Donaldson v HMRC [2016] EWCA Civ 761

The lead case on daily late filing penalties. It confirms that the Schedule 55 conditions are real and must be satisfied, and then confirms that most defects in the paperwork are cured by s114 TMA 1970 anyway. Knowing which defects survive that cure is the whole of the validity argument.

Why This Case Matters

Daily penalties for late filing are issued at enormous scale, hundreds of thousands each year, and they are automated. Donaldson is the lead case in which the mechanics of that automation were tested against the statutory conditions in Schedule 55 FA 2009.

Its practical importance runs in both directions. It confirms that the conditions for a daily penalty are real and must be satisfied, which is why validity remains a live ground of appeal. But it also establishes that a defect of form which did not mislead the taxpayer can be cured by s114 TMA 1970, which is why most validity challenges fail.

The Statutory Conditions

Paragraph 4 of Schedule 55 FA 2009 provides that a person is liable to a daily penalty if:

1. (a) the failure to file continues after the end of the period of three months beginning with the penalty date;
2. (b) HMRC decide that such a penalty should be payable; and
3. (c) HMRC give notice to the taxpayer specifying the date from which the penalty is payable.

Paragraph 18 then imposes requirements on the assessment itself, including that it must state the period in respect of which the penalty is assessed.

Section 114(1) TMA 1970 provides that an assessment is not to be quashed or deemed void by reason of a mistake or omission, if it is in substance and effect in conformity with the intent and meaning of the Taxes Acts.

The Facts

Mr Donaldson did not file his paper self-assessment return for 2010–11 by the 31 October 2011 deadline. HMRC issued the standard sequence: a fixed penalty, daily penalties running at £10 per day up to the statutory maximum, and a further penalty once the failure had continued for six months.

He appealed, challenging not the fact of the default but the validity of the daily penalties. His arguments went to each of the paragraph 4 conditions and to the form of the assessment.

The Issues

1. Had HMRC “decided” that daily penalties should be payable, within paragraph 4(1)(b), given that the process was automated and no officer had considered his case individually?
2. Had HMRC given notice “specifying the date from which the penalty is payable”, within paragraph 4(1)(c)?
3. Did the penalty assessment comply with paragraph 18, and if not, what was the consequence?

The Ratio Decidendi

Why the “decision” holding matters

The argument that an automated process cannot involve a “decision” is intuitively attractive and was, for a period, run widely. Donaldson forecloses it for daily penalties. A generic policy decision applied across a class of taxpayers is enough.

The point is worth understanding precisely, because it does not follow that every automated HMRC action is safe. Where a statutory provision requires an officer to form a view about a particular taxpayer (as s29 discovery does, following HMRC v Tooth) a class-wide policy will not do.

Why the s114 holding matters more

This is the part of the decision that does most work in practice. HMRC penalty notices frequently contain errors: wrong periods, wrong dates, wrong amounts, misdescribed provisions. Donaldson establishes that such defects will usually be cured provided they are matters of form and the taxpayer was not misled.

The corollary is the argument that still succeeds: a defect that goes to substance, or that did mislead the taxpayer, is not cured. Section 114 is a curative provision, not a licence.

Obiter Dicta

• The scope of s114. The Court’s observations about the boundary between form and substance are necessarily general, and the judgment does not define it. Later decisions have had to work out where a misdescribed period, a wrong taxpayer reference or an incorrect statutory citation falls. That leaves real room for argument in an individual case.
• Comments on the automated penalty system. Remarks about the practical necessity of processing penalties at scale explain the outcome but are not part of the rule. They are, however, a useful indication of how the courts approach challenges founded on the impersonality of HMRC’s systems.
• The interaction with reasonable excuse. The judgment does not address reasonable excuse, which is a separate and independent ground. A taxpayer who loses on validity is not thereby prevented from running an excuse under Perrin.

Practitioner Application

The validity checklist for a Schedule 55 penalty

1. Was a valid notice to file given under s8 TMA 1970? If not, there is no filing obligation and no penalty. Check the address used and whether HMRC knew it was wrong.
2. Was the notice to file withdrawn under s8B TMA 1970, or should it have been?
3. Is the penalty date correct, and does the daily penalty period actually run from a date more than three months after it?
4. Did HMRC give the paragraph 4(1)(c) notice specifying the date from which daily penalties run? After Donaldson the reminder and SA326 will usually satisfy this, but confirm the client actually received documents of that kind.
5. Does the assessment comply with paragraph 18, and if not, is the defect one of substance or one that misled the client?
6. Do the arithmetic. Daily penalties are capped, and the six and twelve month penalties are tax-geared, so reducing the underlying liability reduces them.
7. Check the time limits for assessing the penalty.

Where the underlying liability is estimated

Many Schedule 55 cases arrive alongside a determination under s28C TMA 1970. Because the six and twelve month penalties are calculated by reference to the liability, filing the return reduces them as well as displacing the determination. See our resource on HMRC determinations.

Running the appeal

• Plead validity, reasonable excuse and special circumstances together. They are independent grounds and cost nothing extra to plead.
• Do not overstate the s114 argument. Tribunals see it often and Donaldson is against you unless the defect genuinely misled the client or goes to substance. Where it does, say precisely how.
• Get the client’s actual documents. The paragraph 4(1)(c) question is about what was sent to this taxpayer. HMRC’s generic evidence of its standard process is not the same as evidence of what this client received.
• Diarise the 30-day appeal deadline for each penalty notice separately.

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