Of 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.
We are confident though we can help on more reasonable arguments and are always interested to hear of practitioners experience in this area.
Like any large organisation, HMRC sometimes acts in a way that can make individuals, who may be challenged by this monolith feel intimidated. Fortunately, there are general rights of appeal. Recent cases have shown that these rights are useful in ensuring HMRC do not overstep the mark and abuse their powers.
In M. Miron, it was held that the taxpayer’s accountants were at fault in not following a fairly simple procedure. However, that did not excuse the ‘terrible muddle’ that the taxpayer ended up in. The fact that HMRC was a large organisation could not justify a situation where one hand did not know what the other was doing. “The whole purpose of maintaining a file was to ensure knowledge is disseminated across an organisation”. Thus the taxpayer had a ‘reasonable excuse’ in not filing her appeal in a more timely manner.
Similarly, in M. Capuano the ‘staggeringly bad’ service provided by HMRC generally, contributed towards the taxpayer having a ‘reasonable excuse’ for late filing.
M. Beardwood was also held to have had reasonable excuse for late filing. Indeed the First Tier Tribunal said it was ‘difficult to see what more the appellant could have done’. They considered HMRC had wasted everyone’s time in bringing a case which had very little merit on the side.
This contrasted with R. Popat, where the taxpayer (who again won) was allowed an appeal where he wished to postpone payment of tax assessed on an assessment. The taxpayer only had a low hurdle to overcome to get tax postponed, pending settlement of the relevant appeal. The purpose of the postponement hearing was not to settle the appeal finally on its merits, but to allow tax collection to be postponed pending a full rehearsal of all the relevant facts.
For advice on HMRC powers and penalties please contact either Paul Eaves or David Stebbings.
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.
The Dog Ate My [Homework] Tax Return
There has been much publicity recently regarding the funny [!?] HMRC Press Release regarding failed excuses for failing to file Tax Returns on time. Generally, the ‘joke’ seems to be that they are such poor excuses that they are on a par, or even worse claims that ‘The Dog Ate My Tax Return’. This shows the poor standard of education and lack of discipline in our schools. Anyone who has failed with that excuse at school should have at least graduated to ‘A Crocodile Ate My Tax Return’ with an invitation to the Tax Officer to go and retrieve it(!).
No doubt HMRC have much to put up with, and lousy excuses will inevitably test their patience. However, they are Civil servants who should be courteous and sympathetic to all tax payers – not just those they like because of them being ‘compliant’. With this in mind, I refer to the cases of P. Miller and Coomber. Case law shows HMRC are not always correct in their views on penalties. Advisors should always consider whether a penalty being charged is correct, proportional, or could even be suspended.
In the recent case of P. Miller the Courts held that HMRC were wrong in dismissing an application for a penalty to be suspended. The Judge followed the case of Hackett in focussing on the general obligations for all tax payers (rather than the narrow, specific facts of the tax payer’s own mistake) in deciding that there were sensible suspension conditions which could encourage him to avoid a future careless mistake. Thus the immediate imposition of a penalty liability could be avoided. No doubt good news for the tax payer.
HMRC had more success in the case of Coomber, where the Judge rejected a suggestion that a tax payer had a reasonable excuse for late payment when the tax cheque he had written was unexpectedly dishonoured by his bank. Reading the case in detail, it appears to be an object lesson in presenting all relevant evidence and ensuring it is correct in detail. Quoting from Clean Car Co Ltd, the Judge said, ‘The test of whether or not there is a reasonable excuse is an objective one … Was what the tax payer did a reasonable thing for a responsible trader, conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the tax payer, and placed in the situation the taxpayer found himself at the relevant time a reasonable thing to do?’
From the Judge’s comments it may have proved better for the tax payer if he had produced evidence of why the bank dishonoured the cheque (any why it was unexpected) plus better documentary evidence as to the precise dates of events. It is plain details can affect the Judge’s view as to the strength of a case. In this new era of quasi-automatic penalties advisors need to be on alert for sensible mitigating circumstances. Reasonable excuses do go beyond ‘Disaster, death and disease’, to quote the HMRC general view, but throw the excuse ‘A Crocodile Ate My Tax Return’ on the fire!
