As increasing numbers of individuals and businesses are incurring tax penalties, many due to Covid-related disruptions, I thought it appropriate to update you on what qualifies as a reasonable excuse and when it can apply following HMRC’s recent guidance update.
Many of the penalties issued by HMRC can be mitigated where a taxpayer has a reasonable excuse for their failure to meet their obligation. Unfortunately, there is no statutory definition of “reasonable excuse”. Instead, each case is decided upon its own merits. What might amount to a reasonable excuse for one taxpayer may not for another.
The recently updated ‘reasonable excuse guidance’, now states that the “law does not require that a reasonable excuse is based on an unforeseeable or inescapable event”. Instead, HMRC considers a reasonable excuse “to be something that stops a person from meeting a tax obligation despite them having taken reasonable care to meet that obligation.”
HMRC reasonable excuse: Unusual events
The HMRC guidance states that it is “necessary to consider what a reasonable person with the same experience and attributes as the taxpayer, who wanted to meet their obligation, would have done in the same circumstances and decide if the action of the person met that standard”.
This means that to qualify as a reasonable excuse, the circumstances involved do not have to be confined to a single event; rather that a combination of factors can amount to a reasonable excuse when considered together.
HMRC’s Compliance Handbook lists 4 general areas where a reasonable excuse may apply, including: mental health, physical illness, ignorance of the law and a general section.
HMRC reasonable excuse: Do your homework
To successfully challenge a penalty on the grounds of reasonable excuse, a taxpayer must demonstrate that their excuse is in fact realistic and that they’d put their failure right without unreasonable delay following the end of whatever circumstances that had led to their non-compliance with HMRC’s rules. To decide if a taxpayer has a reasonable excuse, the guidance outlines the following four-step process to determine if a reasonable excuse exists:
- Establish what facts the taxpayer believes give rise to a reasonable excuse.
- Decide which of those facts are proven, based on the evidence available, based on a balance of probabilities.
- Decide whether, viewed objectively, the facts that have been proven are an objectively reasonable excuse for the taxpayer’s failure and, if they are, when that reasonable excuse stopped.
- After deciding when any reasonable excuse stopped, decide whether the taxpayer remedied their failure without unreasonable delay.
HMRC reasonable excuse: Timing is critical
When determining if a reasonable excuse exists, you must first consider when the circumstances leading to the penalty first arose. If a defence of reasonable excuse is to be successful, that excuse must have existed on or before the date of the issue which led to the penalty being imposed.
HMRC has stated that where the impact of Covid-19 is the reason behind a failure to meet an obligation on time, it will normally accept this as a reasonable excuse, provided the pandemic issues arose prior to the deadline of the relevant obligation.
In addition, for the excuse to be accepted, the failure should be addressed without unreasonable delay after the circumstances giving rise to reasonable excuse end. Whether or not a delay is considered unreasonable is entirely dependent on the facts of the case.
When an excuse is not reasonable
In deciding if a taxpayer has a reasonable excuse, HMRC always consider the appeal on a case-by-case basis. The revamped HMRC guidance provides some examples that by themselves, do not usually amount to a reasonable excuse, such as pressures at work, a lack of information, or not being reminded by HMRC about a tax obligation.
Also, if the penalty arose simply because a taxpayer or business did not have sufficient of funds; this is not a reasonable excuse unless the lack of funds is due to circumstances outside the taxpayer’s control.
HMRC reasonable excuse: Reliance on a third party
Normally, reliance on a third person, is not considered a reasonable excuse; but if that third party is a professional expert, such as an accountant, this may in certain circumstances, make a difference.
HMRC’s guidance states that “where a person relies on any other person to do anything, that is not a reasonable excuse unless the person took reasonable care to avoid the relevant failure.” An example of this could be when a taxpayer relied on their accountant to lodge their tax return, who failed to do so.
If the taxpayer had evidence that they’d checked that their affairs were up-to-date, such as by keeping a phone log or email evidence, then their reliance on a third party would probably be considered to be a reasonable excuse.
What happens if an excuse is not accepted?
It is not uncommon for HMRC to reject a taxpayer’s claim that they have a reasonable excuse., but all is not lost. The taxpayer can still request a statutory review and may also be able to appeal against the penalty at a tax tribunal.
Also, depending on the circumstances, even when the excuse is rejected by HMRC, they may well agree to a reduction in the amount of the penalty on the grounds of special circumstances.
Tax Accountant’s view
The updated guidelines have not opened the door for a flood of appeals, but they have added some much-needed clarity. This is especially so with the changes to ‘unusual events’, which now effectively means that if significant numbers of taxpayers do the same thing in the same circumstances, then it automatically becomes a reasonable excuse.