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HMRC updates reasonable excuse guidance
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HMRC updates reasonable excuse guidance

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As more individuals and businesses are incurring tax penalties, partly due to Covid-related disruptions, Lucy Webb summaries what qualifies as a reasonable excuse and when it can apply.

7th Jan 2022
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Certain penalties issued by HMRC can be mitigated where a taxpayer has a reasonable excuse for the failure to meet their obligation.

Unfortunately, there is no statutory definition of “reasonable excuse”. Instead, the phrase is taken to have its ordinary meaning, with each case decided upon its own merits. What might amount to a reasonable excuse for one taxpayer may not for another.

HMRC’s reasonable excuse guidance (CH160100-CH160950) which was recently updated, now states that the “law does not require that a reasonable excuse is based on an unforeseeable or inescapable event”.

Instead, HMRC considers a reasonable excuse “to be something that stops a person from meeting a tax obligation despite them having taken reasonable care to meet that obligation.”

Abnormal circumstances

The HMRC guidance states that it is “necessary to consider what a reasonable person with the same experience and attributes as the taxpayer, who wanted to meet their obligation, would have done in the same circumstances and decide if the action of the person met that standard”.

A reasonable excuse does not have to be a single event or issue. In certain instances, a combination of factors can amount to a reasonable excuse when considered together.

There are sections of HMRC’s Compliance Handbook that discuss reasonable excuse in particular situations, including:

Determining if there is a reasonable excuse

To successfully challenge a penalty on the grounds of reasonable excuse, generally the taxpayer must demonstrate that they had a reasonable excuse and they put their failure right without unreasonable delay following the end of the reasonable excuse.

To decide if a taxpayer has a reasonable excuse, the guidance refers to the upper tribunal’s decision in Perrin vs HMRC, which outlines a four-step process to determine if a taxpayer has a reasonable excuse:

  1. Establish what facts the taxpayer believes give rise to a reasonable excuse.
  2. Decide which of those facts are proven, based on the evidence available, on a balance of probabilities.
  3. Decide whether, viewed objectively, the facts that have been proven are an objectively reasonable excuse for the taxpayer’s failure and, if they are, when that reasonable excuse stopped.
  4. After deciding when any reasonable excuse stopped, decide whether the taxpayer remedied their failure without unreasonable delay (unless they had already done so before the reasonable excuse stopped).

Discussion on Perrin can be found within paras CH160900 and CH160950 of HMRC’s internal compliance manual.

The importance of timing

When considering whether a reasonable excuse exists, regard must be given to when the reasonable excuse arose.

If a defence of reasonable excuse is to be successful, that excuse must have existed on or before the date of the relevant obligation.

In the case of Cherwell Optical Ltd vs HMRC [TC07852] the company failed to lodge four RTI returns on time and appealed against the associated penalties.

Although the company was found not to have a reasonable excuse, it requested a reduction on the grounds of special circumstances, citing the business’s closure as a result of a Covid-19 lockdown. This argument was rejected by the FTT on the basis that the business shut down after the returns were already late. Inability to pay is also excluded as a special circumstance.

Although Covid was not a reasonable excuse in Cherwell, HMRC has stated that where the impact of Covid-19 is the reason behind a failure to meet an obligation on time, it will typically accept this as a reasonable excuse, provided the pandemic issues arose prior to the deadline of the relevant obligation.

The second limb of the reasonable excuse defence is that the failure should be addressed without unreasonable delay after the reasonable excuse ends. What constitutes an unreasonable delay is determined by reference to the term’s ordinary meaning, and so again will be dependent on the facts of the case.

What is not a reasonable excuse

Whether a taxpayer has a reasonable excuse is always considered on a case-by-case basis. However,  the revamped HMRC guidance provides some examples that do not usually amount to a reasonable excuse on their own, including pressures at work, a lack of information, or not being reminded by HMRC about a tax obligation.

Additionally, two situations are given in statute that do not amount to reasonable excuse:

  • an insufficiency of funds; and
  • reliance on a third person.

There are exceptions to these two exclusions.

For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.

Reliance on third party

Reliance on an expert, such as an accountant may, in certain circumstances, amount to a reasonable excuse.

This is discussed at CH160700, which states that “where a person relies on any other person to do anything, that is not a reasonable excuse unless the person took reasonable care to avoid the relevant failure.”

An example of where an appeal has succeeded on this ground is that of Stokes vs HMRC [TC07836]. Regular follow-up emails to an accountant who lodged the taxpayers’ self-assessment tax returns later than usual were found to amount to reasonable care being taken by the taxpayer.

Section CH160700 provides other examples of when reliance on a third party can be a reasonable excuse, including circumstances where advice had been provided by a qualified advisor and was relied upon by the taxpayer. For an example, see the case of Fastklean Ltd [TC07773].

When reasonable excuse fails

Sometimes, HMRC may not accept that a taxpayer has a reasonable excuse. Where that does happen, keep in mind that the taxpayer may still be able to request a statutory review and may also be able to appeal against the penalty at tribunal.

Depending on the circumstances, a penalty reduction on the grounds of special circumstances may also have merit.

Replies (15)

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By SteveHa
07th Jan 2022 13:32

I had a fun one 4 - 5 years ago, where I appealed against a penalty on the grounds of reliance on a 3rd party, where the 3rd party was our firm (not me, a colleague), which HMRC rejected. I notified the appeal to the FTT and spent ages preparing the case, only for HMRC to cave before I got my day in court.

"Damn", I thought.

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Replying to SteveHa:
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By Brend201
07th Jan 2022 16:10

SteveHa wrote:

I had a fun one 4 - 5 years ago, where I appealed against a penalty on the grounds of reliance on a 3rd party, where the 3rd party was our firm (not me, a colleague), which HMRC rejected. I notified the appeal to the FTT and spent ages preparing the case, only for HMRC to cave before I got my day in court.

