Reliance on accountant was a reasonable excuse
Mr and Mrs Stokes appealed against late filing penalties on the basis they had relied on their accountant, but the tribunal also found that special circumstances applied.
The Stokes lived in South Africa, and had been filing self-assessment tax returns for several years to report their rental income from their UK property.
Their 2017/18 self-assessment tax returns should have been submitted to HMRC electronically by 31 January 2019, but they were not submitted until 18 August 2019.
HMRC charged each taxpayer the following late filing penalties under FA 2009 Schedule 55:
- an initial late filing penalty of £100 (para 3) – this penalty was not under appeal
- daily penalties of £900 (para 4)
- a six-month late filing penalty of £300 (para 5).
The Stokes appealed against the daily and six-month penalties, with their appeals heard together by the first tier tribunal [TC07836].
Accountant’s father died
Although the taxpayers had only supplied their accountant (Mr James) with the information for their tax returns in June 2019, there was a further unexpected delay in the filing of their returns.
James was attending to his dying father in hospital at the time, and after his father’s death in June 2019 there was an inquest, which continued to occupy much of James’ time. Usually James would have taken around a week to prepare and submit the tax returns, but due to the distressing circumstances, the returns were actually submitted in August 2019.
Between the provision of the information and the submission of the returns, the taxpayers sent several follow-up emails to James at regular intervals.
A penalty imposed under schedule 55 can be waived where there is a reasonable excuse (para 23).
The taxpayers argued that they had two reasonable excuses:
- they did not (as they usually would) receive a reminder from James to provide their return information once the date for daily penalties to commence neared (1 May 2019)
- although they supplied the information for their returns late, the returns were further and unexpectedly delayed due to James’ father’s illness.
Where a taxpayer claims reliance on a third party as a reasonable excuse, the excuse is not reasonable unless the taxpayer took reasonable care to avoid the failure.
The FTT did not accept the taxpayers’ first argument of reasonable excuse: reasonably careful taxpayers would have made themselves aware of the filing deadlines and would have contacted their accountant if they had not heard from them by the time of the deadline. The taxpayers did not do this.
However, the FTT did accept the taxpayers’ second ground of reasonable excuse. As they had followed up with James at regular intervals, they did take reasonable care to avoid further delay beyond 24 June 2019 in the filing of their tax returns.
This meant that the six-month penalty of £300 was cancelled, as well as the daily penalties to the extent they accrued on or after 24 June 2019.
A schedule 55 penalty can also be reduced where there are special circumstances (para 16).
In cases where the amount of penalty is under appeal, the tribunal may either affirm HMRC’s decision or substitute HMRC's decision with another decision HMRC had the power to make.
The FTT found that HMRC’s decision not to reduce the penalties under special circumstances was flawed, because it did not take into account the fact that the accountant was distracted by his father’s illness which caused him to devote less time to his clients than he normally would have.
As a result of this special circumstance, James did not send clients the reminders he would ordinarily have sent prior to daily penalties starting to accrue. Had James sent a reminder to the taxpayers, the FTT found that they would have, in all likelihood, provided the necessary information to James in time to avoid the daily penalties.
While this situation did not give rise to a reasonable excuse for the late filing of the returns (see above) a reduction in penalties was warranted on the grounds of special circumstance. Consequently, the daily penalties were reduced to nil. The appeal was allowed, and the contested penalties cancelled.
While the FTT found that the taxpayers had a reasonable excuse for at least a portion of their late filing penalties, it was the finding that there were special circumstances that reduced the remaining daily penalties to nil.