Andy Keates examines three cases where a reasonable excuse was accepted by the tribunal and the penalties were cancelled and one where the penalties were upheld. What can we learn from these cases?
Misunderstanding of HMRC advice
The Hayhurst partnership and all the partners (Graham, Judith and James Hayhurst) appealed against penalties for late filing of the partnership and personal tax returns for the years 2005/06 to 2011/12 (TC06496).
Their dairy farm had made losses for a number of years, and the family lived off Judith’s earnings from an external full-time job. They couldn’t afford an accountant, and Graham was ill with depression. Rural postal difficulties meant that receiving post could be difficult.
In March and June 2012 Judith spoke to HMRC who informed her that penalties would be reduced to nil once the tax returns had been filed showing no taxable income. The officer was referring to the £100 penalties under TMA 1970 s93, which applied to years up to 2008/09. It was not explained to Judith that from 2010/11 there is no such cap on penalties (under FA 2009 Schedule 55).
Based upon those conversations, Judith believed that submitting the nil returns was less urgent. It was only when she received notice of penalties totalling £7,475, and spoke again with HMRC, that she understood the full gravity of her situation. The family then “did everything they could to remedy matters”, appointed an accountant and the tax returns were filed.
The judge accepted that her belief that the penalties would ultimately be cancelled was a reasonable excuse for late filing of the 2010/11 and 2011/12 returns.
The appeals for the earlier years’ partnership penalties were seriously out of time and could not be admitted.
No notices received
In February 2010 Mark Beardwood left the UK to work in Vietnam for 2.5 years. He submitted form P85, and form NRL1 to inform HMRC he had let out his house.
For 2010/11 Mr and Mrs Beardwood received rental income of £1,901 each (well below the personal allowance). He filed a tax return on 9 May 2013 after returning to the UK.
HMRC alleged that a notice to file a tax return was issued on 6 April 2011, which meant that penalties totalling £1,600 were charged under Schedule 55 of FA 2009 (TC06357).
Beardwood appealed, saying that he had not received any correspondence from HMRC while in Vietnam. He had consulted HMRC’s website, where the advice he found led him to conclude he would not need to complete a return unless asked to do so.
The tribunal observed that the website guidance was “at best unclear in places and caused puzzlement to the tribunal with its conflicting, vague, and inconsistent advice”.
The tribunal was also not convinced that either a notice to file or any notices of penalty had been issued to Beardwood prior to his return to the UK. In the tribunal’s opinion, “it was difficult… to see what more the appellant could have done.”
This was “a case which the tribunal considers should never have come before it… HMRC have wasted everyone’s time in bringing a case which has very little merit on their side… Nothing would have been gained by the issue and completion of the return, no tax was at stake, and another HMRC department had already realised that [Mrs Beardwood], who was in very similar circumstances, should not be penalised”.
Delays registering for CIS and PAYE
Birley Estate Ltd (TC06134) is a contractor in the construction industry, and was charged a penalty under TMA 1970 s98A for late submission of a monthly CIS return.
Birley engaged its first ever subcontractor on 5 August 2016. This meant that a CIS return would be due by 19 August. Unfortunately, in order to file a return, the company must first register for CIS, and to do that it had to register a PAYE scheme.
The director, William Linnell, managed to get both registrations completed and filed the return on 19 September, despite the inevitable postal delays and a neck problem which made it painful for him to use a computer.
The judge found that Linnell had “acted reasonably promptly”, having started the registration procedure the day after the subcontractor was engaged, and drew attention to two facts:
(1) The start date of the subcontractor, in this case, was on the last date of the return period for 5 August 2016, and
(2) The return period was the first return for the company.
He noted that, if the company had engaged a subcontractor just one day later, it would have had until 19 September to file, and would have been on time.
With regard to Linnell’s neck pain, the judge agreed that, for a regular routine obligation, it would not have been a reasonable excuse, as he would have been expected to make suitable arrangements. However, it was not unreasonable that it should “contribute to some short-term delay in a one-off procedure”.
Relied on accountant
The B&M Coatings partnership (TC06935) entrusted the preparation and submission of its tax returns to its accountant, who had performed entirely satisfactorily for 20 years.
Barry Wade, the representative partner, had chased his accountant at frequent intervals concerning the return and late filing penalties; and was routinely told the accountant “was dealing with it”.
Wade realised that something had gone seriously wrong around August 2012, but was reluctant to undergo the turmoil of changing advisers. He finally lost patience and appointed a new tax agent in February 2013, and the 2010/11 tax return was filed on 17 May 2013.
The judge reasoned that, initially at least, it was reasonable for Wade to rely on his accountant. However, by July 2012 – when HMRC confirmed to him that the accountant had done absolutely nothing – he should have bitten the bullet.
Even being generous, and allowing time for a handover, the judge would have expected the reasonable excuse to have elapsed by 6 December 2012.
“Mr Wade should have been significantly more proactive than he was in bringing matters to a head. Instead, he let matters drift.” The appeal failed.
One common factor in the first two cases was that the taxpayers spoke to HMRC and consulted its website, and as a result, deficiencies in HMRC’s guidance provided them with a reasonable excuse.
The Birley case highlights the distinction between:
- Regular and routine obligations – where a taxpayer will be expected to have made prudent and robust arrangements to deal with unforeseen problems; and
- Initial or one-off obligations – where relatively minor obstacles can provide an excuse.
The important factor either way is to have proof that the taxpayer has consistently tried to comply.
The B&M Coatings case shows that taxpayers need to keep their eye on the ball, and to take prompt action when circumstances change. A reasonable excuse can easily stop being reasonable if corrective action is delayed.