HMRC updates reasonable excuse guidance

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:

• mental health (CH160400)
• physical illness (CH160500)
• ignorance of the law (CH160600)
• reliance on another person (CH160700), and
• general examples (CH160300).

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.