01743 271071 [email protected]
David Jones tells you how to challenge a Tax Penalty

David Jones tells you how to challenge a Tax Penalty

When a taxpayers gets a Penalty Notice from HMRC, because of an inaccuracy in their return, late filing, late payment, etcetera; they often claim that they themselves acted reasonably and the error was the fault of their agent, accountant, solicitor or other professional agent.

Will HMRC merely look at this as a try-on, or is such an excuse likely to succeed?

At first glance, the taxpayer has a potential case, as all of the main penalty schedules provide for the situation where they entrusted their tax affairs to a third party who then let them down. The focus is on the actions of the taxpayer rather than those of his agent and as long as the taxpayer themselves acted reasonably in relying on the agent, they have a potential get-out-of-jail card, not to be penalised for the agent’s shortcomings.

The difficulty lies in defining what is reasonable in the circumstances of any particular case and it will not surprise you that HMRC’s own definition does not err on the side of generosity and I quote from their Compliance Handbook:

“Where a person has asked somebody else to do something on their behalf, that person is responsible for ensuring that the other person carries out the task. They cannot claim they had a reasonable excuse merely because the task was delegated to a third party and the third party failed to complete it.

We expect the person to take reasonable care to explain to the third party what they require them to do, to set deadlines for the work and to make regular checks on progress, reminding where appropriate.”

In other words, HMRC will not normally accept that the taxpayer has acted reasonably unless they can show that they have closely monitored their agent’s actions. This is an attitude that tribunals have sometimes endorsed, but in many cases have held that such a narrow view by HMRC, was in itself unreasonable.

As with all relevant case law, the decisions depend on the facts of the case; however, it is possible to identify, at least in broad terms, certain factors that will usually be highly relevant to whether or not the challenge is likely to be successful.  There are 7 possible areas that are relevant to an appeal:

  1. How complex the task is: If the taxpayer takes professional advice on a complex matter and completes his or her return on that basis, they will usually have taken reasonable care. If however, the agent is merely fulfilling an administrative function that the tax-payer could easily have carried out themselves, such as filing a return or sending a payment, it will be hard for him to show that he acted reasonably by placing himself entirely in the agent’s hands.
  2. Is the excuse unusual: It is normal with tribunals that the more unusual the excuse, the more likely it is to be accepted. In one successful appeal, an agent failed to post a cheque because he had a heart attack.
  3. What is expected of a professional relationship: In another successful appeal, the taxpayer was held to have a reasonable excuse when her solicitor failed to file a land transaction report for Stamp Duty purposes. Although filing the return was a simple task, it was one of the solicitor’s responsibilities as part of the conveyancing process.
  4. Did the taxpayer have actual knowledge of the agent’s failure: If the taxpayer knows that the agent was not doing their job properly, that will usually kibosh any reasonable excuse claims, if not, you’ve got an excuse.
  5. Should the taxpayer have known of the agent’s failure: Tax tribunals vary as to how proactive they expect the taxpayer to be in checking that his or her agent is performing their duties correctly. In one case the tribunal held that verbal confirmation that a return had been filed on time was good enough.
  6. Whether agent is honest with the taxpayer: If a taxpayer asks their agent whether or not something has been done, they are normally entitled to assume that what their agent tells them is true and this amounts to both an exceptional circumstance and a reasonable excuse.
  7. Knowledge and experience of the taxpayer: The greater the knowledge, sophistication and commercial experience of the taxpayer, the less likely the tribunal is to accept that relying on an agent was a reasonable excuse. However, in a PAYE case I myself appealed recently on behalf of a new client, he was successful as he was a one-man-band operation, who had no prior knowledge of the requirement to submit the return in question.

So, what are we to make of this? My experience of tax tribunals is mixed and they can and often do, make different judgments on essentially the same circumstances. Having said this, as long as it appears the excuse is reasonable, it’s worth an appeal.

Share
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and a graduate of Liverpool Collegiate Grammar School, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David’s depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire’s most respected Accountancy Practice. Email David