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Peter Vaines of Squire Sanders considers some recent tax cases in relation to payment by post and late payment due to a lack of available funds.

Delivery By Post

Last September I made reference to the case of Browns CTP Limited v HMRC TC 2244 (see Taxpayer Entitled to Assume First Class Post Delivered Next Business Day and Penalties for Late Tax Returns or Tax Payments) where the issue was whether the taxpayer had a reasonable excuse for late payment of tax where his cheque was delayed in the post. Payment was due on the 19th of each month and cheques were regularly sent on 18th of each month. Some cheques did not arrive the next day and HMRC charged a penalty.

The view of HMRC, set out in their Manuals was:

"If paying by post, your cheque payment must be posted early enough to reach HMRC no later than the 19th of the month. To allow for postal delays for which we are not responsible, please allow at least 3 working days for the payment to reach us".

This was an expression of HMRC's view, but with no authority. The Interpretation Act 1978 says that in connection with service by post, service is deemed to be effected at the time when a properly addressed letter will be delivered in the ordinary course of post. Interestingly, in Browns CTP Limited HMRC accepted that the ordinary course of first class post is delivery next day.

Accordingly, if you send a cheque the day before the due date (and HMRC accept that you can reasonably expect it to be delivered in the ordinary course of post on the due date) you would think that you would have a reasonable excuse if it did not arrive in time. However HMRC said this was wrong but without giving any reason. Their position was hardly enhanced by their published practice that cheques sent in payment of VAT one working day prior to the due date are accepted as being posted in time.
 
The Tribunal said that providing the taxpayer had a reasonable expectation that the payment would be received on or before the due date then he will have a reasonable excuse for non payment if it is not received. He clearly did have such a reasonable expectation (and this was obviously accepted by HMRC) so he had a reasonable excuse and no penalty was payable.

I apologise for going over this old ground but the matter has resurfaced in the recent case of Panther Parcels and Courier Limited v HMRC TC 2247. In this case the taxpayer claimed that he had posted the cheques in a timely fashion and that any delay was the fault of the postal service. The Tribunal did not accept this and found as a fact that the taxpayer had regularly posted its payments late.

Accordingly, there was no defence to any penalty which was properly charged by HMRC. Fair enough. End of story.

However, the following finding by the Tribunal may raise some eyebrows:

"I found that despite the warning, the Appellant continued to post its PAYE without allowing the necessary 3 working days for the payment to reach to HMRC".

Where does this "necessary 3 working days" come from? It comes from the submission by HMRC that to allow for postage delays the Appellant should have allowed at least 3 working days for the payment to reach HMRC.

As there is no authority for this "necessary" 3 day requirement and that the Tribunal in Browns CTP Limited had decided that the taxpayer had a reasonable expectation of cheques being delivered the following day, and that HMRC have acknowledged that next day delivery can be reasonably expected, as well as their published position on VAT payments, this is a bit tough. It may be that this Tribunal simply disagreed with the Tribunal in Browns CTP Limited (and that decision was not binding) but they did not say so.

You would have thought that if HMRC were advancing an argument which had been shown to be wrong in another very recent case, somebody might have mentioned it.

Worse perhaps is the real possibility that when the Tribunal found that the Appellant had regularly posted its payments late, it meant that they were posted "without allowing the necessary 3 working days" and if so, there is scope for some genuine grievance.

I think we deserve some clarity about all this.

Reasonable Excuse

It is well established these days (and confirmed in all the relevant bits of legislation) that lack of money is not a reasonable excuse against most HMRC penalties for non payment of tax. For example, in the penalty regime set out in FA 2009 the following phrase appears more than once:

"An insufficiency of funds is not a reasonable excuse unless attributable to events outside the taxpayers control".

It is therefore interesting to read the case of Stephen Brand v HMRC TC2434 in which he was charged a penalty because he failed to pay the relevant tax by the due date. Mr Brand said he had a reasonable excuse. He had sold a property but had not received the sale proceeds. He was planning to borrow the amount needed to pay the tax and applied to HMRC for time to pay. HMRC refused to allow him time to pay and he ended up paying it a month or so late.

The Tribunal acknowledged that he had realised a large gain but did not receive payment, leaving him with the obligation to pay his tax without any resources to do so. They accepted that if he had known that HMRC would not allow him time to pay he would have organised the borrowings earlier. The absence of funds was no fault of his and he had a reasonable excuse for assuming that HMRC would have dealt with his application for time to pay, leaving him insufficient time to raise the funds in order to make payment by the due date.

Although everybody would sympathise considerably with Mr Brand in these difficult circumstances, it is perhaps a surprise that his insufficiency of funds was found to be a reasonable excuse despite the statutory prohibition. It might be said that the insufficiency of funds was attributable to events outside his control and it is very encouraging that the Tribunal are taking such a sympathetic line.