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Tolley's Practical Tax by Keith Gordon ACA, CTA, barrister

Keith Gordon considers the meaning of ‘reasonable excuse’ in the context of late self assessment returns.This article was originally published in Tolley’s Practical Tax, LexisNexis Butterworths leading information service for small to medium sized tax and accountancy practices. It provides the day-to-day information needed to deal with all tax compliance issues and general client problems. For more information or to order this title please visit www.lexisnexis.co.uk/taxationweb

Background

In the early years of self assessment, there was a rush of cases which considered the meaning of various aspects of the self assessment legislation. One such case, Steeden v Carver (1999) SpC 212 considered the meaning of the words ‘reasonable excuse’ in TMA 1970 s 93(8).

The Steeden case

The Steeden case concerned the delivery of a tax return at 10.30 in the morning on the first working day after the relevant deadline of 31 January 1998. The return had been delivered by the taxpayer’s accountant who had worked throughout the weekend, day and night, with the intention of delivering the return before the tax office’s letter box was opened at about 7.30 am on Monday 2 February.

The accountant was intending to comply with the well-publicised policy of the Revenue which recognised that, when returns were at the tax office when it opened that morning, there was no practical way to distinguish between those that had been submitted before midnight on 31 January and those submitted afterwards. In the event, the accountant did not arrive with the return until about three hours after the letter box was opened. His client received a late filing penalty which was then the subject of an appeal.

It was common ground that the tax return itself was late in that it was clearly submitted to the Revenue after the statutory time limit of 31 January. Ultimately, however, the appeal was upheld because of the curious wording of TMA 1970 s 93(8)(a) and (10).S 93(8)(a) requires the Commissioners (in that case, the Special Commissioners) to set aside a penalty determination if it appears to them that the taxpayer ‘throughout the period of default … had a reasonable excuse for not delivering the return’.

S 93(10) defines the period of default as ‘the period beginning with the filing date and ending with the day before that on which the return was delivered’. Consequently, in Miss Steeden’s case, the period of default was, arguably, 31 January and 1 February 1998 (but according to the Special Commissioner just 1 February 1998). On the facts of the Steeden case, the reasonableness of Miss Steeden’s excuse (ie reliance upon the published Revenue practice of allowing returns until 7.30 in the morning of 2 February 1998) existed throughout the period of default (ie throughout 1 February 1998).

The fact that Miss Steeden’s return did not reach the tax office until after 10.30 am was irrelevant for the purposes of s 93(8) as this was based upon facts that existed after the end of the period of default. Therefore, whilst the tax return was undeniably late, the Special Commissioner had no option but to set aside the penalty.

What Steeden did not cover

One of the arguments relied upon by Miss Steeden in her appeal was the original reason her accountant had been required to work up to (and beyond) the statutory filing date. Many practitioners will recognise the need to put in the extra hours in the final weeks of January in a bid to clear the returns and avoid penalties. However, Miss Steeden’s accountant was hampered by two additional factors. First, the tax return software, which had been ordered by the accountant in the summer of 1997, did not arrive until 23 December 1997 (less than six calendar weeks before the time limit) and training was not possible until the New Year. Secondly, a key member of staff was unexpectedly absent due to a serious illness.

It is possible that these factors in themselves would have represented a reasonable excuse for the late return. Therefore, supposing the return was delivered a week late, so that the Revenue’s practice in relation to 1 February could not have been relied upon, it is possible that Miss Steeden would still have escaped a penalty. However, the Special Commissioner made no ruling on the validity of such factors as a ‘reasonable excuse’ on the grounds that the appeal could be (and was) allowed on another basis.

Therefore, Steeden is authority only with respect to self assessment returns that are effectively one day late. There is no firm authority that determines what is a reasonable excuse for a return that is more than a day late.

Stockpiling returns

Many practitioners, particularly in the early days of self assessment, expressed concern that the enquiry window for self assessment returns closes one year after the statutory filing date, irrespective of whether the return is submitted on the day after the end of the tax year or nearly ten months later, on the statutory filing date. This means that a tax return filed early can be with the tax inspector for up to ten more months than a return filed on the following 31 January. Consequently, there was a perception (often denied by what is now HM Revenue and Customs) that tax returns filed early would risk an increased likelihood of selection for inquiry.

Despite these assurances, some practitioners did not wish to take the risk and many deliberately stockpiled completed returns until the last week of January. The argument often cited in support of this approach is that a taxpayer is statutorily entitled to file up to midnight on 31 January and therefore it is a perfectly acceptable tactic (legally, professionally and morally). Indeed, if an early return does increase the chances of an inquiry, then such an approach might even be considered professionally obligatory.

As yet, there has been no tax case that has considered this policy. However, in the context of employment law, the Employment Appeal Tribunal has recently dealt with a similar point.

Agrico UK Limited v Ireland (2005) EAT

Miss Ireland had been employed by Agrico UK Limited (Agrico) since 1999. She was dismissed on 14 June 2004 ostensibly on the grounds of redundancy. However, Miss Ireland claimed that her role had not become redundant and therefore alleged that her dismissal was unfair. Under the provisions of Employment Rights Act 1996 s 111(2), Miss Ireland’s claim for unfair dismissal had to be received by the Employment Tribunal:

(a) before the end of the period of three months beginning with the effective date of termination, or

(b) within such further period as the tribunal considers reasonable in a case where it is satisfied that it was not reasonably practicable for the complaint to be presented before the end of that period of three months.

