Tax Tribunal overturns HMRC’s interpretation of “reasonable excuse”Tuesday, May 3rd, 2011
If a taxpayer does not know what is required, in what circumstances can that be a “reasonable excuse”?
In two decisions given in April 2011, the First-tier Tax Tribunal refused to accept HMRC’s interpretation of what is a “reasonable excuse”,
- in one case emphasising the need for employers to make it clear to leavers that their termination payments may not have been correctly taxed,
- in the other case clarifying that, if HMRC gives telephone advice to taxpayers, that advice must be complete and accurate.
Both cases were heard by the same Tribunal Judge.
In its published guidance (http://www.hmrc.gov.uk/online/excuse-missed-deadline.htm), HMRC states that a “reasonable excuse” is
“when some unforeseeable and exceptional event beyond your control has prevented you from filing your return on time. For example:
- a failure in HMRC’s own computer system
- your computer breaks down just before or during the preparation of your online return
- a serious illness has made you incapable of filing your tax return.”
Budiadi v Revenue & Customs
Mr Budiadi received an additional payment after leaving his employment in December 2007 and, following HMRC guidance at the time, tax was deducted at basic rate (BR). Mr Budiadi was a higher-rate taxpayer but the employer did not advise him that there may be additional tax to pay. HMRC sent him a tax return to complete in April 2010 but, because he should have paid the additional tax due by 31 January 2009, HMRC levied a surcharge. Mr Budiadi appealed against the surcharge.
HMRC’s arguments were that
- the surcharge is payable unless the taxpayer can establish a “reasonable excuse” for the entire period of the delay in payment,
- a “reasonable excuse” necessarily involves some exceptional event within or without the taxpayer’s control, and
- the late filing of the tax return is not a “reasonable excuse”.
The tribunal judge disagreed with HMRC’s interpretation of “reasonable excuse”, stating that it
“involves HMRC putting an unjustified gloss upon the ordinary English words that Parliament has chosen to use. A “reasonable excuse” is just that and does not, as a matter of statutory interpretation, require that there should have been some exceptional event whether within or without the appellant’s control.”
As for HMRC’s view that late filing of the return is not a “reasonable excuse”, the judge stated that that must depend on why the late filing took place. A taxpayer’s belief that the correct amount of tax has been paid by the employer and the absence of any notification that there was anything else to declare to HMRC may not be an exceptional circumstance but can still amount to a “reasonable excuse”.
The judge discharged the surcharge but Mr Budiadi is still liable for the unpaid tax on the termination payment. HMRC may well appeal against this decision but that will not affect the important lesson that this case provides for employers.
From April 2011, employers are required to apply tax code 0T to termination payments made after a P45 has been issued, not BR. Although that collects a higher proportion of the tax due on a termination payment, the employee’s correct tax liability will not be clear until HMRC receives the full year-end figures.
The decision reinforces the need for an employer, on making a termination payment to a leaver, to advise the employee in writing that the amount of tax deducted is inaccurate and that further tax may be due following the end of the tax year.
Fisher (t/a The Crispin) v Revenue & Customs
Following the close of his business in July 2008, Mr Fisher was advised by HMRC’s telephone helpline to send a letter explaining about the termination of the business. Nothing was said about filing year-end returns. There were no PAYE liabilities outstanding. Mr Fisher followed the instructions, provided his new address and asked HMRC in writing to confirm that all PAYE matters were concluded. He did not receive a reply and also did not receive the year-end return that HMRC claimed had later been sent to Mr Fisher. It was likely sent to the wrong address.
As the deadline for filing the year-end return was 19 May 2009, HMRC sent a fixed penalty charge of £800 to Mr Fisher in May 2010. He appealed against the penalty.
After interviewing Mr Fisher, the judge was satisfied that, if he had been correctly advised, he would have completed a year-end return. However, the judge was not satisfied that HMCR had sent a return to Mr Fisher’s new address and HMRC had not produced any evidence to that effect.
Commenting on the advice given on the helpline, the judge stated:
“A reasonably careful person informing the appellant of what he needed to do would have gone further and reminded him that he remained under an obligation to file an end of year return.”
Also, responding again to HMRC’s argument that Mr Fisher had not provided a “reasonable excuse”, the judge stated:
“Incorrectly, HMRC contends that a reasonable excuse must be based upon an exceptional circumstance or exceptional event. 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 ordinarily 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.”
Mr Fisher’s appeal was allowed and the judge, in explaining his decision, stated:
“Whilst HMRC may not be obliged to give advice or guidance as to what a person must do, in any given circumstances, if it does seek to assist or give advice, then that advice must be complete and accurate. If it is not, it provides a potential trap for the taxpayer who, some two years later, is said to be liable for a penalty of £800 absent any wilful default or moral fault on his part. Not only is that offensive to the ordinary person’s sense of fairness and justice; it is not required by the statutory regime which identifies an exception to the penalty if a reasonable excuse exists.”