The changing nature of reasonable excuse

GERAINT JONES QC might not appreciate this, but he is developing a reputation of being a bête noire to the tax-man and a bit of an ally of tax payers. Dozens of rulings over the past two years have widened the definition of “reasonable excuse” and scolded HM Revenue & Customs for its policy of not sending out penalty notices for months, letting penalties stack up.

So what does this series of rulings mean for HMRC and taxpayers?

Reasonable excuse?

A theme running through many of Jones’s rulings is that HMRC’s definition of “reasonable excuse” for the late filing of tax returns is wrong. The taxman has long argued that the reasonable excuse defence can only be used in exceptional circumstances.

However, Jones said this is a “gloss” that HMRC has put on the words. Instead, the defence “uses ordinary English words in everyday usage which must be given their plain and ordinary meaning”.

So what has constituted a reasonable excuse? A surprisingly wide range of cases, in fact.

Maxine Barron (TC 01329, July 7 2011) won her appeal of a £54.07 fine because of lack of funds. “Whilst impecuniosity per se might not amount to a reasonable excuse,” he said, “the cause of or reason for such impecuniosity might nonetheless amount to, or give rise to, a reasonable excuse.”

One of Barron’s tenants had left her rented property in a damaged state, leaving her with cash flow problems. While HMRC commented that people should set tax money aside, Jones said that this would only be the case in a perfect world. “However, even in a perfect world the unexpected happens,” he ruled. Furthermore, he said that the restoration of her rental income would benefit the taxman in the long run, with the greater liabilities it will accrue.

This acknowledgement of greater revenue in the long run is explicitly made in the case of Martin Stone (TC00684, 23 July 2010), who suffered from significant health problems yet ran a construction company. He was issued a fine of £31,800 for submitting no monthly Construction Industry Scheme returns from May 2007 – October 2009.

Jones’s ruling praised Stone, calling him “stoical” in running the business “so as to avoid becoming a burden on the state”. In and of itself, his health would be a “borderline” reasonable excuse. But with a failure from HMRC to send the right forms to Stone, making it a “physical impossibility” for him to remain on top of the tax returns, the appeal was upheld.

Advisor miscommunication & HMRC misinformation

There have been two cases of a miscommunication between advisor and client being considered a reasonable excuse by Jones. In Tower Perkins Products & Services (TC01328, 7 July 2011), the business had its fine reduced because there had been a “genuine and honest belief” that the employer’s annual return had been submitted even though it hadn’t, as the accountant had been recently hospitalised.

Anthony Leachman (TC01125, 14 April 2011) had his appeal upheld as he and his accountant “had their wires crossed”, believing the other party had sent it.

HMRC has also been blamed for providing misinformation. In the case of Dudley Electronics (TC01124, 14 April 2011), no P35 employer return from was sent to the appellant because the business had previously submitted an online return. Jones found in favour of Dudley because this had not been made known by HMRC.

T.J. Fisher (TC0110, 29 March 2011) wound up his company in July 2008. Someone on the HMRC phone line informed him that he needed to send a letter informing the taxman that the company was going under and making sure he was up to date with PAYE. However, HMRC fined him £800 for not sending in an employer annual return in May 2009. HMRC “misled by omission rather than by commission”, Jones said, and allowed the appeal.

Perhaps even more abstract than this was the case of Colin Humphreys (TC00974, 12 January 2011). The appellant said he was misled by an advertising campaign that encouraged people to submit returns online. Because of his situation, he would have to purchase third party software to calculate his return – something that HMRC did not make clear, Jones said, therefore ruling in favour of Humphreys.

Computer says no

A common theme running through the appellants’ victories is the failure of HMRC’s computer systems. Bassilyan Community Forum (TC01121, 14 April 2011), Rushworths Furniture (TC01327, 7 July), Walton Kiddiwinks Nursery (TC01326, 7 July 2011), Hicharm (TC01285, 22 June 2011) and Louise Fernandez (TC01123, 14 April 2011) all had their penalties removed or reduced because they had believed that the online filing had been submitted.