In Miss Ireland’s case, the three-month time limit expired at midnight on 13 September 2004.
Miss Ireland’s trade union instructed a firm of solicitors to prosecute her claim. The firm, due to personnel constraints, had adopted a policy of leaving all cases until the last minute. Most of the claim form was prepared on 6 September, but certain information was outstanding. The solicitor then went on holiday but asked his secretary to obtain the outstanding details on Friday 10 September. She, however, fell ill, failed to collect this information on the Friday and was absent from the office on the following Monday. The secretary returned to the office on the Tuesday, obtained the information required and faxed the claim form to the Employment Tribunal later that day, several hours after the time limit had expired.

The Employment Tribunal then considered, as a preliminary issue, the question of whether or not the late claim should be admitted. The Chairman of the Tribunal concluded thus: ‘Each of these cases has its own facts and circumstances and I have not found it easy to decide on which side of the line those in this case should fall; but on balance I conclude that everything that one could regard as reasonably feasible was done and that the failure to present the complaint in time arose from the unfortunate and unforeseen event of the illness of [the solicitor’s] secretary. I therefore conclude that it was not reasonably practicable for the complaint to be presented within the period of three months.’

This conclusion was then challenged by Agrico UK Limited in the Employment Appeal Tribunal (the next tier for employment cases). Giving the judgment of the Appeal Tribunal, His Honour Judge Serota QC referred to a number of authorities. In particular, he noted that: ‘A competent solicitor practising in this field must be taken to appreciate the vital importance of complying with time limits strictly and having in place a system designed to ensure that such time limits are complied with at a time when they are supposed to be being complied with.’ (Camden and Islington Community Services NHS Trust v Kennedy [1996] IRLR 381)

In addition, Judge Serota quoted Lord Denning MR who had stated in Dedman v British Building & Engineering Appliances Ltd [1973] IRLR 379 that: ‘Summing up, I would suggest that in every case the Tribunal should inquire into the circumstances and ask themselves whether the [employee] or his advisers were at fault in allowing the [claim window] to pass by without presenting the complaint. ‘If he was not at fault, nor his advisers — so that he had just cause or excuse for not presenting his complaint within the [statutory period] — then it was ‘not practicable’ for him to present it within that time. The Court has then a discretion to allow it to be presented out of time, if it thinks it right to do so. ‘But, if he was at fault, or if his advisers were at fault, in allowing the four weeks to slip by, he must take the consequences. By exercising reasonable diligence, the complaint could and should have been presented in time.’ His Honour then applied the law to the case before the Appeal Tribunal and the approach taken by Miss Ireland’s firm.
He concluded: ‘We are satisfied that the Chairman misdirected himself in law by focusing exclusively on virtually the last minute of the three-month period and ignoring the earlier period.

He also failed to take account of the fact that if one deliberately leaves the filing of an application until the last day of the three-month period there are bound to be risks. A competent solicitor practising in the field must be taken to have appreciated the vital importance of complying with time limits strictly. Accordingly, if he were to show he had acted reasonably and without fault, he was bound to have in place a rather better system for ensuring that applications were issued within time when he was away from the office, than simply relying on his secretary to ensure that applications were properly issued.’

Looking at the facts, the Appeal Tribunal held that it was indeed reasonably practicable for Miss Ireland’s claim to have been made in time. Indeed, the claim was ready but for some outstanding details. These, but for the secretary’s illness, would have been obtained in time. What caused the claim to be late was the lack of a fail-safe system within the solicitor’s firm – not the impracticability of the three-month claim period. Consequently, the employer’s appeal succeeded.

The relevance of Agrico

Of course, there is no guarantee that a Court would apply the same logic in a different statutory context, especially as the statutory test is worded differently. Nevertheless, the Employment Appeal Tribunal is roughly of the same seniority as the High Court and therefore its comments should not be dismissed too lightly. In this context, Agrico provides a clear indication as to what constitutes reasonable practice by an adviser.

In Agrico, it was held that it was reasonably practicable for Miss Ireland’s claim to have been submitted within the statutory period (especially as she was professionally advised). It is not too large a step to extend that logic and apply it to cases where tax returns are stockpiled until the end of January, but inadvertently submitted in early February (perhaps due to unexpected absences or perhaps mechanical or electronic breakdowns). It would not be pushing the Agrico decision too far to suggest that a return that could have been sent to HMRC in December (say) lacks a reasonable excuse if, due to being stockpiled and then subjected to an unintended delay, it does not reach the tax office until the following February.

My own view, however, is that the two situations can be distinguished. In particular, the Employment Rights Act considers the practicability of a timely claim (ie within the statutory claim period) whereas TMA 1970 focuses on the period of default. Nevertheless, there are bound to be some cases where the two tests overlap. In the light of this, practitioners will want to ensure that they can always defend the approach they take as reasonable.

December 2005

Keith Gordon

Keith Gordon is a barrister, chartered accountant and tax adviser.