What are advisors current experiences of penalties and mitigation?
Two recent tax cases heard by the First-Tier Tribunal show that the courts continue to interpret the phrase “reasonable excuse” more generously that HMRC internal guidance allows for.
In S Taylor, a taxpayer was somewhat surprisingly found to have a reasonable excuse as he had appointed an agent and relied upon them to deal with the self-assessment form. HMRC guidance is explicit that relying on a third-party is not a reasonable excuse, however, the Tribunal felt this to be incorrect in these specific circumstances.
The taxpayer delivered his papers to the agent in sufficient time but the agent had been busier than usual and had missed the taxpayer’s return. The agent had not told the taxpayer this, and the Tribunal therefore felt that he had taken reasonable steps to file on time.
Another case showed a partial success for the taxpayer in Perfect Permit Ltd t/a Lofthouse Hill Gold Club. HMRC had levied penalties in relation to late employer annual returns for 2008/09 and 2009/10. The 2008/09 return was submitted more than a year late, whilst the 2009/10 return was filed 47 days late by the taxpayer’s new agent.
The Tribunal found that the failure of the previous agent to submit their returns did not constitute a reasonable excuse and it was up to the company to seek redress from the previous agent. However, the new agents had encountered difficulty registered with HMRC. The tribunal agreed that, had HMRC registered the new agents promptly, the return for 2009/10 would have been submitted on time. As such, the delays caused by HMRC did constitute a reasonable excuse.
We would suggest that taxpayers seek advice where they feel that HMRC are being unreasonable with regard to reasonable excuse claims. Eaves and Co would be delighted to help and would love to hear from you.
Recent tax case law has brought out some interesting points on how the Courts view operational issues.
1. Tax avoidance schemes associated with the film industry seem to follow inevitably (with various complications) from the complex tax reliefs which are designed to promote film finance. It seems to lead to a slightly odd dichotomy where the Chancellor sets law to give relief on film investment and is then surprised and upset when schemes are set up to exploit the reliefs. In Samarkand the tax avoidance scheme failed, partly because the Courts found emails which included phrases such as ‘Don’t mention this, it smells of pre-ordained’. This reinforced HMRC’s case that the scheme was not a straightforward use of the relief, but an artificial tax avoidance scheme, with no real commercial substance. A good rule of thumb would be to train staff not to put anything on file which they would be embarrassed to read out in court.
2. An interesting one in terms of postal submissions is the recent case of O’Keeffe. The taxpayer claimed his wife had posted his Return some weeks before the deadline. HMRC said they had not received it until a month after the deadline. They succeeded with their imposition of a late filing penalty.
Whilst the First Tier Tribunal agreed that mail may go astray, which could be a reasonable excuse, there was no proof of postage in this case. It would be interesting to hear what evidence HMRC put forward in terms of date of receipt, as mail does seem to go astray more often than it used to and with the closure of so many Post Offices obtaining routine proof of postage would be difficult for many.
3. Final procedural point – and statement of the obvious – encourage clients to keep proper records. The lack of a clear trail of what was owing led to the taxpayer in Michiels losing a bad debt relief claim against profit, because on balance the outstanding sums related to a later period.
HMRC have released a list of the 10 worst excuses for missing the 31 January tax return deadline, however there are a number of cases where HMRC’s limited definition for what constitutes a reasonable excuse has been exposed.
The list of excuses published by HMRC is as follows:
- 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.
Whilst these excuses are clearly unreasonable, recent cases have shown that HMRC continue to pursue their internal line that only ‘death, disease or disaster’ would constitute a reasonable excuse. However, the legislation itself simply states that the excuse must be reasonable. Recent cases have included excuses such as inability to pay (T James V HMRC), HMRC communication failure (M Styles v HMRC), HMRC system failures (Eclipse Generic Ltd v HMRC) and in the case of Spink v HMRC (2014), it was found that it was reasonable for a taxpayer to assume that tax was not payable until the actual tax status had been established.
Each case should be determined on its own facts and we believe HMRC are continuing to refuse reasonable excuse claims in circumstances that are “reasonable” under case law.
