Incapacitated person – a direct tax definition

 In Tax

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Who would have thought that the current tax definition of an incapacitated person dates back to before 1918 and therefore uses terminology that most of us would now recognise as offensive such as ‘any infant, person of unsound mind, lunatic, idiot or insane person’.

To the government’s credit it was agreed as part of the Budget that the legislative terminology needed to be brought in line with the operational terminology which is both more appropriate and takes into account modern views on mental health conditions. Hence HMRC published a consultation document on 24 May 2011 – for a download see


In principle the tax system needs certainty and we can all appreciate the practical difficulties for HMRC of having to decide at any particular time whether or not a person has capacity in terms of the definition in the Mental Capacity Act 2005 (MCA 2005).

Whilst the advances in modern psychiatric medicine mean that fluctuating capacity is something those caring for and dealing with adults must be aware of the tax system is not able to impose obligations and take away rights designed for a competent adult at a distance and without an assessment by someone qualified to make it. Nevertheless the current operational system apparently works satisfactorily and this allows for the obligations under tax law to remain with the individual unless someone else is dealing with their affairs such as a trustee, guardian or attorney and for the individual’s rights to be treated fairly. In practice this means the ability to seek ‘reasonable excuse’ for any temporary inability to deal with their own tax affairs.

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Policy objectives

HMRC wish to:

• Modernise the language used in the existing provision to define ‘incapacitated persons’ with a view to ensuring that the definition is set in the context of a more modern understanding of mental health and capacity.

• Maintain the scope of the definition by ensuring that, as far as possible, incapacitated people covered by the existing provision are covered by the new definition, whilst avoiding inadvertently extending it to other groups.

• Ensure the new definition interacts with the ‘reasonable excuse’ provisions so that taxpayers or those acting on their behalf do not face penalties in inappropriate circumstances.

Persons covered

The easy part is to identify those who should be regarded as incapacitated permanently:

a. Children whilst under the age of 18 and their parent or guardian has responsibility for their tax affairs during their infancy.

b. A person who has permanent incapacity either from birth and is now an adult or as a result of trauma, illness or injury is permanently unable to attend to their own tax affairs should not be subject to tax obligations nor have rights in relation to them because someone else is appointed to deal with their affairs.

This needs to be considered because the current provisions of s.42(8) TMA 1970 talks about that person’s trustee, guardian, tutor or curator dealing with their affairs. In modern terms this must surely be updated to parent, guardian or person with parental responsibility in the case of a child under 18 and in the case of an adult to their attorney, deputy or person acting in their best interests in accordance with s.5 MCA 2005.

If the incapacity is temporary then current HMRC policy is to leave the taxpayer to comply with their obligations and invoke the ‘reasonable excuse’ provisions thus allowing the individual to retain autonomy at a time of illness and not to confuse matters by passing obligations and rights between different people at a difficult time.

This is not itself without problems because of the nature of mental health issues leaving the person under stress with the obligation to comply and the imposition of penalties and interest and other measures at this time can make health issues worse.

I had a case once where the client, a self-employed property maintenance person, was diagnosed with terminal cancer. He understandably stopped dealing with paperwork and focused on his family taking his children on holiday and generally spending what time he thought he had with them. Fortunately, the treatment worked and he recovered but faced ruin because of his tax situation. The added stress of having to deal with the tax delayed his recovery but a few apposite letters and evidence to HMRC invoked the ‘reasonable excuse’ response.

MCA 2005

We know that the scheme of the MCA 2005 is to regard a person as competent unless it is established that he lacks capacity so to that extent HMRC’s approach is in line with that presumption.

s.2(1) MCA 2005 says that a person lacks capacity in relation to a matter under the MCA 2005 if at the material time he is unable to make a decision for himself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain.

If this definition of incapacitated person was used for tax it would impose a heavy burden on HMRC throughout the tax year to decide whether someone’s lack of response to a tax obligation was because of a lack of capacity or sheer laziness or bloody mindedness.

Again, s.5 MCA 2005 requires a person acting in the best interests of a person to take reasonable steps before doing so to establish whether the person lacks capacity in relation to the matter in question (which under the MCA 2005 is in connection with care or treatment) and when doing the act the person acting reasonably believes that the person on whose behalf they are acting lacks capacity in relation to the matter and that it will be in that person’s best interests for the act to be done.

I have certainly known family members deal with the financial affairs of an adult with learning difficulties who could not read and write apart from sign their name and for whom no deputyship was in place but where there appeared to be trust and an acknowledgement of responsibility. Would it be right to impose on that family member an obligation for which they would be personally liable to deal with their relative’s tax affairs? I suspect not. Would it be appropriate to appoint a tax agent to deal with the tax affairs leaving the incapacitated person with the obligations and rights? A tax agent may not feel competent to take instructions from the family member.


Is it appropriate in the circumstances to have a different definition of ‘incapacitated person’ for the purposes of the Taxes Acts?

I think the answer to that question is ‘yes’. The definition should:

a. Specifically refer to the general incapacity of children whilst under 18 and permit their parent, guardian or person with parental responsibility to handle their tax affairs until they have reached the age of 18 or married under that age.

b. Require the Attorney under a registered EPA or Deputy under an order of the Court of Protection to be responsible for the tax affairs of the donor or patient and for being responsible for deciding whether in the case of the latter the patient is capable of managing his or her own tax affairs which until they so advise HMRC remains the obligation of the Deputy.

c. Permit the Attorney under a Lasting Power of Attorney to be responsible for the tax affairs of the donor if the donor so requests and this request can be evidenced in writing; or, on the production of medical evidence and the registered power it is clear that the donor is unable to manage their tax affairs which will remain the obligation of the donee of the power until they so advise HMRC of a change in capability of the donor, the Court otherwise directs or the attorney dies, becomes incompetent or is removed.

d. Leave the tax obligations and rights with the taxpayer unless and until a person acting in the taxpayer’s best interests puts HMRC on notice that the taxpayer may not currently be able to manage their own tax affairs in which case HMRC will proceed as if this is a temporary situation unless it appears otherwise after a reasonable time.

If you have any views do let HMRC know by 16 August 2011 by e-mail to or by post to David Lewis at HMRC, Room 1/74, 100 Parliament Street, London SW1A 2BQ.

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