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The appellant v HMRC

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In The appellant v HMRC [2017] UKFTT 839 (20 December 2016), the FTT found that mental illness could constitute a reasonable excuse over several years.

On 17 January 2007, HMRC sent the appellant notices to complete five tax returns for the tax years 2001/02 to 2005/06 inclusive, and required them to be submitted on 24 April 2007. The appellant did not submit the returns by the deadline and HMRC imposed penalties and made determinations based on estimates of the appellant’s liability. She subsequently did file returns and HMRC opened enquiries, which led to assessments as no information was forthcoming. The appellant appealed out of date but she failed to comply with unless orders issued by the tribunal.

The FTT had to decide whether the appellant’s appeal against penalties and surcharges should be admitted out of time and if so, to determine the appeal.

The FTT noted that the appellant had been diagnosed with the mental illness of paranoid schizophrenia and that this was an exceptional circumstance, which justified anonymising the decision. It noted that the appellant appeared able to follow the proceedings and that her mental illness was not obvious were it not for the medical reports and the fact that she claimed ‘that there was a conspiracy to prevent her from sorting out her financial affairs’. She was therefore not a reliable witness.

The FTT also observed that the appellant was disorganised at the hearing, arriving very late with large piles of papers, most of which were irrelevant. It concluded that she was not capable of dealing rationally with her affairs nor to properly instruct advisers. Permission to appeal out of time was therefore granted.

As to the substantive appeal, the appellant contended that she had not received the various notices posted to her address by HMRC. The tribunal pointed out that ‘taking into account the appellant’s rather chaotic approach to her affairs’, it was likely that if post had gone astray it was because the appellant had not notified her current address to HMRC. As the appellant had failed to file the relevant returns, the daily penalties and late filing penalties had been correctly imposed.

Finally, the FTT noted that it is well established that physical illness can be a reasonable excuse but that a taxpayer dealing with a long term illness would be expected to take appropriate measures. The FTT added that mental ill-health necessarily implies some irrationality in behaviour ‘which sits oddly with the expression ‘reasonable excuse’’ but nevertheless accepted that mental illness can be a reasonable excuse. It also found that a taxpayer with long-term mental health problems could not necessarily be expected to make arrangements for someone else to act on his behalf during his incapacity. The FTT concluded that the taxpayer’s mental illness had been the reason for her failure to meet her obligations and it allowed the appeal against the surcharges and penalties.

Read the decision.

Why it matters: The FTT noted that, unlike physical illness, mental illness can constitute a reasonable excuse over a period of several years. It also pointed out that the taxpayer should still meet her tax liabilities. Since she had not been able to address her filing obligations, HMRC was entitled to estimate her liability and its estimate may be higher than her liability had she been able to file returns. This was highly unsatisfactory but the tribunal could not see ‘an end to the problem’.