Another Tax Tribunal object to HMRC’s interpretation of “reasonable excuse”Saturday, July 30th, 2011
The pressure on HMRC to adjust its interpretation of “reasonable excuse” increases with yet another adverse Tax Tribunal decision.
In a number of newsletter items this year, we have highlighted the conflicting views of First-tier Tax Tribunal judges in assessing whether employers who have not met their filing and payment obligations had a “reasonable excuse” for not doing so.
In its published guidance, 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.”
One Tribunal judge has disagreed with HMRC’s interpretation of “reasonable excuse” in a number of recent cases, 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.”
However, other First-tier Tax Tribunal judges, in considering a flurry of recent appeals against filing and payment penalties, have taken the traditional hard-line approach to the issues, refusing to accept that any of the employers had provided a “reasonable excuse”, although that is not to suggest that any of the Tribunal decisions were wrong in the circumstances of the particular case.
A more recent First-tier Tribunal decision on 29 June 2011, in the case Buxton Rugby Union Football Club v Revenue & Customs (which was found in favour of the employer), has considered the meaning of “reasonable excuse” in more detail. The Tribunal judge in this case was a presiding member of the First-tier Tax Tribunal. The relevant part of the decision reads:
“HMRC are right to say that ‘reasonable excuse’ is not defined in the legislation. However, this Tribunal has held that ‘an excuse is likely to be reasonable where the taxpayer acts in the same way someone who seriously intends to honour their tax liabilities and obligations would act.’ (B&J Shopfitting Services v R&C Commrs ). It has also been held to be ‘a matter to be considered in the light of all the circumstances of the particular case.’ (Rowland v HMRC )
In the recent decision of N A Dudley Electrical Contractors Ltd v R&C Commrs  (“Dudley”), the Tribunal explicitly rejects HMRC’s formulation of the “reasonable excuse” defence, saying:
‘HMRC argues that a “reasonable excuse” must be some exceptional circumstance which prevented timeous filing. That, as a matter of law, is wrong. Parliament has provided that the penalty will not be due if an appellant can show that it has a “reasonable excuse”. If Parliament had intended to say that the penalty would not be due only in exceptional circumstances, it would have said so in those terms. The phrase “reasonable excuse” uses ordinary English words in everyday usage which must be given their plain and ordinary meaning.’
I too consider that HMRC’s formulation of the ‘reasonable excuse’ defence is too narrow and reflects neither the normal and natural meaning of the term (per Dudley), nor the earlier dicta of this Tribunal quoted above.”
We have asked HMRC to comment on these recent criticisms of its application of the term “reasonable excuse” and whether it intends to appeal against the decisions to the Upper Tax Tribunal.
Other recent First-tier Tax Tribunals (e.g. Needs v Revenue & Customs) have taken up the expression used in the B&J Shopfitting Services case and are basing their decisions on whether or not there is a “reasonable excuse” by examining the employer’s actions
“from the perspective of a prudent tax payer exercising reasonable foresight and due diligence and having proper regard for his responsibilities under the Tax Acts.”
Taking a very different approach to the requirement for taxpayers to provide a “reasonable excuse” to justify the particular compliance failure is the 2009 European Court of Human Rights’ decision in Jussila v Finland. Where the burden of proof should lie in such cases was raised by the judge who initially criticised HMRC interpretation of “reasonable excuse”.
This same Tribunal judge and another Tribunal member have explained the application of the Jusilla decision in another recent First-tier Tax Tribunal decision (Hicharms (UK) Ltd v Revenue & Customs), which was also decided in favour of the employer. The judge began by setting out the principle, as established in 1978 in the case Johnson v Scott, that, where neglect on the part of the taxpayer has to be established, the onus of establishing such neglect lies with the Crown. With reference to the Jusilla decision, the judge stated:
“…penalties and surcharges, despite being regarded by the Finnish authorities as civil penalties, nonetheless amounted to criminal penalties despite them being levied without the involvement of a criminal court. At paragraph 31 of its judgment the court said that if the default or offence renders a person liable to a penalty which by its nature and degree of severity belongs in the general criminal sphere, article 6 ECHR is engaged. It went on to say that the relative lack of seriousness of the penalty would not divest an offence of its inherently criminal character.”
Then with reference to the case in question, the judge stated:
“In our judgement there can be no good reason for there to be a reverse burden of proof in a surcharge or penalty case. A surcharge or penalty is normally levied where a specified default has taken place. The default might be the failure to file a document or category of documents or it may be a failure to pay a sum of money. In such circumstances there is no good reason why the normal position should not prevail, that is, that the person alleging the default should bear the onus of proving the allegation made. In such a case HMRC would have to prove facts within its own knowledge; not facts peculiarly within the knowledge of the taxpayer.”