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Tax penalties: Can ignorance of the law be a reasonable excuse?

22nd Jun 2018
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Tax barrister George Rowell asks a fundamental question about the penalty system: can a taxpayer’s ignorance of their legal obligation ever amount to a reasonable excuse for not complying with it?

The last few months have seen a spate of appeals against penalties for late filing of non-resident capital gains tax (NRCGT) returns. In each case an expatriate taxpayer was ignorant of the new requirement, introduced with effect from 6 April 2015, to file a special NRCGT return within 30 days of disposing of a UK property rather than declaring the gain on their next self assessment return as previously (s. 12ZB TMA 1970).

Such appeals raise a fundamental question about the tax penalty system: can the taxpayer's ignorance of their legal obligation ever amount to a reasonable excuse for not complying with it?

Rowell is co-author of Tax Penalties (Sweet & Maxwell, 2017).

Wildly inconsistent decisions

Despite the importance of this question, the FTT’s recent decisions have given wildly inconsistent answers to it. In McGreevy v HMRC [2017] UKFTT 0690 (TC), the taxpayer was resident in Australia but sold a property in the UK in July 2015. At the time she expected that this disposal would need to be reported in the usual manner on her self assessment return the following year.

It was not until August 2016, when she received the blank return and notes, that she deduced the need to file an NRCGT return. By then the return was a year late and HMRC imposed Sch. 55 FA 2009 penalties of £1,600. She contended that there was no reason why she should have known of the new NRCGT provisions and that she had taken reasonable care by following the notes in the return issued to her.

In a remarkably detailed judgment, Judge Richard Thomas allowed her appeal on this and other grounds. He held that the old maxim ‘ignorance of the law is no excuse’ is confined to the criminal law, and statements to similar effect in earlier tribunal cases usually applied to commonplace situations such as filing of self assessment or PAYE returns.

Although ignorance of the law is still not generally an excuse in relation to tax defaults (eg Hendrickson v HMRC [2017] UKFTT 563 (TC) at §42), it had to be asked whether unusual, rather than general, circumstances existed in this case. The test of reasonable excuse was to be applied objectively to a person having the experience and other relevant attributes of the appellant. Would such a person have realised that an NRCGT return must be filed within 30 days of the property disposal in July 2015?

HMRC contended that she ought to have stayed up to date with the relevant UK legislation, for instance by reading the Autumn Statement and online ‘agent updates’ by which the impending NRCGT legislation had been announced.

The judge rejected this contention in trenchant terms. The notion that it was unreasonable for the appellant not to recall the Autumn Statement was “claptrap” and ”nerdview”, as only a “small coterie of people obsessed by tax” would expect the Autumn Statement to register in anyone’s consciousness (at §160).

The legislation itself was “arcane, difficult to find and counter-intuitive”, and reading it made the judge’s “eyes glaze over and his senses reel” [at §174]. Nor did the online material help HMRC: ”it is preposterous to expect that a document on HMRC’s website which is not easy to find for a tax judge makes invalid all possible excuses about not knowing of the NRCGT return deadlines” (at §176). HMRC was criticised for legal errors of its own, while the appellant was commended for working out the need to file an NRCGT return at all.

Rule a ‘matter of policy’

This decision was followed by Judge Connell in Saunders v HMRC [2017] UKFTT 765 (TC) but was emphatically rejected by Judge Mosedale in Welland v HMRC [2017] UKFTT 870 (TC) and Hesketh v HMRC [2017] UKFTT 871 (TC).

In Welland, Judge Mosedale mentioned dicta in half a dozen earlier FTT cases to the effect that Parliament could not have intended ignorance of the law to be a reasonable excuse. This rule was a matter of statutory construction, in that reasonable excuse must be interpreted in accordance with Parliament’s intention that when it enacts tax legislation (however complex) it is to be obeyed.

The rule was also a matter of policy, as treating ignorance of the law as a reasonable excuse would result in the legal system favouring persons who chose to remain in ignorance of the law over those who sought to know the law in order to obey it.

Judge Mosedale acknowledged, however, that treating the rule as absolute would be inconsistent with dicta in the only tax appellate case in this field, Neal v CCE [1988] STC 131. The case concerned a 19-year-old model who had failed to register for VAT as she had been entirely ignorant of the VAT system.

Simon Brown J drew a distinction between “on the one hand basic ignorance of the primary law governing value-added tax including the liability to register and on the other hand ignorance of aspects of law which less directly impinge upon such liability”. The latter category included the distinction between whether the taxpayer was employed or self-employed, which was perhaps equally a question of fact and degree as one of law. But Miss Neal’s mistake was clearly in the former category and so could not amount to a reasonable excuse. Judge Mosedale drew from this decision that ignorance of the law may only be a reasonable excuse where complex, or at least uncertain, law is involved; and this exception was to be narrowly construed in view of the considerations of statutory construction and policy she had identified (§77, §88).

