The nice people at Tax Journal have recently published a summary of Tax cases that went to court or to a Tax Tribunal for the first 6 months of 2015, especially those with wider implications such as, ‘what constitutes a reasonable excuse’.
Today I’ve picked out the most important cases involving ‘reasonable excuses’, which will hopefully be of interest to you:
1. Sudar Mahendran v HMRC
Mrs Mahendran had sold a property and the monies to pay the CGT were held by her solicitor. She had submitted an unsolicited Tax Return with a liability of £12,544 consisting entirely of CGT. Payment was due by 31 January 2014 but it was not made until the following September; and HMRC had imposed penalties. under FA 2009 Sch 56. Because of queries by HMRC she had appointed accountants and had diligently provided the accountants with any information requested and had chased them on several occasions.
The issue was whether Mrs Mahendran had a reasonable excuse and the Tribunal found that it had been ‘sensible and reasonable’ for Mrs Mahendran to rely ‘upon persons whom she reasonably believed to have the relevant specialist knowledge and expertise’. The Tribunal also found that it had been reasonable for her not to contact HMRC to ask for assistance before the due date, as she thought that matters were being dealt with by her accountants.
Wider implications: This case illustrates that taxpayers wishing to rely on this type of ‘reasonable excuse’ should ensure that, like Mrs Mahendran, they keep records of communications with their tax agents.
2. Jaswinder Dhariwal v HMRC
Mr Dhariwal is a dentist who manages several dentistry practices, and his tax affairs were dealt with by his accountant Mr Bhamra. At a meeting in February 2009, Mr Bhamra had indicated to Mr Dhariwal that his return for the previous year had been submitted. The return was in fact not submitted until December 2012. Between April 2009 and December 2012, HMRC had written to Mr Dhariwal several times, stating that the return was still outstanding and imposing penalties. Mr Dhariwal contended that he had a reasonable excuse; as he had relied on his otherwise trustworthy accountant who had intentionally misled him.
The Tribunal noted that one of the few circumstances where the failure of a tax agent can amount to a reasonable excuse is when the agent has been providing technical advice. The act of filing the tax return, as opposed to completing it, was however an ‘administrative task’ which did not fall into that category and had been separately invoiced. They did however accept that the fact that the accountant had offered reassurances which had turned out to be false and ruled that should be taken into account when calculating the penalty, which must therefore be substantially reduced.
Wider implications: This case focuses on the distinction between technical tax advice, reliance on which can be a reasonable excuse, and the failure to carry out administrative tasks, which can’t. It also suggests that even where reasonable excuse is not established, mitigating circumstances can reduce the penalty and that such circumstances should therefore always be put forward.
3. Perfect Permit v HMRC
Perfect Permit had delivered its employer annual returns (EAR) including forms P35 and P14) late in respect of the years 2008/09 and 2009/10 and had been charged penalties. Perfect Permit stated that they had appointed a new accountant in 2009 who had experienced ‘genuine and continuing difficulties’ in registering with HMRC as an agent. He had started the process on 5 March 2009 and still had not been registered by 5 August 2010.
The Tribunal ruled that had HMRC registered the new agent reasonably promptly, it was likely that the return would have been filed on time and that HMRC’s delay in registering the new agent therefore represented a reasonable excuse.
Wider implications: Similar to the Mahendran case, this is an example of ‘reasonable excuse’ being successfully pleaded. It also confirms that a system failure by HMRC can constitute a reasonable excuse.
4. Joanna Porter t/a Crafty Creations v HMRC
Ms Porter was appealing against a penalty imposed for the late filing of her personal Tax Return. She had repeatedly contacted HMRC prior to the 31st January deadline explaining that she was unable to pay the tax due online due to some access issue; and she had been informed that this was due to an IT failure which would be remedied. The return and payment eventually went through on 5th March 2014, but because of the 5 week delay she had been fined.
The Tribunal found that Ms Porter had ‘done her best’ to submit her return on time. The IT difficulties that she had encountered were unexpected and had eventually been solved when HMRC had issued her with a new ID number. The taxpayer therefore had established a reasonable excuse.
Wider implications: This case confirms that a system failure by HMRC can constitute a ‘reasonable excuse’ and may well provide a useful precedent to any taxpayer who files a return late due to IT issues.
5. The Bunker Secure Hosting (BSH) v HMRC
The taxpayer was appealing against penalties for the late payment of PAYE and NICs. It argued that the letter from HMRC imposing the penalties was the first it had received regarding the late payments and It had had received no generic information from HMRC.
The key point was the date, BSH’s BillPay statement showed that a payment had been debited from the taxpayer’s account on 20th July (the due date for payment). However, as such a payment requires activation three days before the due date; it had therefore reached HMRC late.
The Tribunal ruled that the 2009 Finance Act gave them no discretion, the rate of penalty being simply driven by the number of PAYE late payments. Furthermore, the legislation did not require HMRC to issue warnings; and failure to do so by HMRC did not amount to a reasonable excuse and that, in any event, ignorance of the law was not a reasonable excuse.
Wider implications: In this case the taxpayer accepted that he was aware of the due date for payment and the fact that he was not aware of the penalty regime does not in itself constitute a reasonable excuse.
If any of you would like more detailed information on any aspect of Important Tax Cases 2015, send me an e-mail and I’ll be pleased to advise further.