Penalties – Excuses, Excuses!

Mark McLaughlin looks at the ‘reasonable excuse’ exception from certain types of penalty for taxpayer compliance failures.

 

Taxpayers who fail to comply with their tax compliance obligations are generally liable to penalties. However, what if the compliance failure was due to circumstances beyond the taxpayer’s control?

 

Fortunately, there is an exception from certain penalties if the taxpayer has a ‘reasonable excuse’ for the offence. This reasonable excuse exception potentially applies to various penalties for non-compliance, including the late filing of tax returns (FA 2009, Sch 55), late payment of tax (FA 2009, Sch 56), failure to notify liability to tax (FA 2008, Sch 41) and failure to comply with an HMRC information notice (FA 2008, Sch 36). 

 

This article focuses on reasonable excuse in the context of late tax returns and the late payment of tax.

 

The penalty provisions for late tax returns do not define what constitutes a reasonable excuse. This has resulted in the meaning of ‘reasonable excuse’ being considered in various tax cases (e.g. Rowland v Revenue & Customs Commissioners [2006] SSCD 536 and N A Dudley Electrical Contractors v Revenue & Customs Commissioners [2011] UKFTT 260 (TC)) 

 

Instead of defining ‘reasonable excuse’ in positive terms, the legislation states two circumstances in which a reasonable excuse does not exist (FA 2009, Sch 55, para 23) (nb the reasonable excuse provisions for late payment of tax mirror those for late tax returns (FA 2009, Sch 56, para 16)):  

 

(a) An insufficiency of funds – This does not constitute a reasonable excuse unless it is attributable to events outside the person’s control. For example, an individual who does not file his tax return because he has severe cash flow problems and knows that there is a large tax liability does not have a reasonable excuse for not filing his tax return, as it should have been filed on time even if he was unable to pay the tax (CH61620).

 

On the other hand, a shortage of funds which could not have been reasonably foreseen and which left the taxpayer with insufficient time to arrange additional funding may be regarded by HMRC as a reasonable excuse for failing to pay tax on time, on the basis that it was attributable to events outside the taxpayer’s control (CH155800).

 

(b) Reliance on another person - Where a person (A) relies on another person (B), there is no reasonable excuse unless A took reasonable care to avoid the compliance failure (e.g. a late tax return). This ‘reasonable care’ condition means that HMRC will probably want to know what steps were taken by A to ensure that the return was filed on time. HMRC's guidance includes an example (at CH155850) in which a taxpayer’s reliance on her accountant to submit her VAT return and payment constituted a reasonable excuse in the circumstances.

 

If a reasonable excuse existed but has ceased, the person is treated as continuing to have the excuse if the compliance failure is remedied (e.g. the late return is filed, or the outstanding tax is paid) without unreasonable delay after the excuse ended. Unfortunately, there is no definition of ‘unreasonable delay’ for these purposes, so HMRC officers will judge each case based on the person's abilities and circumstances (CH61660). HMRC guidance gives examples of ‘unreasonable delay’ and ‘no unreasonable delay’ following the death of a family member (CH155900).

 

The late tax return filer or late tax payer must satisfy HMRC that there is a reasonable excuse for the failure, or alternatively must satisfy the First-tier Tribunal or Upper Tribunal on appeal as to the reasonable excuse. If HMRC does not accept that an excuse is ‘reasonable’ and an appeal has been made, the person is entitled to a statutory review of that decision by another HMRC officer.    

 

Tax returns or tax payments may be late for a number of legitimate reasons. However, many excuses given by taxpayers to HMRC have not fallen into this category.

 

HMRC has listed the following ten ‘terrible excuses’ for missing the 31 January tax return deadline, which were all used in unsuccessful appeals against HMRC penalties for late filing and payment: 

 

• ‘My pet dog ate my tax return…and all the reminders.
• I was up a mountain in Wales, and couldn’t find a postbox or get an internet signal.
• I fell in with the wrong crowd.
• I’ve been travelling the world, trying to escape from a foreign intelligence agency.
• Barack Obama is in charge of my finances.
• I’ve been busy looking after a flock of escaped parrots and some fox cubs.
• A work colleague borrowed my tax return, to photocopy it, and didn’t give it back.
• I live in a camper van in a supermarket car park.
• My girlfriend’s pregnant.
• I was in Australia.’

The ‘reasonable excuse’ exception from penalties is clearly a higher hurdle for many taxpayers may think, and needs to be taken seriously.

 

There is detailed guidance in HMRC's Compliance Handbook manual on reasonable excuse in the context of late tax returns (at CH61500 and following) and late tax payments (at CH155500 and following). However, it should be borne in mind that HMRC's guidance does not carry the force of law.

