HMRC has published guidance on what constitutes ‘reasonable excuse’ (fire, flood, bereavement, coma etc) and what doesn’t (eg tax return too difficult, failure by agent), but emphasises that a ‘reasonable excuse can only exist where an exceptional event beyond the control of the taxpayer prevented completion and return of the tax return by the due date’.
Where reasonable excuse is established, penalties are withdrawn or not charged, but there is no definition of ‘reasonable excuse’ in the legislation.
Penalties usually involve late filing of a tax return – PAYE or self-assessment – inaccurate returns (‘negligence’) or late payment of tax. Some cases recently heard by the Tribunals have concerned HMRC’s insistence that ‘reasonable excuse must involve an exceptional event beyond the control of the taxpayer’, which appears to have no basis in law.
Section 71 (1) VAT Act 1994 states:
‘For the purpose of sections 59 to 70 which refers to a reasonable excuse for any conduct:
(a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and
(b) where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.’
In addition, HMRC has always refused to accept:
- ignorance of the law
- oversight or misunderstanding
- preoccupation with work
- inexperience of business affairs
- no intention to escape payment of tax
as ‘reasonable excuse’.
However, there are several cases where the tax tribunal found there was a reasonable excuse without an exceptional event. It’s clear that ‘reasonable’ means just that, and ‘exceptional’ is nothing more than an HMRC gloss which the tribunal was not prepared to uphold. Each case will be considered on its merits, but taxpayers may wish to refer to earlier case judgements.
A number of cases have been heard at the first-tier tribunal and some are outlined below.
Cases where the taxpayer was successful
Ithell and another (TC1029)
HMRC carried out a compliance review and, as a result, decided to revoke the company’s gross payment status. The company had made a profit in 2007 and, on the advice of their accountant, had issued a cheque to HMRC which paid the 2007/8 liability and also part of the 2008/9 liability. Unfortunately, the cheque was both unsigned and inadequate to meet the liability.
HMRC considered that, as two years’ liability was involved, they had two failures to make payments. It contended that the taxpayers had failed the construction scheme compliance test on four occasions and cancelled their gross payment status from August.
The contractors claimed that they had never received the notice and it was only when one of their sub-contractors notified them that they were aware of the cancellation.
They appealed; they accepted their errors but claimed that they were given wrong advice and had made innocent mistakes.
The Tribunal found that they had probably not received the notice, HMRC had not met its obligations to notify and the Tribunal allowed the appeal.
AK Construction Company (TC1090)
AK Construction appealed against HMRC’s decision to cancel his registration for gross payment under the construction industry scheme. Under the scheme, sub-contractors can receive gross payments from contractors without deduction of the 20% levy, provided they have met their compliance obligations.
HMRC claimed that AK had not met these obligations as one payment was 332 days late and another 189 days late.
AK argued that he had done his best to avoid late payment but insufficiency of funds had prevented meeting the due date. Insufficiency of funds is not normally a reasonable excuse, but AK’s problems were caused by an earlier decision to remove the gross payment status, which had subsequently been overturned. It was therefore unreasonable for HMRC to assume that he would be non-compliant in future.
The Tribunal agreed and allowed the appeal.
This is in contrast with section 71 VATA1994 (see above) which states that insufficiency of funds is not a reasonable excuse, although the Tribunal did look at the circumstances surrounding the insufficiency of funds.
John Scofield (TC1068)
John Scofield objected to HMRC’s cancellation of his construction industry scheme gross payment status due to compliance failure. The matter concerning the appeal was HMRC’s discretion in relation to cancellation of registration contained in section 66 Finance Act 2004. Section 66(1) states; ‘The Board of Inland Revenue may at any time make a determination cancelling a person’s registration…’
Originally, ten failures were put forward as grounds for cancellation but HMRC accepted responsibility for eight of these and one was waived under reasonable excuse. The final one was a payment over 30 days late and there followed a lengthy argument as to whether the word ’may’ was permissive and gave HMRC discretion.
The Tribunal decided that HMRC’s determination cancelling the registration was invalid, as it had not exercised discretion as required by the Act.
The Tribunal also took the view that the taxpayer was an honest man, who may well lose his business should his gross payment status be removed.
The taxpayer’s appeal succeeded.
Anthony Wood t/a Propave (TC1010)
Mr Wood appealed against withdrawal of gross payment status as HMRC claimed that he had not met the compliance test. Mr Wood’s business had suffered badly in the recession. The taxpayer had heard from the media that the government had announced in the November 2008 pre-budget report that firms suffering difficulties in paying would be able to spread their payment on a timetable they could afford. Not being computer-literate and therefore unable to visit HMRC’s website, he did not realise that this arrangement must be agreed in advance; he sent three £1,000 cheques on the understanding that he would be given time to pay.
