Is Ignorance of the Law a Reasonable Excuse?

eaves and co lawOf course, all first year law students will bellow ‘No’ to what has long been thought a standard legal principle. However, in today’s complex, highly regulated society a strand of case law is emerging which suggests that in certain circumstances a lack of knowledge of the detail of the law can be a reasonable excuse, thus preventing a penalty from being levied.

The recent First Tier Tribunal hearing in respect of A and R Bradshaw is a case in point. The taxpayers lived in the UK for many years before emigrating to Canada. Their former marital home was put on the market, with the sale going through after the couple had left the country. No capital gains tax was due, because the property had qualified as their principal private residence.

However, HMRC sought to impose a late filing penalty, because strictly a return should have been made under the Non Resident Capital Gains Tax Regime (NRCGT). The judge in giving his verdict acknowledged that a return should have been made under the law. He did dismiss he HMRC penalty demand though. The judge said that the rules were new and had not been well publicised despite marketing a significant departure from previous, well established tax policy in imposing CGT on non-residents. He also noted the new legislation demanded a novel and onerous reporting deadline of only 30 days after the disposal.

This may be very tight especially if a complex capital gains tax computation was required or information needed to be garnered from earlier years. Citing the cases of Perrin v CRC, McGreevy and Scowcroft the judge accepted that in this case ignorance of the law amounted to a reasonable excuse.

It is pleasing to see the Courts accepting that in the real world of unfortunate circumstances and human foibles that ‘reasonable excuse’ can go beyond the trite triple of ‘disease, disaster and death’ Taxpayers and their advisors should therefore look at the whole picture and consider mitigating factors before accepting an HMRC demand for penalties.

Of course, certain excuses are unlikely to succeed. Crafting an argument around ‘The Dog Ate My Tax Return’ would I suggest remain doomed to fail.

eaves and co dog

We are confident though we can help on more reasonable arguments and are always interested to hear of practitioners experience in this area.

Non-resident penalty appeal allowed

In a recent First-Tier Tax Tribunal case, a non-resident’s appeal for reasonable excuse in relation to late filing penalties was denied, however, interestingly the Tribunal still decided to waive the penalties.

The appellant in A Newton v HMRC was resident in France and filed his 2012/13 tax return late.  He appealed against the higher later filing penalties on the basis that as he was living in France, he had not seen any advertising in relation to the new penalties.

We recently wrote about another case involving a non-resident appealing on similar principles, in relation to the introduction of the Non-Resident Capital Gains Tax (NRCGT) returns.  In that case the appeal was allowed because it was felt to be unreasonable to expect the taxpayer to have found the new rules independently.

However, the tribunal in this case did not feel the same principle would apply.  In this case, the taxpayer would have received documents showing the new penalty levels (for example on the notice to file) and the Tribunal therefore felt that, “a person reasonably trying to meet their tax return filing responsibilities would have realised from reading any of these documents that the penalties had changed”.

However the tribunal judge did overturn the penalties on the basis that the individual did not have a UK tax liability at all and stated that, “he would not have met the “SA criteria” that HMRC use, and he would not have had any obligation to notify chargeability under s 7 Taxes Management Act 1970”.  He was therefore, in the judge’s opinion, not legally obliged to complete the UK return.  The penalties were therefore reduced to nil.