"Damn", I thought.

I think this was covered in the Bible:

"Greater love hath no man than this, that a man lay down his friend's life for his client."

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Replying to SteveHa:
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By Catherine Newman
07th Jan 2022 16:15

Keith Gordon helped me with mine SP Taylor v HMRC. We lost the first leg but with his help we won the second one. It was where 870,000 penalties got removed-what a result. I would have resented writing a cheque for £100 penalties. Keith and I wrote joint articles in Taxation and Tax Adviser. I simply forgot to file. The client always came in the middle Sunday in January every year. I walked past the records on 6 February and thought, I don't remember filing them. Kevin Slevin made some comment in Taxation along the lines "the poor accountant. There for the grace" so I rang Andrew Hubbard saying it was me and was asked to write an article.

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Replying to Catherine Newman:
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By Justin Bryant
07th Jan 2022 16:54

There have been similar taxpayer penalty victories re SDLT where the conveyancer overlooks filing the SDLT1 on time:

https://webcache.googleusercontent.com/search?q=cache:1D-Mk83NRYoJ:https...

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Replying to Catherine Newman:
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By Andy Reeves
10th Jan 2022 13:48

Why have you continually let that client leave delivering records until two weeks before the deadline?

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Replying to Andy Reeves:
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By Catherine Newman
10th Jan 2022 17:05

I live out in the sticks in a village and have been used to this client for 23 years. He is finishing this year.

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Replying to SteveHa:
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By Justin Bryant
07th Jan 2022 17:01

If there's been a c*ck-up by the adviser firm, then strategically it's usually better for the taxpayer alone (or a different representative firm) to run that adviser reliance defence as it's not a good look for the adviser to argue his own negligence in court as a defence on behalf of the taxpayer.

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By Hugo Fair
07th Jan 2022 16:20

A good introduction to an ever-changing topic, but one bit puzzles me (in terms of logic not of correctness).

"If a defence of reasonable excuse is to be successful, that excuse must have existed on or before the date of the relevant obligation" ... seems reasonable. But what about where:
* the obligation was known for several months but kept being put-off ... until, on the very day before the obligation deadline was reached, the intention to meet it (by the procrastinating taxpayer) was frustrated by the fortuitous occurrence of a 'reasonable excuse'?

This meets the stated criteria (of the excuse having existed before the date of the obligation), even though the taxpayer had had many months to have met it before the excuse serendipitously arose!

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By More unearned luck
07th Jan 2022 17:02

"Certain penalties issued by HMRC can be mitigated where a taxpayer has a reasonable excuse for the failure to meet their obligation."

That's not so for failure to file or pay on time penalties (which are the sort that permit an RE defence). If there is an RE and the default is put right within a reasonable time of the excuse ending then the penalty is cancelled in its entirety. Otherwise the full amount is due. You can't mitigate; it's all or nothing.

Penalties for errors can be mitigated, eg by 'telling' and 'helping' HMRC, but such penalties are not the subject of this article.

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Tornado
By Tornado
09th Jan 2022 13:11

Have penalties and reasonable excuses for HMRC been updated for when they get it wrong as well ........ oh no, I forgot that there are no penalties for HMRC and every excuse is reasonable.

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By Paul D Utherone
09th Jan 2022 16:32

I remember back in the old days when I was on the other side of the fence (long before SA as I am so incredibly old) we had a version of "the dog ate my homework" when a severely mauled tax return was received. We imagined the taxpayer having used it as a dog toy & dragging said canine around the garden to give it suitable authenticity.

We also received a return on which "F*** OFF" was scrawled (gouged) in large letters on every page. Put it down to the taxpayer having had a bad day, posted out fresh return and awaited its return with some trepidation. That one came back completed with no comment :)

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Replying to Paul D Utherone:
By Nick Graves
10th Jan 2022 11:46

Paul D Utherone wrote:

I remember back in the old days when I was on the other side of the fence (long before SA as I am so incredibly old) we had a version of "the dog ate my homework" when a severely mauled tax return was received. We imagined the taxpayer having used it as a dog toy & dragging said canine around the garden to give it suitable authenticity.

We also received a return on which "F*** OFF" was scrawled (gouged) in large letters on every page. Put it down to the taxpayer having had a bad day, posted out fresh return and awaited its return with some trepidation. That one came back completed with no comment :)

Way back when I had a proper job, a client would send us his Tax Return for completion/filing, it was invariably punched with canine teeth holes.

I used to include an explanatory line in the covering letter to HMRC.

The client had a letter box cage, but his dog was too clever for that to work.

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By Tax Networks
10th Jan 2022 10:11

On the topic of reasonable excuse.:

Last year in a "WDF" nudge letter case (statutory staring point was 150% penalties), are successfully argued reasonable excuse (it took a lot of correspondence from August 2020 to October 2021) . First of its kind as I have not read anyone mitigating the FTN penalties in this particularly tough penalty regime.

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Replying to Tax Networks:
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By AndyC555
10th Jan 2022 16:33

I'm about to embark on the same process. Client got told by a Spanish lawyer that there would be no UK tax to pay on the sale of his Spanish property as "it is taxed in Spain". I'm going to be arguing ignorance + reliance.

Should be fun.

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By chronus
11th Jan 2022 16:20

A question of that which should have been done and why it was not done by when it should have been done, without the proverb better late than never.
It is now more than 12 months since I appealed against late filing penalties for a client. HMRC has not even assigned it to anyone to deal with it. Whilst my client continues to be flooded with demands and threats for payment of the penalties and mounting suspicion I am not doing my job correctly. Should there not be a similar penalty system for their unreasonable delay. The proverb, what`s good for the goose is good for the gander comes to mind.

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