It transpired, on completion of his tax return, that he had overpaid for the year, but his second payment on account had been late. Had he made an arrangement with HMRC, this may not have been the case.
The Tribunal accepted that this was a misunderstanding and concluded that Mr Wood did have a reasonable excuse and that the consequences of withdrawal of gross payment status would be wholly disproportionate to the late payment.
The Tribunal was exhibiting knowledge of the reality of the taxpayer’s limitations and the commercial environment and the taxpayer’s appeal was allowed.
Thames Valley Renovations (TC947)
Incorrect advice was the cause of the appeal by Thames Valley Renovations. It was refused gross payment status because the directors had filed their self-assessment returns late.
The directors had taken advice from their accountant who had told them that, as they had no income, they did not need to file a return and they could also ignore the late filing penalties. Because the returns were outstanding, gross payment status was refused. The directors tried dealing with HMRC, who sent the replacement returns to the wrong address. They were unable to file all the returns online.
The Tribunal concluded that the taxpayers had a reasonable excuse and had acted reasonably in relying on their accountant and trying to sort out the matter themselves, once they realised the accountant’s advice was incorrect.
This is interesting, since HMRC will not accept reliance on a third party as a reasonable excuse, but it does reflect the fact that taxpayers can be vulnerable to incorrect advice.
The company’s appeal was allowed.
Christian Sanders v HMRC (TC 1005)
The case deals with an appeal against a surcharge for late payment of tax. The taxpayer’s tax return for 2008/09 showed a tax liability of £75,536.44 of which £60,353.50 was outstanding at the surcharge date of 28 February. He was therefore liable to pay surcharge at 5% of £60,353.50, i.e. £3,017.67.
The majority of the tax related to the sale of a partnership and an LLP and the consequent capital gain. The taxpayer’s estate agency income had reduced as a result of the economic downturn. He decided to pay his income tax immediately and pay the capital gains tax by instalments.
On 1 February 2011, he agreed a payment plan of ten monthly instalments of £6,228.52 to clear the outstanding tax. This was confirmed by HMRC on 3 February. In April 2011, Mr Sanders’ accountant informed him that payments under the payment plan were not being taken from his bank account. The taxpayer contacted HMRC and explained that the payments were not being collected. The HMRC officer told him that he had not supplied details of his bank account, the payment plan had lapsed and he was liable to a surcharge of £3,017.67. Another plan was agreed at £7,973.41 per month which discharged the debt including the surcharge by the original date.
Mr Sanders could not recall why the bank details had not been supplied. When he made the first agreement his father, who was also a partner of the firm, was suffering from acute pancreatitus, so the taxpayer had to take his elderly mother to the hospital on a regular basis. He also believed that everything was in order when he received confirmation of the plan on 3 February, which made no mention of the requirement for bank details.
The Tribunal has no power to mitigate a penalty; they can confirm it or quash it. The Tribunal decided that the appellant’s actions were those of a prudent taxpayer having proper regard to his responsibilities.
They upheld the appeal and quashed the surcharge of £3,017.67.
Difficulties: after an excuse has ceased
It is extremely difficult to appeal against a penalty as some of the following cases will illustrate. Section 118(2) Taxes Management Act 1970 states that if a person has ‘a reasonable excuse for not doing any thing required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it without unreasonable delay after the excuse ceased’.
Yusuf Budiadi v HMRC (TC1098)
This PAYE case involved both late filing and late payment. At the end of December 2007, Mr Budiadi left his employment with UBS; he was paid up to date. After that date but before the end of the fiscal year, Mr Budiadi received a further payment from UBS. Tax was deducted under PAYE, but only at the basic rate and not at the higher rate, which would have been correct. The taxpayer said he was unaware that insufficient tax had been deducted.
In April 2010, Mr Budaidi was sent a tax return, which he completed. HMRC wrote on August 2010 thanking him for the completed tax return for the fiscal year ended 5 April 2008, which went on to explain that it is the individual’s responsibility to ensure that the correct amount of tax is paid at the appropriate date. It also stated that as the higher rate tax should have been paid by 31 January 2009, surcharges at 28 days thereafter and at a further six months were being levied. The amount of the surcharges was £210.44.
The return to 5 April 2008 showed a liability of £2,104.40, which should have been paid by 31 January 2009. The taxpayer had paid only £500 on 31 August 2010, there being £1,604.40 remaining unpaid for that tax year.
