What amounts to ‘reasonable excuse’ for failing to file a tax return on time?

 In Tax

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Penalties for late payment of tax – McDonald v HMRC [2017] UKFTT 265

Case Summary from LawSkills | Private Client specialist trainersMs McDonald had failed to file several years’ worth of  tax returns on time. These covered a period during which she had been running her own business while at the same time being a primary carer for her elderly parents. HMRC had issued penalties for the delay, some of which Ms McDonald now challenged.

The facts

In 2004 Ms McDonald’s parents, who were becoming infirm in their old age, moved to a bungalow close to her home. Her mother had already had a number of strokes, and they needed assistance both with household tasks and, increasingly, with personal care. In 2008 her mother had another stroke, and became much more incapacitated. She spent several months in hospital and then her remaining days as an in-patient in other care facilities. Ms McDonald at this point took on more of her father’s care, as well as taking him on a 36 mile round trip to see his wife once or twice each day. In April 2009 Ms McDonald’s father was diagnosed with cancer and needed an increasing amount of care and support, much of it provided by her. Ms McDonald’s mother died in April 2010, and her father in September 2010.

During all the time that Ms McDonald had been taking on increasing responsibility for her parents, she had continued to run her own business as a therapist and counsellor. For the year following her parents’ deaths, Ms McDonald was in deep grief, while at the same time sorting out their affairs and still continuing her business. As soon as she felt she was in a position to ‘move on’, she sought help to get her tax affairs in order and began to make any and all back payments necessary.

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The law

Finance Act 2009, sch. 55 deals with the penalties for failure to make returns. For the purposes of this First-tier tax tribunal hearing, two parts of the schedule were relevant.

Paragraph 4 of the schedule provides:

“(1) P is liable to a penalty under this paragraph if (and only if)—
(a) P’s failure continues after the end of the period of 3 months beginning with the penalty date,
(b) HMRC decide that such a penalty should be payable, and
(c) HMRC give notice to P specifying the date from which the penalty is payable.
(2) The penalty under this paragraph is £10 for each day that the failure continues during the period of 90 days beginning with the date specified in the notice given under sub-paragraph (1)(c)

Paragraph 5 provides:

“(1) P is liable to a penalty under this paragraph if (and only if) P’s failure continues after the end of the period of 6 months beginning with the penalty date.
(2) The penalty under this paragraph is the greater of—
(a)5% of any liability to tax which would have been shown in the return in question, and
(b)£300.”

And paragraph 16 provides:

(1) If HMRC think it right because of special circumstances, they may reduce a penalty under any paragraph of this Schedule.

The Taxes Management 1970 was also relevant, in that HMRC argued Ms McDonald did not have a ‘reasonable excuse’ not to file her returns on time. S.118(2) of that Act states that:
“For the purposes of this Act…where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased…”

The decision

HMRC argued in relation to reasonable excuse that the actions of a taxpayer should be considered from the perspective of a prudent person exercising reasonable foresight and due diligence, having proper regard for their responsibilities under the Tax Acts. They submitted that serious illness could only be accepted if the situation meant that the taxpayer was incapacitated for the whole period from the filing date to the date the return was received, and did not consider Ms McDonald had provided ‘reasonable excuse’ in these terms.

HMRC also considered the provisions of par.16 sch.55 Finance Act 2009. They submitted that special circumstances under that paragraph must be “exceptional, abnormal or unusual’, or “something out of the ordinary run of events.” HMRC observed that throughout the period concerned Ms McDonald had continued to run her business, and should therefore be expected to deal with the associated paperwork as part of that.

The Tribunal did not agree with HMRC’s submissions. They found it ‘difficult to understand’ why HMRC considered that Ms McDonald’s letter, outlining the situation over the four year period she cared for her parents and dealt with their estates, did not lead them to conclude that these conditions had been fulfilled. The phrase “an unexpected or unusual event, either unforeseeable or beyond your control”, used by HMRC in their submissions, was taken from a dissenting judgment of Scott LJ in Salevon Ltd. The Tribunal considered it inappropriate for HMRC to use it to consider if Ms McDonald had a reasonable excuse in this case.

It was clear to the Tribunal that Ms McDonald had gone through a prolonged period of difficulty, which had been traumatic and involved her juggling many responsibilities. “It would have been physically and mentally exhausting for her”, and the Tribunal considered it was understandable that during that period she omitted to give proper attention to her tax affairs.

HMRC had said because Ms McDonald was able to continue her business there was no reasonable excuse or special circumstances that could allow them to cancel or reduce the penalty. The tribunal disagreed. Ms McDonald had had to work to support herself. “The fact that she did that and was able to look after her parents in the way she described is remarkable”. They further noted that Ms McDonald had continued to work beyond retirement age, one of the reasons being she was conscious she needed to sort out her tax affairs. The Tribunal held that Ms McDonald had been through a time of great personal difficulty, and that once her situation eased she attended to her tax responsibilities without too much delay. On that basis she had established that she had a reasonable excuse for the late submission of her return for the tax year ending 5 April 2011.

If the Tribunal was wrong to hold that Ms McDonald had fulfilled the reasonable excuse requirement of par.16 sch. 55 Finance Act 2009, the Tribunal further held that it would have found that there were special circumstances within the terms of the Taxes Management Act 1970, and would have reduced the penalty to nil.

Ms McDonald’s appeal against the penalty was allowed.

Points of interest

  1. The precise meaning of what is ‘reasonable excuse’ is important because it often stands between a taxpayer paying a penalty, and avoiding one.
  2. HMRC has relied on the phrase ‘an unexpected or unusual event, either unforeseeable or beyond your control’ (taken from a dissenting judgment) for some time.
  3. This case makes it clear that reliance should not be placed on that phrase, and it appears that in its wake HMRC has updated some of its factsheets: CC/ FS2, FS3, FS5 and FS23.
  4. These factsheets used to incorporate the phrase, “A reasonable excuse is normally an unexpected or unusual event that is either unforeseeable or beyond your control”.
  5. They have now been amended to the following:
    “A reasonable excuse is something that stopped you from meeting a tax obligation on time which you took reasonable care to meet. It might be due to circumstances outside your control or a combination of events. Once reasonable excuse has ended, you must put things right without unnecessary delay”.
  6. This is a welcome change, although it should perhaps be noted that HMRC’s Compliance Handbook for its own staff has not yet been revised to reflect this change.
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