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  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  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  UKFTT 765 (TC) but was emphatically rejected by Judge Mosedale in Welland v HMRC  UKFTT 870 (TC) and Hesketh v HMRC  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  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  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  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  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.
About George Rowell
George is a commercial barrister specialising in tax disputes, professional negligence and insolvency. He combines heavy-weight advocacy experience with in-depth tax and commercial knowledge. In the field of tax he regularly advises on VAT, IHT, CGT, employment-related taxes, and penalties. His professional negligence practice has a particular focus on claims against accountants, tax advisors and IFAs. He also acts in insolvency cases, especially where there is a tax dimension.
George commenced his career in-house with HMRC before moving to independent practice. He has been a member of the Attorney-General’s Regional Panel of Counsel since 2008 and appears for and against HMRC and other Government departments.
George is a contributing editor of Simon’s Taxes and co-author of Tax Penalties (Sweet & Maxwell, Practitioner Tax Library, 2017).