The Tribunal pointed out that this should not be taken into account; the point at issue was whether the appellant had a reasonable excuse for the entire period of the relevant delay. ‘HMRC contends that “a reasonable excuse” necessarily involves some exceptional event within or without the taxpayer’s control. That involves HMRC putting an unjustified gloss upon the ordinary English words that Parliament has chosen to use. A “reasonable excuse” is just that and does not, as a matter of statutory interpretation, require that there should have been some exceptional event within or without HMRC’s control.’
They accepted that the appellant believed that all necessary tax had been deducted under the PAYE system and that reasonable excuse applied.
However, the appellant has still not paid the tax due. Any reasonable excuse must have ceased upon him being informed of the correct tax, so if HMRC seeks interest or lawfully imposes any surcharges or penalties for the period thereafter, it is highly unlikely that the taxpayer could properly contend that there is any reasonable excuse for that period.
The appeal succeeded.
N A Dudley Electrical Contractors Ltd (TC1124)
The taxpayer company filed its 2006/07 form P35 online. It was not registered to file online, neither was it compulsory for it to do so. HMRC decided that, since the 2006/7 return was filed online, it was not necessary for it to send the taxpayer company a paper form for 2007/08. The company did not file a 2007/08 form on the grounds that it could not file a form that it did not have. HMRC issued a late filing penalty for the period 20 May to 19 September and a further penalty for the period 20 September to 5 December. The company appealed, claiming reasonable excuse.
The first-tier tribunal judge asked HMRC to satisfy him that the company had elected, by word or deed, not to receive a paper P35 and that HMRC was justified in not sending the paper return. HMRC had not produced any evidence that this was the case and had assumed that there was no need to send one, even though the paper return would have stated that it had to be filed by 19 May 2008.
Since online filing was not compulsory for this period, the judge decided that the company had a reasonable excuse throughout the entire period of the default, since HMRC admitted that they had not sent the return. He added that even if the first penalty had stood, the second could not because HMRC, knowing that the P35 had not been filed on time, did not send out the penalty notice until 29 August, after the start of the period in which a second penalty could be levied. They had therefore not given the taxpayer company the chance to remedy the default.
The taxpayer’s appeal was allowed.
Mr T.J.Fisher (t/a The Crispin) v HMRC (TC1100)
Mr Fisher traded as The Crispin until 28 July 2008. He then paid his employees up to date and issued them with forms P45. As the business ceased in July 2008, the annual return P35 should have been submitted by 19 May 2009; it was not submitted. In May 2010, HMRC sent a fixed penalty charge of £800 to the appellant.
Mr Fisher contended that the business was sold in July 2008 and prior to the sale he phoned HMRC and spoke to someone called Kath so that he could establish what had to be done to finalise PAYE arrangements. He was told that a letter should be sent to HMRC explaining that the business had closed and that the PAYE should be brought up to date, which in fact, it was. There was no suggestion that PAYE was outstanding. He specifically asked Kath if there was anything else to be done and she said that he should simply send the letter explaining the termination of the business.
Mr Fisher also said that notwithstanding the HMRC claims that the return was sent to him on 5 September, it was not received by him and may have been sent to the wrong address.
The Tribunal found that the appellant was misled by omission rather than commission. ‘HMRC contends that a reasonable excuse must be based upon exceptional circumstances or exceptional event. As a matter of law, that is wrong. If Parliament had intended to say that a person could only avoid a penalty by establishing that an exceptional event or exceptional circumstance had arisen, it would have said so. Parliament chose to use the phrase “reasonable excuse” which is an ordinary expression in everyday usage which must be given its natural meaning. A reasonable excuse may involve an exceptional event but need not necessarily do so.’
‘In this case the reasonable excuse relied upon by the applicant is that he was given misleading information, at least by omission, by HMRC. Whilst HMRC may not be obliged to give advice or guidance as to what a person must do, in any given circumstances, if it does seek to assist or give advice, then that advice must be complete and accurate. If it is not, it provides a potential trap for the taxpayer who, some two years later, is said to be liable for a penalty of £800 absent any wilful default or moral fault on his part. Not only is that offensive to the ordinary person’s sense of fairness and justice, it is not required by the statutory regime which identifies an exception to the penalty if a reasonable excuse exists.’
The appeal was allowed.
Cases where the taxpayer was unsuccessful
Dr Wald (TC1052)
Dr Wald was paid removal expenses by his employer, but failed to show the excess over £8,000 on his tax return. When he filed the return, he had not received a P11D and HMRC were aware of this. They felt that, despite this, he was negligent in preparing his return and imposed a 10% fine for negligence.
Dr Wald, an American, who relied on his accountants to complete his return, could not be expected to know that removal expenses are taxable in the UK to the extent that they exceed £8,000, unlike in the US, where they are not taxable.
