Why Public Law Arguments Can’t Cancel Tax Penalties

Taxpayers disputing penalties issued by HMRC may assume that all aspects of the dispute can be raised in the tax tribunal. However, a recent case involving a company issued with late payment penalties highlights a key limitation: the First-tier Tribunal (FTT) cannot hear public law arguments, such as claims of legitimate expectation. These types of arguments can only be considered through judicial review in the High Court.

Background of the Case

The appellant, a company, had been involved in a tax avoidance scheme registered under the Disclosure of Tax Avoidance Schemes (DOTAS) regime. As a result, HMRC issued Accelerated Payment Notices (APNs) for the tax years 2011/12 and 2012/13.

When the company failed to pay the amounts due under the APNs, HMRC imposed a series of Late Payment Penalties (LPPs) in 2017 and 2018. The company appealed these penalties to the FTT.

Meanwhile, the appeal was paused pending the outcome of judicial review proceedings in another related case. Although those proceedings were later withdrawn, the appellant entered into a settlement agreement with HMRC in October 2020 to resolve outstanding tax liabilities.

The Dispute

In 2022, the company’s representative contacted HMRC, asserting that the penalties should have been included in the previous settlement and therefore considered resolved. HMRC replied that the settlement did not cover the LPPs.

The company argued that, based on the nature of the “full and final” settlement, it had a legitimate expectation that all liabilities, including the penalties, were settled. It sought to have the penalties cancelled on that basis.

HMRC’s Position and Tribunal Response

HMRC applied to the FTT to have the proceedings struck out, arguing that the tribunal had no jurisdiction to consider public law arguments such as legitimate expectation. The tribunal agreed and made several key points:

1. Limited Jurisdiction: The FTT can only consider statutory appeals as permitted by law. In this case, the Finance Act permits appeals against the imposition of LPPs, but not against the manner in which HMRC exercised discretion under public law principles.
2. No Role in Public Law Claims: Claims of legitimate expectation fall under public law and must be pursued through judicial review. The tribunal cannot make findings on HMRC’s conduct or implied representations outside of what the statute permits.
3. Mandatory Strike-Out: Since the tribunal lacked the power to determine the claim being made, it was required under the tribunal procedure rules to strike out the appeal.

Key Legal Insight: Jurisdiction Limits of the Tax Tribunal

This case reinforces that the FTT is not a general-purpose forum for resolving disputes with HMRC. Its powers are strictly limited to the statutory grounds for appeal. Taxpayers cannot raise broader arguments involving fairness, implied assurances, or HMRC’s conduct unless those issues are part of the specific statutory framework being considered.

Public law challenges—such as whether HMRC created a legitimate expectation or breached fairness—must be brought through judicial review in the High Court, not as part of a statutory tax appeal.

Practical Implications for Taxpayers and Advisers

1. Settlement Clarity Is Crucial: Any agreement with HMRC should specify in writing which liabilities it includes. Never assume that a “full and final” label covers everything unless it is explicitly detailed.
2. Understand the Appeal Limits: Before launching an appeal, assess whether the issue is a statutory one or a public law matter. This determines the correct forum.
3. Preserve Your Rights: If you believe HMRC has acted unfairly or made misleading representations, consider a judicial review route early. Timing is critical in these applications.
4. Use Dual Approaches if Necessary: In complex cases, it may be appropriate to appeal penalties in the tribunal while also initiating judicial review on broader legal grounds.
5. Seek Specialist Advice: When public law elements are involved, obtaining legal advice is crucial to ensure the correct procedure is followed and deadlines are met.

This tribunal decision makes it clear that the First-tier Tribunal (FTT) cannot consider public law arguments, like legitimate expectation, in tax penalty appeals. Taxpayers need to present these arguments through judicial review. When negotiating settlements or appealing penalties, it’s essential to have clear information, thorough documentation, and a solid understanding of the process to avoid costly mistakes.