So you missed the 31st January 2013 deadline, maybe, because it was your wedding day, your birthday anniversary, your favourite TV programme was on, the cat ate the tax return or you simply forgot! What next? Well, welcome to the new HMRC penalties regime. Most British tax payers would agree that the present HMRC penalty regime is harsh, stern and disproportionate but they are left with no choice the returns have to be filed on time.
If you are 1 day late say your Self Assessment Tax Return got to HMRC by 1st February 2013, you would have incurred a £100 fine regardless of whether or not you have any tax to pay. After three months, in addition to the £100, you would be charged £10 per day for a maximum of 90 days. If you are 6 months late you would be required to pay a further £300 or 5% of the tax due whichever is higher, if 12 months late a further £300 would be required or 5% of tax due. In serious cases you maybe required to pay 100% of the tax due instead.
As explained in SAM61290 by HMRC, ‘a customer can appeal against any late filing penalty on the grounds that they had a reasonable excuse for the late submission of the return, and against a late payment penalty, or a surcharge (for tax years 2011-2012 and earlier), on the basis that they had a reasonable excuse for late payment.’
The key word that may help you in any tax appeal is ‘reasonable excuse’. The core question to consider is do you have a reasonable excuse for not filing your tax return or making a tax payment on time?
What is reasonable excuse?
There is no definition in law of ‘reasonable excuse’ however there appears to be two differing interpretations of the law-[FA 2004,Schedule 11, Paragraph 4] HMRC appears to have a differing interpretation from the two tribunals based on recent case laws.
HMRC View and Interpretation
In HMRC SAM10090, [Appeals, postponements and reviews: appeals: reasonable excuse] the revenue says ‘A reasonable excuse is normally an unexpected or unusual event, either unforeseeable or beyond the customer’s control, which prevents him from complying with an obligation when he would otherwise have done. A combination of unexpected and unforeseeable events may, when viewed together, be a reasonable excuse.’
In this compliance guide and other parts of its website , HMRC regards the following as reasonable excuses:
Return not received, return lost in post, extreme weather, loss of tax records, serious illness, bereavement and computer online submission faults.
In the same vein, it points out the following as possibly no grounds for a reasonable excuse:
Difficulty in submitting online, pressure of work, failure by tax agent, shortage of funds.
HMRC’s interpretation of the law is often seen as extreme and beyond the ordinarily understanding of the word ‘reasonable’ as HMRC prefers to interpret ‘reasonable excuse’ as an unusual, exceptional, or unforeseeable event beyond the control of the tax payer that prevents him/her from delivering his/her tax return or making a payment. Such view appears to have no basis in law.
Enter Tax Tribunals
Tax Tribunals both the First Tier and Upper Tribunals have tended to take a commercial view and the summary of their position which on substantial grounds differs from the views held by HMRC is that : ‘a “reasonable excuse” is just that and does not, as a matter of statutory interpretation, require that there should have been an exceptional event within or without tax payer’s control and: ‘as a matter of law, that is wrong. If Parliament had intended to say that a person could only avoid a penalty by establishing that an exceptional event or exceptional circumstance had arisen, it would have said so. Parliament chose to use the phrase “reasonable excuse” which is an ordinary expression in everyday usage which must be given its natural meaning. A reasonable excuse may involve an exceptional event but need not necessarily do so.’
Let us a examine a few cases where this principle has been presented in case law.
John Scofield (TC1068)
The appellant, John Scofield objected to the cancellation of his (CIS) gross payment status by the HMRC who exercising the powers conferred of them by the Financial Act 2004, Section 66 (1) made a determination and cancelled his registration initially based on 10 compliance failures which were later waived except for one- payment of income tax received 30 days late. The tax tribunal determined that the cancellation was invalid because HMRC failed to exercise discretion as required by law and the appeal was allowed.
Thames Valley Renovations (TC947)
The directors at Thames Valley Renovation were turned down by HMRC when they applied for (CIS) Gross payment status on the grounds that their Self Assessment returns were outstanding. They had however received incorrect advice from their accountant who told them they had no income and therefore did not need to file any return. On realizing that they had acted on incorrect advice they reapplied for the tax returns but again the HMRC sent it to the wrong address hence they ended up filing the returns late. The tribunal determined that the tax payers had a reasonable excuse and had acted reasonably in relying on their accountant. The appeal was allowed.
Ithell and another (TC1029)
The appellant following a compliance review by HMRC had his gross payment status revoked. An unsigned cheque has been issued by the tax payer based on profits made in 2007/8 and 2008/9 but the sums were deemed inadequate to cover the outstanding tax liability. HMRC therefore considered that the tax payer had failed the construction scheme compliance test on four separate occasions and as such cancelled their gross payment status. The appellants denied receiving a notice from the HMRC whilst accepting their errors as innocent mistakes. The tribunal accepted that on the balance of probabilities they did not receive the notice and the appeal was allowed.
N A Dudley Electrical Contractors Ltd (TC1124)
The accountants of the taxpayer company filed a P35 return online for the year 2006/7 therefore HMRC neglected to send out a P35 notice to deliver a return for the following tax year. It was not compulsory during this period to deliver returns online nor had the company instructed HMRC of its intentions to continue to deliver the P35 return online. Therefore the First Tier Judge ruled HMRC failed to satisfy him ‘that the company had elected, by word or deed, not to receive a paper P35 return and that the department was justified in failing to provide a paper return. The judge retorted that this was ‘not plain dealing’. He was of the opinion that as a matter of common fairness and justice, HMRC should give the defaulting party a chance to remedy the default therefore the taxpayer’s appeal was allowed.
ASI Properties Ltd (TC981)
ASI Properties Ltd appealed the late filing penalties imposed on it. The tax return for the corporation tax liability in the sum of £82,940 was filed in March 2009 almost 2 years late. The First –tier Tribunal was unimpressed by the stated excuse that the director was going through a divorce and consequently could not set aside time to deliver the corporation tax return and therefore the appeal was dismissed and the penalty upheld.
JH Joy (TC1006)
The taxpayer appealed penalties imposed on him for late filing of his self assessment return on the grounds of ill health [He had suffered a mild stroke] work leave, divorce and the care of two daughters. His appeal was dismissed and the penalty upheld.
Dr Wald (TC1052)
Dr Wald, an American relied on the advice of his accountant and failed to show the excess over £8,000 for removal expenses on his tax return and he consequently received a 10% fine for negligence. He appealed on the grounds of reliance on his accountant but despite these grounds, his appeal was rejected and the penalty upheld.
How to Appeal Against HMRC Penalties
Based on the above rulings you may want to appeal on the basis of reasonable excuse. To do this follow the following procedure:
Challenge the decision of HMRC by completing a reasonable excuse form online or download the form and sent it by post alternatively you could write a letter within 30 days from the date of the penalty determination to appeal the penalty
In most cases, the appeal would be settled by an agreement with HMRC which may mean that you are happy to pay the penalty or alternatively HMRC had decided to cancel the penalty
If you are unhappy about the outcome of the appeal you may either ask for a review by HMRC [an independent HMRC officer unconnected to the case would take it over for review and should respond within 45 days] or escalate your appeal to the First Tier Tribunal
An independent officer may find in your favour and cancel the penalty or he/she may uphold the penalty in which case you may then proceed to the First Tier Tribunal by completing a form on the Ministry of Justice website within 30 days from the date of the review officer’s letter
The First Tier Tribunal judgment may find in your favour or otherwise. If otherwise you may appeal to the Upper Tribunal. The decision at that stage becomes final.