HMRC’s compliance handbook (CH84540) states that ‘a person who goes to an apparently competent professional adviser, gives the adviser a full and accurate set of facts, checks the adviser’s work or advice to the best of their ability and competence and adopts it…will have taken reasonable care to avoid inaccuracy’.
Despite this, his appeal was rejected and the penalty upheld.
JH Joy (TC1006)
The taxpayer appealed against fixed penalties for the late filing of his self assessment return for 2005. He felt that he had a reasonable excuse in that he was on leave, having suffered a mild stroke. In addition, he had recently been through a divorce and was supporting two daughters.
His appeal was rejected and the penalty upheld.
ASI Properties Ltd (TC981)
The company filed its corporation tax return for the year to July 2006, which was due by July 2007, in March 2009. Penalties for late filing were imposed and the company appealed.
They claimed that the director had been involved in divorce proceedings during the relevant period and he had been unable to deal with the filing of the tax returns. The Tribunal was unimpressed by this and the penalty was upheld and the appeal dismissed.
Case allowed in part
Serpol Ltd (TC1043)
The company supplied workers to clients and treated them as self-employed. HMRC investigated and claimed that the workers should be subject to the agency legislation. They issued notices under regulation 80 of the Income Tax (PAYE) Regulations 2003 and under section 8 Social Security Contributions (Transfer of Functions) Act 1999, charging Class 1 contributions on the earnings. However, they failed to name the workers subject to the notices and the company did not know to whom they related, neither did HMRC give the effective date of the notice.
The company also claimed that the workers were self-employed and were not subject to class 1 NIC.
The tribunal ruled that the section 8 notice was not valid. The employment status of the workers depended on the amount of control exercised and some were excluded by and some included in the legislation.
The appeal was upheld in part.
Upper Tribunal AZ v R&C Commissioners
The taxpayer was a self-employed qualified massage therapist. In February 2003, she was the victim of a vicious robbery that left her with both physical and psychological injuries. Her bank cards were stolen and her bank accounts systematically emptied. The money she had earmarked for her income tax payments was among the funds lost. It took the bank two years to sort out the account.
The taxpayer became homeless, relying on the kindness of acquaintances or sleeping on the floor of the clinic where she worked. She was told that she was not eligible for state benefits and not a priority for housing. There were times when she could not afford to eat properly. She gradually resumed work, at first hampered by her own injuries. Her psychological state was poor as a result of her attack; even years after the robbery she still suffered periods of severe depression.
She appealed to the first-tier tribunal against fixed penalties for late submission of her self-assessment returns for 2002/03 and 2007/08 and surcharges on unpaid tax for the years 2002/03 to 2008/09.
The taxpayer contended that all the penalties and surcharges were covered by the same continuing reasonable excuse, namely post traumatic stress suffered by her as a result of the robbery.
The first tribunal held that the reasonable excuse had to exist throughout the period of the default. Consequently, the penalty and surcharge had to be examined separately. On that basis the reasonable excuse had not covered the penalty for non-filing the 2007/08 return and the surcharges for late payment of tax for 2007/08 and 2008/09.
The appeal was to that extent dismissed.
The upper tribunal said that the first-tier tribunal was correct in law and rightly approached each penalty and surcharge separately.
However, they were satisfied that the taxpayer’s mental health had been severely impaired as a result of the robbery and assault. The consultant psychiatrist’s report had stated that her mental state would cause ‘avoidance symptoms’ and that the tribunal had failed to take account of the information in the psychiatrist’s report.
The upper tribunal allowed the appeal.
Looking at these cases, it is encouraging to see the first-tier tribunal and, indeed, the upper tribunal, taking a commercial view. It is true that not all taxpayers, as illustrated in Anthony Wood’s case, are computer literate.
The position with reliance on tax advisers is less clear; Ithell and another and Thames Valley Renovations successfully appealed against a refusal to grant gross payment status on the grounds of non-compliance, whereas Dr Wald, an American who relied on his accountant to complete his tax return, was unsuccessful in his appeal against a negligence penalty for not knowing the UK tax treatment of removal expenses.
It is reassuring to see the tribunal challenging the HMRC view that a reasonable excuse must be based on exceptional circumstances or an exceptional event. They comment: ‘a “reasonable excuse” is just that and does not, as a matter of statutory interpretation, require that there should have been an exceptional event within or without HMRC’s control’ and: ‘as a matter of law, that is wrong. If Parliament had intended to say that a person could only avoid a penalty by establishing that an exceptional event or exceptional circumstance had arisen, it would have said so. Parliament chose to use the phrase “reasonable excuse” which is an ordinary expression in everyday usage which must be given its natural meaning. A reasonable excuse may involve an exceptional event but need not necessarily do so.’