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TaxationWeb’s Lee Sharpe with a reminder that HMRC has a notoriously – unreasonably – narrow view of penalty appeals under reasonable excuse.

Introduction

Many readers will be familiar with “reasonable excuse” in the context of penalties for failing to file tax returns or to pay tax on time. But it seems that HMRC sets the bar unreasonably high – and Tribunals have been telling HMRC so for some time.

The Legislation

The penalty regime for Self Assessment (for individuals) is to be found at FA 2009 Sch 55 for filing returns and Sch 56 for payment. Para 23 of Sch 55 says,

“23(1) Liability to a penalty under any paragraph of this Schedule does not arise in relation to a failure to make a return if P [the taxpayer or person otherwise responsible for filing the return] satisfies HMRC or (on appeal) the First-tier Tribunal or Upper Tribunal that there is a reasonable excuse for the failure.

(2) For the purposes of sub-paragraph (1)—

(a) an insufficiency of funds is not a reasonable excuse, unless attributable to events outside P's control,

(b) where P relies on any other person to do anything, that is not a reasonable excuse unless P took reasonable care to avoid the failure, and

(c) where P had a reasonable excuse for the failure but the excuse has ceased, P is to be treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased.”

Clearly, cashflow difficulties will not ordinarily afford a reasonable excuse for failing to file a return – unless “attributable to events outside the taxpayer’s control”. (In passing, Sch 56 says something quite similar in relation to late payment at para 16, which is arguably more relevant). But note that this "events outside P's control" condition applies only to a lack of funds.

While Corporation Tax returns are still governed by FA 1998 Sch 18, TMA 1970 s 118(2) says,

“118(2) For the purposes of this Act, [note s 93 in relation to CT late filing penalties] a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within such further time, if any, as the Board or the Commissioners or officer concerned may have allowed; and where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased…”

HMRC Sets Too High a Threshold

HMRC seems to think that a reasonable excuse will basically apply only when there are unforeseen events beyond the taxpayer’s control, such as:

Self Assessment Manual SAM10090:

“A reasonable excuse is normally an unexpected or unusual event, either unforeseeable or beyond the customer’s control, which prevents him from complying with an obligation when he would otherwise have done. A combination of unexpected and unforeseeable events may, when viewed together, be a reasonable excuse… “

Corporation Tax Manual CTM94140:

“However, there will be occasions when a company tries hard to meet its filing obligation but fails because of unforeseen misfortune.” 

Or this nugget from HMRC’s Online Filing web guidance:(http://www.hmrc.gov.uk/online/excuse-missed-deadline.htm)

“Generally, a 'reasonable excuse' is when some unforeseeable or unusual event beyond your control has prevented you from filing your return on time. “

The Tribunals Disagree with HMRC

There are numerous examples of Tribunals finding against HMRC in the interpretation of “reasonable excuse”. A recent case heard by Ann Redston - Christine Perrin v Revenue & Customs [2014] UKFTT 488 (TC) – together with Peter Vaines’ continuing to highlight the difference between HMRC and the Tribunals – (IHT Developments, Penalties and Reasonable Excuse for example) – is what prompted this article.

Perrin – HMRC Wins But for the Wrong Reasons

Ironically, Perrin went against the taxpayer. But what is interesting is that the Tribunal Judge saw fit to explain, at some length, why the taxpayer did have a reasonable excuse for the late filing of her Self Assessment Return although she ultimately failed to address her error reasonably promptly, once the reasonable excuse ended – which is why her appeal failed and the penalty was upheld.

The judgment goes into great detail about what may be accepted as a reasonable excuse and it is fair to say that it is not quite so ‘forgiving’ as some previous tribunals, requiring not only that

1. The taxpayer’s belief (that a return had been filed or a payment made) must be genuine, but also
2. The taxpayer’s excuse must be objectively reasonable, taking into consideration the circumstances and attributes of the taxpayer

Ms Redston was critical of HMRC’s insistence that there must be “an unexpected or unusual event that is either unforeseeable or beyond the person’s control.” She found that this derived from C&E Commissioners v Salevon [1989] STC 907, and the famous C&E Commrs v Steptoe [1992] STC 757.

However, as Ms Redston pointed out, Scott LJ’s assertion in that case that there must be an “unforeseeable or inescapable misfortune” comprised part of a dissenting judgment and, as such, has no precedent value other than potentially persuasive authority, as noted in Electrical Installations v R&C Commrs [2013] UKFTT 419 (TC).

Perhaps the reason why Ms Redston felt it appropriate to go into such detail about the concept of reasonable excuse is that HMRC has clearly failed to learn from its mistakes – HMRC has “form”.

Lifesmart Limited

Lifesmart Ltd v Revenue & Customs [2012] UKFTT 137 (TC) is a case in which the company inadvertently submitted its Employer’s Annual Return online in “test mode” so it was not considered by HMRC to be a valid submission. Notably, once the employer had realised the error, a “live” submission followed very soon afterwards.

Ms Redston happily found that the company had a reasonable excuse, saying:

“[HMRC’s definition] is clearly too narrow. This Tribunal has held that the meaning of “reasonable excuse” is “a matter to be considered in the light of all the circumstances”.

Purveur

Brian Purveur v The Commissioners for Her Majesty's Revenue & Customs [2011] UKFTT 850 (TC) was also heard on P35 late filing penalties and a misunderstanding of the online filing regime. Geraint Jones, Q.C., head the case. He wasted very little time in finding for the taxpayer, along similar lines to the aforementioned (but later) cases:

“For there to be a "reasonable excuse" an appellant has to demonstrate two things. The first is that there is an excuse. If there is an excuse the Tribunal then has to be satisfied that, when viewed objectively, the excuse can properly be characterised as reasonable.”

In fact Mr. Jones found for the taxpayer by para 7 of the first page of the judgment (which feels like it should be some kind of record), and used most of his time left over to roast HMRC for its policy of delaying the issue of P35 penalty notices for 4 months, such as:

“The question would thus arise in the mind of any fair-minded objective observer as to whether this is something done deliberately by HMRC so as to increase the penalty monies received in respect of P35 cases, given that additional penalties accrue whilst the default continues. In many cases the continuing default may represent no more than the sin of oversight or forgetfulness which, had a timeous First Penalty Notice been issued, would, in many cases, be remedied forthwith.”

Conclusion – The Onus is on HMRC

Both judges have stipulated that

1. There must be a “genuine” excuse, and
2.  It must be reasonable

But there is no requirement for there to be an unforeseen event beyond the taxpayer’s control, contrary to HMRC’s assertion.

This has been going on for years, and the innocent taxpayer is being unfairly treated as a result.

Last words from Ms Redston, in Perrin:

“HMRC should not be applying such a narrow view of the “reasonable excuse” concept…

We observe that it is not only the tribunal which is tasked with applying the “reasonable excuse” concept to taxpayer behaviour: in the first instance, it is for HMRC to decide whether or not a person has a reasonable excuse.  It is clear from the correspondence sent to Mrs Perrin that Ms Lai’s second submission – that a reasonable excuse is “an unexpected or unusual event” – is a mantra used as a matter of course by HMRC when assessing whether or not a person has met this legal test.

As a result, cases will come to the Tribunal when they could have been resolved by HMRC.  This is a waste of time and resources, as well as causing unnecessary stress to taxpayers.”