With tax penalties becoming a part of daily life for advisers, an up-to-date understanding of the defence of ‘reasonable excuse’ has never been more important. As ever, what is ‘reasonable’ is highly subjective and will often have to be decided by the Tribunal – hence the recent raft of cases on the topic. Establishing a reasonable excuse will involve looking at all the circumstances and actions of all parties to see who is to blame. If all else fails, it may be possible to argue that the size of a penalty charged is disproportionate to the offence.
What is a reasonable excuse?On one level, the answer to this simple question is equally simple, if unhelpful: it depends on the circumstances.
HMRC offer basic guidance on reasonable excuse – for example, in their training module for Compliance Checks, they list these reasonable excuses:
In addition, if a taxpayer needs to obtain a document from a third party, HMRC accept that it can be reasonable for this to cause a delay – provided the taxpayer can prove that they requested the document in good time and has followed up with the third party.
However, HMRC will not normally accept the following as a reasonable excuse:
HMRC even envisage that lack of fundsmay be a reasonable excuse for late payment of tax debts but only where ‘unforeseen events outside a person’s control’ cause a late payment.
With time to pay agreements now possible, the likelihood of such a reasonable excuse being accepted is probably very limited – although, inKincaid v HMRC [2011] UKFTT 225, a cash crisis that HMRC partly caused by withdrawing a CIS taxpayer’s gross payment status did qualify.
HMRC generally seek to attach a higher burden than the law requires.
HMRC’s long-held view is that a reasonable excuse defence can only apply in exceptional circumstances, an argument which should be resisted as the law does not refer to ‘exceptional’ at all, only to ‘reasonable’ (a point that was recently highlighted in the case of Leachman v HMRC [2011] UKFTT 261).
Some taxpayers have successfully claimed reasonable excuse by blaming someone else.
In HMRC v Mercury Tax Group Ltd [2009] STC (SCD) 307 and, further back, in Rowland v HMRC [2006] STC (SCD) 536, the taxpayers successfully avoided direct tax penalties triggered because of mistakes made by their agents.
However, in the world of VAT, VATA 1994 s 71 specifically prevents taxpayers from claiming reasonable excuse where they have relied on a third party.
Interestingly, in the case of Dental IT v HMRC [2011] UKFTT 128, the Tribunal decided that a taxpayer who relied on advice from HMRC’s advice line on payment arrangements did have a reasonable excuse against late payment of VAT.
In other recent cases, the Tribunal has also established that reasonable excuse can exist when HMRC are partly to blame.
For example, in NA Dudley Electrical Contractors v HMRC [2011] UKFTT 260, a taxpayer failed to file a P35 on time but had a reasonable excuse as his accountant had not received a paper return because HMRC had assumed he would file online.
In TJ Fisher (t/a The Crispin) v HMRC [2011] UKFTT 235, the taxpayer had a reasonable excuse for failing to submit a P35 return after the cessation of his business because HMRC had not made it clear to the taxpayer that an end of year return was needed after P45s had been issued to all staff and all PAYE paid.
In other cases, HMRC have shared the blame where they sent a taxpayer a paper P35 return to complete for a year for which online filing was compulsory (Tower Leasing Ltd v HMRC [2011] UKFTT 487) and where the advertising for their online self-assessment software did not make clear that it was not suitable for all taxpayers (Humphreys v HMRC [2011] UKFTT 98).
Of course, there have been a wide array of Tribunal cases on reasonable excuse in other circumstances – see the table opposite for an overview of the more recent cases.
The concept of proportionality has appeared in some recent decisions.
Perhaps the most well-known case is Enersys Holdings UK Ltd v HMRC [2010] UKFTT 20, where a VAT default surcharge of £131,881 for a one-day delay was ruled disproportionate and discharged.
Although this type of argument has not succeeded for all taxpayers, a default surcharge of over £4,000 for a one-day delay was held to be ‘plainly unfair’ in Total Technology (Engineering) Ltd v HMRC [2011] UKFTT 473 and part of the penalties levied for failure to submit CIS returns were set aside as excessive in Lewis v HMRC [2010] UKFTT 327.
HMRC issue hundreds of thousands of self-assessment late filing penalties each year.
I suspect that when the more draconian penalties start to kick in next spring we may see many more cases on what constitutes a reasonable excuse.
John Cassidy, Partner, PKF
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