By Jason Piper, technical officer, ACCA
When is the exceptional “reasonable”, and the predictable “unreasonable”?
When you’re talking tax of course – or to be more precise, the excuses people have for not filing their UK tax returns. If you file late or pay your tax late, you’re subject to a penalty, unless you can show you had a “reasonable excuse” for the delay. “Reasonable Excuse” is not by any means a new concept – it’s in the Magna Carta, so the courts should have had a while to get used to it and maybe work out what it means.
But it seems we’re still having trouble.
HMRC have published guidance on what grounds they think are “reasonable excuse” (fire, flood, bereavement, coma etc.) and what aren’t (e.g. tax return too difficult, failure by agent), but emphasise that “[a] reasonable excuse can only exist where an exceptional event beyond the control of the taxpayer prevented completion and return of the tax return by the due date.”
Historically, taxpayers have had to jump through hoops to demonstrate some “exceptional” circumstance, and HMRC set the bar high. In one recent case a taxpayer successfully appealed against a fine of over £3,000 for not setting up a payment instruction properly to service a capital gains tax payment plan. The taxpayer couldn’t explain exactly why the relevant details hadn’t been forwarded to HMRC on time, but the Tribunal agreed that the hospitalisation of his elderly father/business partner, and associated burden of caring for his mother, was certainly relevant. HMRC’s conduct in writing to him and confirming that the payment plan was in place was a further contributory factor; he had done all that a reasonable taxpayer could be expected to, and the fine was overturned.
However, a recent run of cases has seen some robust criticism of the “exceptional” principle. In two out of the three cases where the tax Tribunal found there was a reasonable excuse without an exceptional event (so not including the one above), HMRC themselves had been responsible for providing, or failing to provide, the information which led to the late payment of taxes.
As a point of principle, it certainly feels wrong that HMRC could fine people for doing what HMRC led them to believe was the right thing. (It would also be nice to think that an error by HMRC was “exceptional” in itself.) And from a PR perspective you have to wonder what positive message the officials concerned thought that they would give out by punishing taxpayers for the authority’s shortcomings; refusing to back down and pushing the cases to appeal has simply led to publicity for both the initial failings and the subsequent rigid adherence to the Manual.
But from a practical point of view, it’s also led to the Tribunal stating very clearly that “reasonable” means just that, and “exceptional” is nothing more than an HMRC gloss which the Tribunal was not prepared to uphold. So, will we see a rash of appealed and overturned penalties? It’s hard to say; every case should be judged on its merits, and Tribunal judgments aren’t binding. However, there seems to be a marked reluctance on HMRC’s part to suspend penalties even in cases which might meet their own guidelines. If that continues, we’re bound to see more appeals, and if the Tribunal sticks to its guns, an even higher proportion of those appeals will be successful.