Reasonable excuse cases continue to be found in favour of taxpayers, casting further doubt on HMRC’s internal policy regarding Reasonable Excuse (see our earlier post – ‘Death, disease or disaster’).
The trend continued in the P35 case of Eclipse Generic Ltd v HMRC. The taxpayer claimed to have submitted their P35 online in April 2011 and stated they had received a confirmation from HMRC.
In August 2011, the taxpayer discovered that HMRC had not received this document and were levied with a late filing penalty on submitting the return in August.
The tribunal found that it was not possible for HMRC to accept a document twice, and as such it was a fact that the original return had not been received by HMRC. However, they also found that due to system updates taking place at the time of the original submission it was possible there had been a fault, with the taxpayer incorrectly receiving an acknowledgment.
The tribunal were unable to quash the penalty on the grounds of fairness but stated that the circumstances meant that the taxpayer did have a reasonable excuse, and allowed their appeal.
It is interesting that the taxpayer had to take such a case to tribunal where it was found that the fault lay with HMRC’s system. However, it does show the continued importance of challenging HMRC penalties and interpretation where a genuine excuse exists.
HMRC have successfully appealed against the decision of the first tier tribunal in the case of Hok Ltd v HMRC.
In the original case (see our blog http://wp.me/p2JyHb-7i), Hok Ltd claimed that HMRC’s practice of delaying sending out penalty notices for the late submission of form P35 (PAYE end of year return) by 4 months was unfair as they had already built up penalties of £500 before they knew they had to submit the return.
Following the decision in Hok Ltd and a number of similar cases being found against them, HMRC changed their practice such that employers will now receive earlier correspondence regarding the late submission and penalties.
The upper tier tribunal found that the first tier tribunal erred in its judgement on the basis that the company (Hok Ltd) did not deny that the return was late nor attempt to argue that they had a reasonable excuse, as such the first tier tribunal did not have the jurisdiction to mitigate the penalty.
The upper tier tribunal considered that the first tier tribunal has no statutory power discharge or adjust a penalty because of a perception that it is unfair. Thus in the absence of a statutory route of appeal, the only option available to the taxpayer is to seek a judicial review.
On 27 September 2010 a charity organisation was issued with a £400 late filing penalty in reference to its PAYE P35 for 2009/10 which was due on the 19 May 2010.
However the penalty charge was issued when the return was 5 months late and the taxpayer was not notified at any time before.
The taxpayer’s accountant requested a review of the penalty as he believed he had filed the P35 online on 16 May 2010.
The tribunal stated that it was not legally correct to state that, once an assessment or charge had been raised by HMRC, the onus is on the taxpayer to prove it is incorrect.
Consequently, it was for HMRC to prove – on the balance of probabilities – that the P35 had not been filed by 19 May 2010 and a penalty was due.
The tribunal went on to state that TMA 1970 s118 did not define reasonable excuse in a way that required exceptional circumstances and it should therefore be given its ordinary meaning.
The accountant honestly believed he had submitted the return on time. The tribunal found him to be an honest and candid witness and counsel for HMRC were forced to agree that this might amount to reasonable excuse even though it was not exceptional.
The tribunal also stated there was no logical reason for the delay in sending out the penalty notices for four months.
The tribunal upheld the appeal against the penalty in full, adding that HMRC had ‘neither acted fairly nor in good conscience’.
This case has a wide-ranging impact on excuses for late filing of returns.
The tribunal ruling goes directly against HMRC’s longstanding view and published guidance that reasonable excuse equates to exceptional circumstances outside the taxpayer’s control.
The tribunal’s view was that reasonable excuse should be given its ordinary meaning.