A ‘Reasonable Excuse ‘?
By Russell Cockburn : taken from “HMRC Enquiries Investigations and Powers “
Russell Cockburn offers his practical experience of representing an appellant in a First-tier Tribunal hearing of an appeal against penalties for the late filing of corporation tax returns based on ‘reasonable excuse’.
Following on from my last article (see July 2017 issue), this article provides a review of a case I dealt with before the First-tier Tribunal recently, representing a client as regards their appeals against two late corporation tax return penalties.
The facts of the case are simple and the outcome was on balance probably fair for the client, but what I found most interesting was the approach of the tribunal judge to the issue of ‘reasonable excuse‘ and the clear indication it gave me that currently, it may actually be possible to achieve a better result than I believe many tax agents and accountants might perhaps expect from this sort of dispute with HMRC.
A series of unfortunate events
The small family company carried on a retailing business and had been issued with two penalty notices for late corporation tax returns by HMRC. One return was over nearly two years’ late and one more than six months late. This situation had arisen as the direct result of the serious illness and absence from work over a period of eight months of one senior member of the company’s finance team and then again, the absence of another team member due to a family bereavement. As a clear consequence of this series of unfortunate and desperately sad events, tax matters had clearly not been attended to timeously as they should have been.
To its credit, HMRC had been most sympathetic to the client and had made strenuous efforts to point out the potential for penalties to arise along the way. However, despite this, the returns had not been submitted on time and HMRC had evidently felt that it had no choice but to issue the penalty notices.
For some reason never adequately explained to me, the accountant acting for the company had also not been kept informed of the problems which had arisen, either by the client or HMRC, and then, again most unfortunately, when he had become involved he also had been unable to assist due to a family crisis, which took him away from his office for three months. It also appeared that copies of the relevant correspondence addressed to the company, including the penalty notices initially, which are normally sent to the tax agent acting had, for some unexplained reason, also not been issued to the accountants in this case, and so matters went from bad to worse!
The matter before the tribunal was, in essence, a simple one; did the client have a reasonable excuse to use as grounds for their appeals against the penalties which HMRC had imposed?
At first sight, most readers would probably take the taxpayer’s side here, as I did, and contend that HMRC should have adopted a more lenient approach, but the facts showed that they had indeed taken their time before issuing the penalty notices, and moreover had probably allowed the clients significantly more time than they were legally entitled to. The approach of HMRC was that the failures to get the returns in on time had not been rectified quickly enough and that any ‘reasonable excuse‘ that the company might have had not been drawn to its attention soon enough to justify dropping the penalties.
When taking a case such as this before the tax tribunal, it is always uppermost in my mind that what the judge wants to hear is facts. Technical arguments about the veracity of the penalty notices are unlikely to be germane, as it will be rare for HMRC to issue penalty notices incorrectly, although it can happen on occasion. What is always key in such cases is giving the judge as many facts and background information about the case as is possible, to enable them to come to a reasoned and supportable decision. So, it proved here. The presentation of factual evidence supported by documentation where possible, is most important to make it more difficult for HMRC to appeal a decision in the taxpayer’s favour.
The judge here was given a detailed summary of the facts and case history, basically the chronology of events and ‘disasters‘ that had led up to the client getting into the mess they now found themselves in. The judge was most sympathetic (in my experience they often are!), but clearly felt that he needed something more than just this to enable him to uphold the client’s appeals given the length of time that had elapsed by the date of the tribunal hearing.
Getting all the facts
Many practitioners are often wary of taking cases before the tax tribunals, but there is, in fact, an argument for saying that any decent accountant or tax agent ought to be able to represent their client very adequately on a relatively straightforward matter such as this. After all, it is in most cases a simple exposition of the facts rather than a detailed argument about the technicalities on such matters. I am sometimes informed that an agent feels unable to take a case before the tribunal owing to lack of experience and familiarity with the relevant procedures and presenting such appeals, when actually the people who are almost always best placed to deal with such a matter are actually the accountant and the client themselves, as they almost always have a thorough grasp of the relevant facts.
This proved to be the case here. I was able to examine the accountant and the client director of the company as witnesses, and they gave a very detailed summary of all the facts. Facts are the taxpayers’ strongest weapon in such a matter before a tax tribunal, and it is this that the Judge always wants to hear. Judges need something on which to base their decisions, and the provision of detailed factual evidence is of paramount importance.
