CPAA Insight: Taxpayers, late payments and NatWest's IT

Steve Willis looks at how recent IT problems could increase late payment penalties

IN THE WAKE of NatWest’s IT collapse comes the likelihood of a wave of late payment penalty charges from HMRC. 

Taxpayers on direct debit or standing order arrangements could find that their non payment has triggered an automatic penalty. (HMRC’s IT never seems to fail in this function). 

You might think that with all the publicity surrounding the debacle that no HMRC staff member would issue a penalty with such an obvious ‘reasonable excuse’ for late payment but it is unlikely that a staff member would be involved. 

The penalties would be sent automatically by the computer. The taxpayer is then faced with the appeals procedures and months of uncertainty whilst trying to get the penalty cancelled under the ‘reasonable excuse’ provision. 

It is at this point that the difference between the ordinary everyday meaning of ‘reasonable excuse’ and that applied by HMRC becomes apparent.

Relevant cases

Help is at hand in the form of recorded past judgments of The First-tier Tribunals in which many of the submitted excuses turned down by HMRC have been accepted on appeal. 

In Walton Kiddiwinks Private Day Nursery (TC1326) Judge Geraint Jones QC ruled that;

1.     following a judgement in which a European Court of Justice decision established that, article 6 of the European Convention on Human Rights to penalties and surcharges, was a criminal rather than a civil nature and therefore the burden of proof in establishing that a return was filed late, rests with the accuser [HMRC]. Jusilla v Finland

2.     “... a Common Law Duty of fairness applied to the state and its organs.
The judge said that it was unfair for HMRC to deliberately send penalty notices late knowing that their lateness would incur higher penalties. Not to issue reminders promptly was ‘unfair and unconscionable’. Hok Ltd (TC1286)

3.     “... it is not open to HMRC to take advantage of its own default [in not sending out reminders] in sending a timeous default notice to a taxpayer.” NA Dudley Electrical Contractors (TC1124).

4.     liability to a penalty under TMA 1970 s98(2)(a) for failing to make a return on time does not mean that a penalty is mandatory – it is an option for HMRC to consider, subject to any circumstances that may qualify as a reasonable excuse. HMRC has discretion to waive or reduce a penalty based on the taxpayer having a reasonable excuse.

5.     HMRC’s interpretation of the words ‘reasonable excuse’ to mean ‘exceptional circumstances beyond a taxpayer’s control’ was wrong.
The ‘ordinary and natural’ meaning of the words should be applied.

6.     “... an assertion or allegation unsubstantiated by evidence, was not ‘self proving”. Not only must HMRC provide evidence of a late submission but in the absence of such evidence they can not assume or assert that a lack of it proves their case.

There can be no liability for a penalty if the taxpayer has a ‘reasonable excuse’. FA2009 Sch.56 para 16, and a penalty can be reduced if the taxpayer cites special circumstances beyond his control Sch.56 para 9. 
Some examples of ‘reasonable excuses’ include;

a.     Incorrect agent advice
A taxpayer claimed that he had relied upon the advice of his accountant regarding a filing date deadline. The advice proved to be incorrect. The reasonable excuse was allowed. Rowland v HMRC(SPC548/06)

b.     Incorrect or absence of information on a tax return, website, or advice from call centre was a reasonable excuse. Adrian Waddington (TC00425)

c.     State of mind – genuinely believing that something would happen i.e. that money would become available or that someone else would fulfil the necessary compliance – was a reasonable excuse. E.g.

                                      i.        Late postal delivery. MEM Industrial roofing Ltd.

                                     ii.        Insufficient funds to cover a payment.  Stone Manor Hotels Ltd

                                    iii.        Taxpayer thought or expected that someone else would deal with the payment or return. Anthony Leachman trading as Whiteley and Leachman

Avoid penalties

A penalty can be avoided or mitigated if the taxpayer explains to HMRC his or her inability to pay a demand and offers and keeps to a schedule of future payments on account.  This demonstrates constructive reaction deserving of mitigated penalties.

Agents should note from the cases cited above; in Rowland v HMRC where ‘acting on the incorrect advice from the taxpayer’s accountant’ was accepted as a reasonable excuse for a late filing penalty. 

This illustrates the need for accountants to keep up to date with current filing dates and to regularly review handling procedures and to make sure their indemnity insurance is paid up to date! 

The Leachman case emphasises the need for an up to date and accurately worded client engagement letter to make sure that it clearly spells out who will do what and when and by what dates the client must submit information and documents that the accountant is to act upon. 

The engagement letter may prove to be the accountant’s only salvation in a negligence suit.  

And finally to end on a happy note - the PAYE in year monthly late payment penalty regime is such that the first late payment is free from penalty, the 2nd, 3rd and 4th are charged at a fixed 1% of the payment value paid late. 

The penalty is calculated and issued after the year end. A further 5% is charged if a payment is made later than six months after its due date. 

Any taxpayer paying punitive overdraft rates might find the 1% charge over six months positively helpful.

Note

This article appeared in the August 2012 edition of Practising Accountant. The above cases are taken from a new tax guide, Successful Excuses in Defence against Penalties. The guide covers 34 cases and 23 successful ‘excuses’ previously denied by HMRC. Price £19.95 and comes to CPA members with a free updated and editable Accountant’s Engagement Letter sent as an email attachment.

To order; simply email your order to mail@bizguides.co.uk