‘Reasonable excuse’ is a term which regularly appears in indirect tax legislation, but has only recently received much attention in relation to direct tax matters.
Where ‘reasonable excuse’ is established, penalties are withdrawn or not charged, however, there is no definition of ‘reasonable excuse’ in the legislation.
Some cases recently heard by the tribunals have concerned HMRC’s insistence that ‘reasonable excuse must involve an exceptional event beyond the control of the taxpayer,’ which appears to have no basis in law.
Penalties usually relate to late filing of a tax return or late payment of tax. Section 71(1) VAT Act 1994 states:
‘For the purpose of sections 59 to 70 which refers to a reasonable excuse for any conduct –
(a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and
(b) where reliance is placed upon any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse…’
HMRC have always refused to accept as a reasonable excuse:
- ignorance of the law
- oversight or misunderstanding
- preoccupation with work
- inexperience of business affairs
- no intention to escape payment of tax.
There is no definition of ‘reasonable excuse’ in the legislation, so the recent First-Tier Tribunal cases are of particular interest.
- HMRC failed to issue a notice of cancellation of gross payment for CIS Scheme
- late payment of tax was due to insufficiency of funds. This is not normally a ‘reasonable excuse’, but was caused by HMRC having cancelled gross payment status on an earlier occasion, which had been subsequently overturned on appeal
- ten failures to comply had been put forward as grounds for cancellation of the gross payment scheme. HMRC admitted that eight were their fault and one was allowed as a ‘reasonable excuse’. HMRC had failed to exercise their discretion as required by the law. Indeed they appear to consider that they must apply penalties
- a taxpayer had heard from the media that the Government had announced that firms suffering difficulties would be able to spread their payment on a timetable they could afford. He was not computer-literate and therefore did not visit HMRC’s website and did not realise that this must be agreed in advance. The tribunal accepted that taxpayers do have their limitations and that this was a misunderstanding
- the directors of a company had received incorrect advice that they did not have to file a return and could ignore filing penalties because they did not have any income. The directors tried dealing with HMRC who sent replacement returns to the wrong address. This is interesting, since HMRC will not accept reliance on a third party as a reasonable excuse, but does reflect the fact that taxpayers can be vulnerable to incorrect advice.
- the majority of tax related to the sale of a partnership and LLP and the consequent capital gain. The taxpayer decided to pay the income tax immediately and pay the capital gains tax by instalments. He agreed a plan of ten monthly instalments which was confirmed by HMRC, but did not realise that HMRC did not have details of his bank account. He had contacted HMRC and told them that payments were not being collected. The tribunal has no power to mitigate a penalty, but decided that the taxpayer’s actions had been reasonable and quashed the penalty.
- an American was paid removal expenses by his company, but failed to show the excess over £8,000. When he filed the return, he had not received his P11D and HMRC were aware of this. He had relied upon his accountants to prepare the return and did not know that, unlike American tax, UK tax is charged on removal expenses to the extent that they exceed £8,000. HMRC’s compliance handbook states that ‘a person who goes to an apparently competent professional adviser, gives the adviser a full and accurate set of facts, checks the adviser’s work or advice to the best of their ability and competence and adopts it, will have taken reasonable care to avoid inaccuracy.’ Despite this, his appeal was rejected
- a taxpayer submitted an appeal against 243 penalties imposed for late filing of 31 monthly CIS returns. His marriage had broken down and he had been locked out of his house, from which he ran his business. Despite claiming ill health, he had been able to continue running his business. The appeal was dismissed
- a late filing penalty of a self assessment return was the subject of another appeal. The taxpayer felt that he had a reasonable excuse as he was on sick leave, having had a mild stroke. He had recently been through a divorce and was supporting two daughters. His appeal was rejected
CIS returns were submitted late and penalties imposed. The taxpayer had appointed new agents, who submitted paper returns; the previous agent had submitted returns online. Penalty notices were issued, but some time later the agents wrote to HMRC. Meanwhile, HMRC wrote to the taxpayer, enclosing a 64-8. The agents stated that the form was ‘re-completed’ and sent on 4 June, but as the form was enclosed with HMRC’s letter dated 4 June, the tribunal was not convinced that this was the case. The appeal was dismissed as they could find no evidence that the taxpayer’s returns had been submitted prior to 29 June. This illustrates that proof of posting is important.