Judge Mosedale held that the obligation to file an NRCGT return did not fall into this exception, as the application of the law to Mr Welland was clear and there was no suggestion that it was legal uncertainty or complexity which had caused him to file his return late. She expressly rejected Judge Thomas’s contrary view and also disagreed that HMRC had been under an obligation to publicise the new law to identifiable taxpayers who would be affected by it.

It would not be practicable for HMRC to send letters to taxpayers every time the law affecting them was due to change; instead, Parliament expects taxpayers to be proactive in taking responsibility for ensuring that they obey the law (at §108). For these reasons, Mr Welland did not have a reasonable excuse for missing the deadline. He did, however, have special circumstances justifying a reduction in the penalty (para. 16, Sch. 55, FA 2009). He had received three separate penalties relating to three property sales in quick succession after the NRCGT obligation came into force, and thus did not have the opportunity to learn from his mistake after the first penalty was issued. These unusual circumstances justified the cancellation of the second and third penalties, which reduced the overall bill from £1,800 to £700.

Exceptions to the general principle

In the latest in this line of cases, Hart v HMRC [2018] UKFTT 207 (TC), Judge Brannan noted the conflict between the FTT’s recent decisions and largely followed the approach taken in Welland and Hesketh. He referred to dicta in several non-penalty tax cases to establish that ignorance of the law being no excuse is not confined to the criminal law (eg HMRC v Kearney [2010] STC 1137).

He then quoted lengthy excerpts from the Neal decision and agreed with Judge Mosedale’s summary of it cited above. He added that an exception to the general principle would be justifiable where there are finely balanced “evaluative decisions concerning mixed fact and law such as the difference between employment and self-employer or, perhaps, between trading and investment activities”. He noted that the Neal approach could give rise to intractable questions as to how difficult an area of tax law must be before a reasonable excuse based on ignorance of the law can be established, but said that it would not be desirable or sensible to try to lay down sweeping general principles in this area (§64).

A further exception to the general principle occurred when the correct law could not be easily discovered through sources in the public domain. This problem was vividly illustrated by R v Chambers [2008] EWCA Crim 2467, where the Court of Appeal allowed a criminal defendant’s appeal when HMRC’s Prosecutions Office had relied on an out-of-date version of the relevant excise regulation.

Judge Brannan found that Mr Hart’s case did not fall into either of these exceptional categories. The obligation to file an NRCGT return was not particularly complex and did not require a balanced evaluative decision. The text of the law was publicly announced and available online, and it would have been impractical for HMRC to communicate with all affected tax-payer individually. Mr Hart’s ignorance of the obligation did not constitute a reasonable excuse.

The judge then considered his secondary reasonable excuse argument: that he had informed his long-standing UK tax adviser of the impending sale of his UK property and the adviser had failed to inform him of the filing obligation. The judge accepted this argument on the facts and quashed the penalty.

What conclusions can be drawn from these cases?

First, the case law at first instance is in a regrettable state of confusion. In Welland, Judge Mosedale noted that it would be advantageous for the Upper Tribunal to make a binding ruling on when ignorance of the law can be a reasonable excuse. It is much to be hoped that a litigant will take up this invitation in the near future, although admittedly the low value of many penalty appeals might make this unlikely.

Second, although the new NRCGT obligations have given rise to particular problems, the case law on ignorance of legal obligations and reasonable excuse is of much wider significance. Even if the approach in Welland, Hesketh and Hart eventually prevails in NRCGT cases, that should not deter taxpayers from running reasonable excuse arguments where the legal obligation was not clear-cut at the time of the default.

Third, whatever the outcome of the debate on ignorance of the law, taxpayers should always consider running alternative grounds for reasonable excuse or special reduction where possible. Such arguments succeeded in Welland and Hart despite the judges’ strict approach on the main issue. 

Replies (17)

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By SteveHa
22nd Jun 2018 23:27

In my mind, the question should be turned around in any defence argument on a complex legislative question. I spend a lot of time going through the legislation and (more's the pity) trying to interpret it according to the "Will of Parliament" and in context of other, disjointed but associated legislation.

So surely, the opening salvo when asking would a reasonable taxpayer know, is would the judge know (as an expert, and without his research assistants) that same law?

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By adam.arca
23rd Jun 2018 08:11

Can only agree with the above comment.