There is, of course, an element of some formality about most tribunal hearings, but agents and their clients should not be put off by this, as usually nowadays these are kept to a minimum by the judges in recognition that most taxpayers and agents are, of course, to some extent unfamiliar with tribunal hearings. Actually, the most formal aspects of such tribunals are normally the instruction to stand when the judge enters the room and then having to swear the oath if someone is giving evidence on examination. Apart from this, I often find that most clients and accountants are quite pleasantly surprised at how informally most judges and their clerks normally conduct such hearings.
It is also important to recognise that the procedural rules for such hearings do contain a small built in ‘advantage‘ to the taxpayer, in as much as the normal procedure is for the taxpayer appealing an issue to present their case ‘first and last’. Readers of William Golding’s ‘Lord of the Flies’ will recall the paragraphs dealing with the meeting on the beach where the Conch is passed around to indicate who is to speak and when. Thus, the power is clearly shown to rest with the chap who speaks ‘first and last’ and this element of built-in emphasis for the taxpayer is equally important in tribunal hearings, as it gives the taxpayer a slight advantage, which must be used to the full.
Another feature of modern tax tribunals which can sometimes be off-putting is the HMRC’S use of its ‘advocacy teams’ (i.e. barristers), to present their side of the case. Realising that one is against such an individual can perhaps be a slightly unnerving experience the first time it happens. Again, this may actually not be such a problem at all, as it can happen that in fact the HMRC representative has only been presented with the case ‘brief’ fairly recently and may not have the detailed knowledge of all the facts and history of the case, which undoubtedly the accountant and the client will have and which can be brought out on examination of the evidence by a well prepared and represented client at the tribunal
A successful outcome
In this case, the matter eventually turned on simple issues. It became clear that had the accountant in the case been copied in on the voluminous correspondence by HMRC at every stage, matters might well have been dealt with sooner and more promptly. Indeed, the HMRC representative actually said at one stage that whilst the department is not actually obliged legally to copy the accountant in on the letters and notices going to the client ‘perhaps we should have done’.
Cases can sometimes turn on matters such as this. I refer to it with my clients as a ‘hook’ on which the tribunal judge may be able to hang their decision. It is always important to obtain a detailed grasp of all the facts of a case in preparation (preparation is everything in tribunal hearings), and to be able to identify something critical like this, which a judge might choose to see as being much more important than it at first appears to be.
As it turned out, the judge here chose to uphold the taxpayer company’s appeals and dismiss the penalties. To be fair, I don’t think HMRC was all that surprised given the case history, and had probably taken the case to appeal because they felt it was not incumbent on them to accept appeals where matters had dragged on for such a long time.
It is becoming clear to me in recent years that the concept of ‘reasonable excuse’ is perhaps significantly wider than traditionally thought, and may be more useable on appeal that many agents and taxpayers realise. In this case, there was also an element of ‘blaming the agent’ by the taxpayer, i.e. the accountant should probably have acted more timeously than perhaps had been the case.
Now traditionally, HMRC will not normally accept that a taxpayer can blame their accountant or tax agent for their own failings which have led to the submission of late tax returns, and for many years this approach was indeed supported by the courts. However, more recently there have been a few cases where, on the particular facts, the tribunals have indeed accepted that this may in extremis be a reasonable excuse if it can be shown that the facts support such an approach, and there was an element of this in the decision which the tribunal judge took in this case, much to the client’s relief!
If I have learned anything when representing clients before the tax tribunals in recent years, it is clearly that one must have a detailed grasp of all the facts, and be prepared to give the judge a very detailed exposition of them to enable him or her to identify what has been the key matter which has resulted in the taxpayer arriving before them. Tribunals are very much a ‘court of fact’ and it will be a fairly unusual occurrence for an upper tribunal or court in the UK to overturn a decision of the tax tribunal soundly based on such evidence.
Clearly, where a case involves very technical arguments or fine interpretation of a point of law then it may well be the case that a taxpayer would be better instructing legal counsel/barristers to deal with their appeals. However, in simple cases like this I do find that, actually, the accountant may be well able to take the hearing themselves and is often better placed to do so, having been intimately involved with their clients over many years and thus being in possession of a wealth of factual evidence to bring in support of their clients’ appeals.
Russell Cockburn is an independent taxation consultant. He was formerly an inspector of taxes.