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A ‘reasonable’ approach?

Mark McLaughlin looks at a recent case in which the tribunal suggested an approach when considering whether a taxpayer has a reasonable excuse for failure to comply with certain tax obligations

The imposition of penalties by HMRC is a constant danger for taxpayers with compliance obligations such as filing self-assessments and paying tax liabilities on time, where the taxpayer fails to meet those obligations. This article focuses on penalties for individuals who have filed their tax returns late.

There is an important exception from late filing penalties where the taxpayer satisfies HMRC (or the tax tribunal) that there is a reasonable excuse for the late filing, provided that the return is filed without unreasonable delay after the excuse has ended (FA 2009, Sch 55, para 23). However, insufficiency of funds is not a reasonable excuse unless it is attributable to events outside the person’s control. In addition, reliance on another person (e.g. an agent) is not a reasonable excuse unless the taxpayer took reasonable care to avoid the failure.

HMRC’s previous (incorrect) position

There is no statutory definition of ‘reasonable excuse’. Until fairly recently, HMRC’s position was that a reasonable excuse was normally an unexpected or unusual event that could not be reasonably foreseen or was beyond the person’s control, and which prevented the person from complying with an obligation to file on time. However, HMRC’s approach was rejected by the First-tier Tribunal (FTT) in a number of cases (e.g. Barrett v Revenue and Customs [2015] UKFTT 329 (TC) and Scott Building Contracts Ltd v Revenue and Customs [2017] UKFTT 630 (TC)).

The above HMRC statement about reasonable excuse apparently originated from an earlier case (C&E Commissioners v Salevon [1989] STC 907), where the judge referred to a person having a reasonable excuse by reason of “unforeseeable and inescapable misfortune”. However, in the subsequent case C&E Commissioners v Steptoe [1992] STC 757, the same judge (Nolan LJ) stated that this “cannot be regarded as an all-purpose test of what constitutes a reasonable excuse”.

In Steptoe, a different judge (Scott LJ) endorsed the view that to be a reasonable excuse there must be an “unforeseeable or inescapable event”. However, the judgment of Scott LJ was a dissenting judgment.

HMRC’s current position

Perhaps as a result of the tribunal’s criticisms, HMRC subsequently amended its guidance on reasonable excuse. HMRC’s current guidance (in the Compliance Handbook manual at CH61540) indicates a ‘reasonable person’ test, based on the following comment by Judge Medd in The Clean Car Company (LON/90/138X): “One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time, a reasonable thing to do? Put in another way which does I think alter the sense of the question; was what the taxpayer did not an unreasonable thing for a trader of the sort I have envisaged, in the position that the taxpayer found himself, to do?”

Four-step approach

More recently, in Perrin v Revenue and Customs [2018] UKUT 156 (TC), which concerned a late filing penalty, the Upper Tribunal (UT) suggested a four-step approach for FTTs when considering whether there is a reasonable excuse defence. This four-step approach broadly involves:

(1) Establishing facts the taxpayer asserts that give rise to a reasonable excuse.

(2) Deciding which of those facts are proven.

(3) Deciding whether, viewed objectively, those proven facts do indeed amount to an objectively reasonable excuse for the default and the time when that objectively reasonable excuse ceased. The UT commented that it might assist the FTT to ask itself: “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”

(4) Having decided when any reasonable excuse ceased, deciding (once again objectively, based on the circumstances, etc.) whether the taxpayer remedied the failure without unreasonable delay after that time (unless, exceptionally, the failure was remedied before the reasonable excuse ceased).

The UT also stated: “it will be a matter of judgment for the [FTT] in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long”.

The way forward?

The above statement by the UT has already been used in numerous FTT cases, including Marshall v Revenue and Customs [2018] UKFTT 626 (TC) and Thornton (t/a A* Education) v Revenue and Customs [2018] UKFTT 568 (TC), and will no doubt be applied in many other reasonable excuse cases, subject to any future decision to the contrary by a higher court.

Practitioners should also consider using the four-step approach when considering the merits of penalty appeals on their clients’ behalf on the grounds of reasonable excuse in appropriate cases.

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By Mark McLaughlin