The important point here is that Jones has put the burden of proof on HMRC. Using the Jussila v Finland ruling (2009) in the European Court, Jones has said that imposing a penalty should have the same burden of proof as a criminal fine. Therefore, HMRC must show that the appellants wilfully failed to submit a return.

In many of these cases, the appellants had print-outs to show that the online returns had been successful in their eyes. HMRC’s defence had been that the fault lay with the appellant’s computers. However, Jones refuted this, saying even if this were the case, the appellants had an honestly held belief that it had been submitted.

Jones also seemed dubious about HMRC’s computer systems. In the Bassilyan case, he said HMRC had demonstrated a “touching faith” in its computer system; in the Hicharms appeal, he cited the number of “public announcements concerning computer system problems experienced by HMRC, often involving large numbers of people.”

Line in the sand

Although Jones has changed the definition of reasonable excuse to attempt to give it its every meaning, there have been decisions in favour of the taxpayer.

In the case of the Qureshi School of Motoring (TSC01099, 31 March 2011), the partnership was unaware that it needed third party software. But, as opposed to the Humphreys case, it was liable for this, as the partnership tax return clearly stated that it needed third party software.

Peacock Development (01338, 7 July 2011) laid off its whole staff bar one person, who sent the letter in late. Jones dismissed this appeal. If this were to constitute a reasonable excuse, he said, “any poorly administered company would be able to rely upon its own shortcomings”.

A similar ruling was made about Centralised Services, which had only two employees, one of whom went off on maternity leave. The business decided to “hibernate” and failed to submit a return, despite being owed money by the Revenue. As the director was aware of the deadline, but consciously decided not to submit on time, the penalty stood.

Two other cases were dismissed for an unintelligible letter from the Mr M Riaz’s accountant (TC01096, 30 March 2011), which formed the only evidence against HMRC, and Jaswant Singh Digpal (TC01331, 24 November 2010) submitted his tribunal application after the deadline was not granted leave to appeal because he displayed an “ostrich like…head in the sand” appraoch to letters being sent by HMRC.

Late penalties

Criticisms of HMRC sending penalty notices out late and letting them build up is another element of Jones’s rulings.

In two cases – Hok Ltd (TC01286, 22 June 2011) and HMD Response International (TC01322, 7 July 2011) – the parties agreed to the initial late payment fines. However, they said the fine had increased from £100 to £500 in both cases because HMRC did not send letters for six months, so they did not know they were liable.

In both rulings Jones said: “There can be no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months so that, in effect, a minimum penalty of £500 will be levied unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing.”
HMRC response

HMRC says its definition of reasonable excuse is upheld in 70% of tribunal cases – significantly higher than rulings by Jones.

A spokesman said: “The ‘reasonable excuse’ provision ensures that no one will pay a penalty if they have a strong reason for being unable to meet the deadline. Only a small proportion of the millions of decisions HMRC make each year are challenged by taxpayers, with most disputes resolved by agreement between HMRC and the taxpayer.”

On the penalty notice decisions, the spokesman said the timetable for issuing penalties is “designed to allow a reasonable period for a nil return to be sent in thus avoiding any penalties being issued to customers who did not need to operate PAYE in the year concerned but who did not let us know until after the deadline. It also gives time for us to make sure all returns in by the annual deadline have been processed.”

We can only know the significance of Jones’s rulings once HMRC has indicated whether the decisions will be appealed or not. But there has been a development. In the case of Stephen Rich (TC0180, 21 July 2011), the appellant’s defence was that his return was late as he was reliant on his accountants to inform HMRC that his website was profitable and therefore eligible for income tax. The tribunal found that, as VAT specifically excluded reliance on third parties as a reasonable excuse, the lack of this specific provision for income tax meant this was an allowable reasonable excuse.

Which sounds like a Jones ruling. However, this time the judge was a Nicholas Aleksander. Unfortunately for HMRC, it might be that tribunal judges are keeping up with the Joneses.