It has always seemed to me that judges and prosecutors use the "ignorance is no excuse" card when they know the result they want but can't get to it from established law.

It has also always seemed to me that this ignorance card should only be valid for gross and obvious misdemeanours: murder is bad, people with taxable income need to declare it, that sort of thing. To use that argument where the law is technical and even an expert (the accountant in one of the above cases) gets it wrong is simply stacking the deck like a card sharp.

Other than judge Thomas in the McGreevy case, all the judges quoted above have clearly bent over backwards to avoid the logical result. NRCGT was clearly a sea change, it wasn't advertised, the man on the Clapham omnibus, and especially the Sydney one, wouldn't have been aware of the change (and that's a legal principle those judges appear to have been careful to steer clear of).

I would also disagree with the apparent judicial carte blanche given here for HMRC to avoid the need to target its customer base with an update on changes like this. They have the database, they can sift for taxpayers who are both non resident and who have property income and are therefore likely to have NRCGT at some point.

But hey, what do I know? I'm only an accountant and not a policy maker.

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Replying to adam.arca:
By sammerchant
25th Jun 2018 10:59

Excellent analysis! I think HMRC rely too heavily on the income from penalties to take a less jaundiced view of when to apply them.

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By rememberscarborough
25th Jun 2018 09:48

Surely her solicitor should have been up to speed with the change of law and advised her accordingly? If they weren't to know then how can you expect an ordinary person to be fully conversant with all the myriad of law changes that take place?

More a reflection of our inadequate legal and tax systems than the person they are trying to hold as "breaking" it...

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Replying to rememberscarborough:
By Paul D Utherone
25th Jun 2018 11:08

rememberscarborough wrote:

Surely her solicitor should have been up to speed with the change of law and advised her accordingly? If they weren't to know then how can you expect an ordinary person to be fully conversant with all the myriad of law changes that take place?

More a reflection of our inadequate legal and tax systems than the person they are trying to hold as "breaking" it...

That was suggested in another of the recent cases where the taxpayer failed in their appeal. The solicitor said that they were only engaged to do the conveyancing and not to give tax advice.

That in so many of these cases there was no liability, either because there was a loss, or any gain was covered by PPR & Letting Relief should surely have some bearing in this type of case. NRCGT returns are not a regular requirement, like annual ITSA returns, and it would not seem unreasonable for the NRCGT return rules to include a need only to submit NRCGT returns as well as ITSA return including the disposal where a chargeable gain arises. HMRC would still have penalties available to it for failure to make, or notify on the ITSA return if so.

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By Mike Nicholas
25th Jun 2018 10:12

This comment resonated: "it is preposterous to expect that a document on HMRC’s website which is not easy to find for a tax judge makes invalid all possible excuses about not knowing of the NRCGT return deadlines”

Did the judge use GOV.UK to try and locate guidance I wonder? Some think GOV.UK is a hindrance to locating important and relevant info.

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Replying to Mike Nicholas:
By Paul D Utherone
25th Jun 2018 11:09

...and how out of date generally is the legislation hosted on GOV websites?

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By G Webber CTA
25th Jun 2018 10:38

I fear that the already tangled position indicated in the excellent article above, is about to have some real and dangerous consequences.

HMRC claim that those who used a disguised remuneration scheme and who have loans or other forms of credit outstanding at 5th April 2019, dating back to 1999, will be required to declare these and suffer a (retrospective) tax charge. Failure to do so will result in potentially huge penalties.

Recently one such company that offered these schemes wrote to all the former clients they could still trace to advise them of this. The result was that for some 40% of the users, this was the very first indication that they had received of this arcane piece of legislation.

Repeated across all years and schemes, we might be looking at 40,000 people who, through ignorance, will not realise a need to declare, who probably do not complete SATRs as a matter of annual routine and who almost always do not have the basic information.

I could be kind and argue that - as above - people should be aware and as HMRC has been running its anti contractor campaign for close on 20 years, nobody in this space has an excuse. The reality is that HMRC does not have a coherent analysis of what a disguised remuneration scheme is and recently has sought to deny that a key part of the gateway conditions (the presence of a third party) can be ignored as it was always the intention of Parliament that it should be. Unbelievable?

Sadly, many of my clients have had their trust in HMRC eroded to such an extent that they will almost certainly believe that if penalties come their way, it's just another example of HMRC seeking to remove the contracting sector from UK Plc (in the name of "compliance") and doing so with maximum prejudice.