Following a prison sentence for benefit and mortgage fraud, a taxpayer in a recent case (Mr Tee v HMRC), was issued a notice by HMRC under FA 2008, Sch 36 requiring him to provide details of payments to workers and his own income as a financial advisor.
On failing to respond to the notice, he was issued with a penalty which he appeal, claiming that he had not traded as a financial advisor and that HMRC had already accepted that tax returns were not due for 2009/10 and 2010/11. At the Tribunal, he also claimed that he had not responded as the police still had his documentation.
The Tribunal agreed with the steps taken by HMRC, but found that the actual notice issued was too vague in terms of the information required, as well as being unspecific with regard to the time period in question. It was therefore very likely that the taxpayer would have a reasonable excuse for not complying.
They determined that the taxpayer’s appeal should be allowed, and HMRC should then make a fresh start on their proceedings.
Tax unattended to is a recipe for disaster. Peter Figg vs Commissioners for HMRC presents a sorry tale of taxpayer woe!
- Mr Figg was promised a new job with a tax free removal package offered by his employer as an incentive.
- He started his new job and immediately found it did not meet his expectations. He complained, and after some time agreement was reached that the role was not really what had been promised, so it was agreed he should leave.
- He received a tax free lump sum (which was accepted as tax free compensation for loss of office by HMRC) but his employer put the cost of temporary living accommodation (paid in the interim whilst he was working for them) on his P11D. This was against the original agreement in the job offer.
- Mr Figg realised he had to file an online tax return in January (before the 31st deadline) but did not receive the relevant access code from HMRC until after the filing deadline. Like many people who have sought to represent themselves before courts in the past, Mr Figg found himself on the losing side.
- Whilst the courts found that the delay in filing may have been a ‘reasonable excuse’ it held it was not in this particular case, because the taxpayer did not act promptly when HMRC did send him the delayed access code. Filing actually took place the following January . No explanation was offered for the continuing delay. Once the original excuse (no valid access code) ceased to be operative, the taxpayer had an obligation to file without further delay.
- The courts also found that, whilst the temporary accommodation expenses could have been tax free if associated with a permanent move of home to get a new job, Mr Figg did not actually move permanently. He resigned and entered into a compromise agreement without making a permanent move. Hence the statutory rules for tax free moving expenses were not met.
Like many tax stories ‘the Devil is in the Detail’. The best course of action is not to leave tax matters unattended to.
The saga of HM Revenue and Customs seeking penalties at the slightest provocation continues, as a recent case on reasonable excuse demonstrates.
In Spink  a taxpayer:
- Received advice from the Department of Work and Pensions about receipt of a pension lump sum which they described as having had tax deducted.
- The taxpayer included it on her tax return on the basis that tax had already been paid.
- HMRC said that they had to check with DWP about the tax status. This took some months, with HMRC finally telling the taxpayer on 14 August 2013 that they had now been informed by DWP that no tax had been deducted. On the same date DWP told the taxpayer this conclusion was reached because they no longer had the relevant documentation, because the papers had been destroyed apart from a ‘note on file’.
- The taxpayer, on returning from holiday paid he tax due in full on 3 September 2013.
- HMRC sought to levy a 10% penalty for ‘late filing’ and took the case to Tribunal because they did not feel the taxpayer had a ‘reasonable excuse’.
Fortunately for the taxpayer, the judge accepted it was ‘reasonable’ for the taxpayer to believe the tax was not payable until the actual tax status had been established. Therefore the penalty was discharged.
The mind boggling thing about the case is that HMRC felt it worth putting the taxpayer through the stress of a Tribunal hearing (with all the taxpayers’ resources that such a step will have cost on their side too) despite the fact that the bulk of the delay was down to a fellow Government Department.
Logically, it suggests they believed the taxpayer’s behaviour was ‘unreasonable’ and a 10% fine was proportionate to satisfy the expectations of the compliant majority. Personally, my view, as part of the compliant majority, would be that HMRC’s grasp for penalties represented an unfair and unreasonable impost. It does not seem to be behaviour which is either civil, nor, when combined with the DWP role in the matter, to be providing an appropriate level of service. Ms Spink won, after fighting. However, how many other taxpayers have been bullied into agreement, through pressure and lack of professional advice?