 

The onus is on late tax return filers to satisfy HMRC that they had a reasonable excuse at the time of the failure. In the absence of a statutory definition of ‘reasonable excuse’, HMRC will consider all the circumstances of the particular case. HMRC states that a reasonable excuse does not apply if the failure to submit a tax return on time was deliberate (CH61520).

 

What is ‘reasonable’ in HMRC's view will differ from person to person, depending on their particular circumstances and abilities. A reasonable excuse in one person’s circumstances may not be a reasonable excuse for another person in different circumstances.

 

A reasonable excuse from HMRC's perspective normally arises from one or more unexpected or unusual events that could not be reasonably foreseen or is beyond the person’s control, and which prevents a person from complying with an obligation to file on time. The standard required by HMRC is that of “a prudent person, exercising reasonable foresight and due diligence, having proper regard for their responsibilities under the tax acts” (CH61540). 

 

Aside from the two statutory exceptions to an excuse being reasonable as mentioned above (i.e. shortage of funds and reliance on another person), examples given by HMRC of what might constitute a reasonable excuse include:

 

• Bereavement – The death of a close relative or domestic partner around the time when the person should have filed the return or paid the tax.
• Serious illness - This can be the serious illness of the taxpayer or a close relative or domestic partner around the time when the return should have been submitted or the tax payment should have been made.
• Unforeseen events - These can include the tax return or payment being lost in the post (e.g. due to fire or flood at the sorting office) or delayed (e.g. due to industrial action) (CH61560; CH155650).

 

Examples of what does not constitute a reasonable excuse on their own in HMRC’s view include:

 

• Complexity (in the case of tax returns) - The return was too difficult to complete; 
• Pressure of work; 
• Lack of information; 
• No reminders from HMRC; and 
• Ignorance of basic law (CH61600; 155750). 

 

In borderline cases, when presented with taxpayer excuses HMRC officers must exercise their judgment based on the particular circumstances. Taxpayers (or their advisers) should therefore present their case as best they can, supported by documentary evidence if possible. 

 

Numerous tax cases have considered whether a reasonable excuse existed for late tax returns and late tax payments. The following is a selection of recent cases:

 

 

• The ill-health of an agent was a reasonable excuse in relation to a late filing penalty (Collins v Revenue & Customs [2014] UKFTT 479 (TC)).
• A contractor’s failure to make monthly construction industry scheme returns in reliance on proper advice from his accountants was a reasonable excuse (Laithwaite v Revenue & Customs [2014] UKFTT 759 (TC)). 
• A taxpayer whose self-assessment return was late when his agent had to wait for an agent authorisation code from HMRC to file the return online did not have a reasonable excuse for its late filing (Hegedus v Revenue & Customs [2014] UKFTT 1049 (TC)).
• A contractor’s belief that all construction industry scheme returns had been filed by his accountant and reliance on a third party did not provide a reasonable excuse for the late filing of the returns (Turner v Revenue & Customs [2014] UKFTT 1124 (TC)).

 

• A partnership had a reasonable excuse in respect of penalties for a late tax return after HMRC sent the original filed return to the partnership to correct an error, and not to the agent who prepared it (Peter Haigh Partnership v Revenue & Customs [2014] UKFTT 796 (TC)).
• Incorrect completion of a paper stamp duty land tax return by the taxpayers’ solicitor, resulting in HMRC sending the return back for correction, was not a reasonable excuse against a late filing penalty in respect of the resubmitted return (Heler & Anor v Revenue & Customs [2014] UKFTT 1002 (TC)).

 

• A taxpayer who was diagnosed with a terminal illness did not have a reasonable excuse for the late payment of tax (Roper v Revenue & Customs [2014] UKFTT 736 (TC))
• An unforeseen change in personal circumstances beyond the taxpayer’s control was a reasonable excuse for his late payment of tax (Cooke v Revenue & Customs [2014] UKFTT 506 (TC)).
• Cash flow difficulties caused by the unexpected loss of a major client contract and a change of banking arrangements was a reasonable excuse for the late payment of PAYE (PSC Photography v Revenue & Customs [2014] UKFTT 926 (TC)).

 

In Perrin v Revenue & Customs [2014] UKFTT 488 (TC), the First-tier Tribunal, in considering late filing and late payment penalties, considered case law on the meaning of ‘reasonable excuse’, and rejected the view expressed by some tribunals that a genuine belief is sufficient for there to be a reasonable excuse. However, the tribunal also rejected HMRC's submissions on reasonable excuse, and criticised one of them (i.e. that a reasonable excuse is ‘an unexpected or unusual event’) on the basis that it had resulted in cases that could have been avoided. This was ‘a waste of time and resources, as well as causing unnecessary stress to taxpayers.’

 

Taxpayers (and agents) who believe that they have a genuine reasonable excuse for the late filing of the tax return or the late payment of tax should not be afraid to appeal to the tribunal if HMRC does not agree, and even if HMRC’s non-statutory guidance suggests otherwise.