. This was the Tax Tribunal.
59. Both directors told us that the impacts were still being felt several years after the events. We carefully considered this and came to the view that there would still have been outstanding issues, for example company penalties, which would have contributed to those impacts described. While we recognise the directors may be experiencing ongoing strains, we find that we cannot link these fully to the delay in establishing whether the PLN was sent.
60. We also considered whether the late September 2022 letter should be the point where we determined the impacts were reduced. While we recognise this is the point at which it became clear the letters were never sent, the fact that HMRC had, in May 2022 already accepted they were never received and removed the penalties does in our view mean the impact was already significantly reduced by September 2022.
61. We identify the offer to withdraw the penalty notices in May 2022 as the point at which we can say that HMRC removed the source of the impact.
62. Therefore, we identify the period of impact to be 20 weeks.
Remedy already offered 63. The AO asked HMRC to apologise and pay Mr A and Ms B £250 each in recognition of the worry and distress caused to them. It explained that it chose an amount towards the higher end of the scale because it considered the events had had a high impact on the directors.
64. When HMRC and the AO decide on financial remedy, they use the HMRC CRG.
65. This guidance says payments HMRC makes are ex gratia and come from public funds and it will make payments for financial loss where it is clear that its mistakes or delays were the direct and sole cause of that financial loss, and this is supported by irrefutable evidence. It also says HMRC will consider making payments to its customers if its mistakes led to worry, distress, confusion, or sadness, or made an already difficult situation worse. These payments are designed to be a token and tangible recognition of its mistakes, rather than punitive.
66. Payments made for worry and distress will typically range between £25 and £500. That said, it may pay towards the higher end, or exceed this range, if its mistakes have had a significant impact. In other words, the CRG allows it to decide what financial remedy it thinks is appropriate based on the individual merits of the case.
67. Our ‘UK Central Government Complaint Standards’ say we expect organisations to provide a meaningful apology and, where possible, provide a remedy that aims to return anyone affected to a position they would have been if the failings had not occurred. If this is not possible, we expect any remedy to compensate them appropriately.
68. In considering the level of impact a failing has had on an affected person we refer to our Severity of Injustice scale (SOI). The SOI sets out the amounts of financial remedy we consider appropriate depending on the impact arising from an organisation’s mistakes or failings. We refer to this when we consider whether the amount offered by an organisation is fair and appropriate.
69. The SOI also helps us to ensure recommendations we make to put things right are consistent and transparent for everyone who uses our service. This is because while the failings or injustice in two complaints can be similar, the affected person may have experienced them very differently. Minor failures will tend to have a smaller impact than major ones.
70. Impact is related to the nature of the failings found and will vary from case to case. Some failings will also have secondary impacts which may not be immediately clear from the evidence we have.
71. In this case, HMRC’s £250 financial remedy falls within ‘Level 2’ of our scale, which carries a range of £120 to £550. We expect financial remedies within this range to be paid where the impact is distress, worry, annoyance, or similar, and of the sort which a healthy adult would be expected to deal with on a regular basis. We would expect the emotional impact to affect the person’s day to day functioning or ability to live a normal life for a period from one to two weeks up to around six months.
72. We also consider a financial remedy in this range to be reasonable where delays in complaint handling lasted from a few weeks up to around a year, or longer if we find there was no substance to the complaint.
73. We find the impact both parties describe is more significant than what we would typically expect to be appropriate for ‘Level 2’ on our scale. As such, we consider HMRC has not done enough to put this right for Mr A and Ms B.
74. We were initially concerned that HMRC did not offer any apology or remedy itself until the AO stepped in and recommended it do so. When HMRC wrote and cancelled the penalties in September 2022, we said it had an opportunity to take responsibility for its error and address the impact at that point.
75. HMRC has explained to us that when that letter was issued in September 2022, this action was subject to ongoing litigation orders agreed in the early June 2022 letter It did not believe it was appropriate at that time to be offering an apology. It added that as the June letter explained it was anticipated that this would be sought through HMRC’s complaint procedures.
76. We have carefully considered HMRC’s explanation, reviewed the format of the September 2022 letter and are satisfied that the complaint process was the most applicable avenue for issuing an apology.
77. We note HMRC wrote to Mr A and Ms B in January 2024 and apologised for the missed opportunities and stress and worry they experienced. We are pleased to see this, and this action is in line with the UK Government Complaint Standards.