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By trecar
25th Jun 2018 12:15

Not being conversant with the legal niceties of things such as NRCGT I will refrain from comment on what is a very lucid if somewhat confusing summation of the position above. However, what I think the article highlights is the potential danger to the state of abusing its right to raise laws and levy taxes without considering the social impacts that such behaviour can cause. I agree that where the tax payer should be aware of their responsibilities then there is every justification for exacting penalties. But when a new tax or process is introduced then social justice demands that those affected should be made aware of the impact upon them. Where this does not happen then to claim the protection of 'ignorance is no excuse' is to indulge in repressive behaviour and will only serve to undermine respect and thus observance of the law. I get the feeling that HMRC and successive governments are increasingly taking this path. They should be aware that it is a path that will hold great dangers for them in terms of social cohesion and compliance. The social compact holds good equally for the state as it does for the citizen. When that breaks down disorder is the result. Remember that for the majority the legal process is no longer an option as costs prohibit access. So please HMRC, play the game and show respect for those who have no choice but to comply.

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By Ian McTernan CTA
25th Jun 2018 12:21

Once again, all this could be avoided by changing the conveyancing pack/laws so that the question of residence needs to be asked (I'd assume they would do this anyway as Money Laundering checks), and then the requirement to consider filing a NRCGT return would be flagged up by the solicitor and they could then point to an accountant (if the NR doesn't already have one) to ensure it gets done.

I can't blame the NR for not knowing- trying to find anything relevant on the site isn't easy and there is no real reason for the NR to even to think to check if there is a shortened filing deadline when everything else mentions 31 January following.

If you're a decent tax consultant then of course you will have discussed all this with your overseas clients and planned the disposal beforehand, so late filing wouldn't happen...

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By moneymanager
25th Jun 2018 12:36

Isn't there the old adage that no one knows the law until it is tested in Court and even then judges get it wrong which is why we have the higher Courts to set them right?

Having said that though it would be impossible to prove knowledge i.e. the absence of ignorance if you will.

In criminal law (sexual abuse) that rubicon has already been crossed and recently with one "recent arrival", a doctor I think, not realising and clearly not appreciating "cultural differences" as to how to treat female colleagues, I'd have banged him up.

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By jonahwhale
25th Jun 2018 13:52

This is a query after reading about whether ignorance of tax matters is reasonable. The circumstances surround a leaseholder owned management co. filing dormant accounts with no tax liability as the receipts belong to the registered owners, who are not aware of their liability.
The lease stipulates annual balancing of service charge and as freeholders the fixed estate charge and GR.
The flatowners think that the has the tax liability.
What I am saying would misunderstanding the implied meaning of the tax liability in the lease be excusable ?

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By AndrewV12
26th Jun 2018 08:58

Good article,it just sums up the law, very inconsistent and theres always one individual who is no better or worse than anyone else that really kops it, whilst others continue on by, totally unaware...or are they.

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By tedbuck
26th Jun 2018 11:53

When all is said and done HMRC should apply a bit of common sense to penalties and more importantly to tax laws.
All this posturing by HMRC about people should know and understand tax rules is just rubbish when half their staff don't understand the rules themselves. I have a pile of tax books in my office which is about 18 inches high which represents tax law for 2017/18.
I suppose HMRC thinks that every taxpayer should have read and understood every page.
I have a surprise for HMRC and HMG most accountants need the assistance of tax specialists to understand this stuff and Joe Public wouldn't stand a chance in Hell of understanding it even if they could make it make sense.
It just goes to show how stupid HMRC and the legislators are, or, probably more likely, they are deliberately obfuscating matters so that penalties become the next stealth tax.
What we really need is a body, the Taxpayer's Alliance?, to scream and shout at the top of its voice so that the system is overhauled and made comprehensible to the man in the street.
As for MTD since the schools don't bother to educate people these days in anything but media studies it is a bit hard to see how Joe Public will cope with MTD. More penalties for HMRC I guess so that they can waste it on computer systems that don't work or throw it at the Sacred Cow, the NHS, where judging on my recent observations it will provide seats for nurses to use whilst drinking their coffee and ignoring the patients.

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By rbw
26th Jun 2018 16:26

I am puzzled where the tribunals are going with this approach, and hope that the High Court eventaully takes a look at the issues.

Eg should the test also take account of illiterate and innumerate taxpayers? The days are long gone when they might have covered most of a large lump (sic) of taxpayers. But there are still many people who can't cope with even the simpler HMRC guidance notes.

And what about language? It seems arguable that A who does not understand written English has (with other factors) reasonable excuse while B who does understand it has (with the same other factors) no such excuse. That may not amount to a breach of the Equality Act but it seems to me at the very least controversial and - in the case of British nationals - a perverse incentive.

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By Justin Bryant
09th Apr 2019 11:48
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