When is a “Reasonable Excuse” Reasonable?

Joshua Carey appeared for HMRC before the Upper Tribunal (Tax and Chancery Chamber) (“UT”) in the matter of Christine Perrin -v- The Commissioners for HM Revenue and Customs [2018] UKUT 0128 (TCC).

The decision was released today.

This case marks the first opportunity the Upper Tribunal has had to consider the test for “reasonable excuse”. This is a significant decision and affects the future interpretation of “reasonable excuse” across the spectrum of taxes.

Facts

The facts of this case can be summarised as follows:

1. Mrs Perrin attempted to file her self-assessment prior to the 31 January deadline. However she did not complete the final step and accordingly the self-assessment remained outstanding;
2. She had been notified of a similar problem the previous tax year and the penalty for that tax year had been cancelled;
3. Mrs Perrin tried to appeal the £100 penalty and daily penalties which were imposed but her self-assessment return remained outstanding and therefore HMRC could not consider her request;
4. HMRC advised Mrs Perrin in May 2012 that she had failed to complete the final step in lodging her self-assessment return and that was the reason the penalty had been imposed;
5. In an attempt to ensure HMRC could consider her appeal she tried to file her self-assessment return again in June 2012 but unfortunately filed her 2010/2011 self-assessment return in the 2011/2012 year. The consequence was that her 2010/2011 self-assessment remained outstanding with penalties accruing. Mrs Perrin was notified of this in July 2012;
6. In August 2012 HMRC wrote to Mrs Perrin and reminded her that her 2010/2011 self-assessment had been incorrectly filed in 2011/2012 form and therefore her self-assessment for the previous tax year remained outstanding; and
7. Mrs Perrin called HMRC in September 2012 and indicated that she thought she had filed the correct return. However, once she had checked she realised the error and immediately filed her self-assessment for the 2010/2011 tax year.

The First-tier Tribunal’s decision

The First-tier Tribunal’s (“FTT”) decision found that a reasonable taxpayer would not have realised that the return was initially outstanding because she was issued with a “submission receipt”. It found that Mrs Perrin had a reasonable excuse for non-filing. It also found that she had not unduly delayed in remedying the error when she tried to file the return in June 2012. However, that excuse ended when she either (a) filed the 2010/2011 tax return in the 2011/2012 tax year or shortly after she was notified of the problem in July 2012 and accordingly her reasonable excuse had come to an end. This had the effect that the penalties were not to be cancelled and her appeal was, largely, dismissed.

The Upper Tribunal

The UT decided to take the opportunity to cast the net wide and give a decision on a variety of topics. It is not unfair to observe that the UT went wider in its consideration than the grounds of appeal to give guidance to the FTT. Those issues included:

1. The test for reasonable excuse;
2. The burden of proof;
3. The standard of proof;
4. The test for “unreasonable delay”;
5. Whether ignorance of the law is capable of being a “reasonable excuse”;
6. Whether it is appropriate to rely on Steptoe and the consequence of continued reliance; and
7. The reliance by taxpayers on the “submission receipt”.

Outcome of the issues?

The UT found that the appropriate approach to considering “reasonable excuse” was as follows [paragraph 81]:

1. First, establish what facts the taxpayer asserts give rise to a reasonable excuse (this may include the belief, acts or omissions of the taxpayer or any other person, the taxpayer’s own experience or relevant attributes, the situation of the taxpayer at any relevant time and any other relevant external facts).
2.  Second, decide which of those facts are proven.
3.  Third, decide whether, viewed objectively, those proven facts do indeed amount to an objectively reasonable excuse for the default and the time when that objectively reasonable excuse ceased. In doing so, it should take into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times.  It might assist the FTT, in this context, to ask itself the question “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”
4.  Fourth, having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time (unless, exceptionally, the failure was remedied before the reasonable excuse ceased). In doing so, the FTT should again decide the matter objectively, but taking into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times.

It was found that the burden of proof initially rests on HMRC to establish, on the balance of probabilities, that a penalty is due. This cannot be done by mere assertion or reference to it in the Statement of Case. If there is insufficient evidence of this fact then the penalty must be cancelled without consideration of “reasonable excuse” [paragraph 69].

The UT also determined that when considering whether a failure to file has been remedied without “unreasonable delay” the test is, like reasonable excuse, objective [paragraph 77]. It was also at pains to point out, possibly to settle the current conflict of authorities in the FTT, that ignorance of the law is no basis to escape liability. The UT expressly found that [paragraph 82]:

“One situation that can sometimes cause difficulties is when the taxpayer’s asserted reasonable excuse is purely that he/she did not know of the particular requirement that has been shown to have been breached.  It is a much-cited aphorism that “ignorance of the law is no excuse”, and on occasion this has been given as a reason why the defence of reasonable excuse cannot be available in such circumstances.  We see no basis for this argument.  Some requirements of the law are well-known, simple and straightforward but others are much less so.  It will be a matter of judgment for the FTT in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long.  The Clean Car Co itself provides an example of such a situation.”

A warning shot was also fired across HMRC’s bow. They have been subject to fierce criticism for what it said to be the continued reliance on the minority judgment of Scott LJ in Commissioners for Customs and Excise -v- Steptoe [1992] STC 757. Accordingly, the UT found that in an appropriate case it may be proper to order costs against HMRC for its reliance on Steptoe which it found to be an “unsustainable position”.

Finally the UT required an assurance that since the Perrin case was originally decided by the FTT in 2014 that changes had been made so as to prevent taxpayers “unwittingly” falling into the same error, particularly those with limited technological experience. It was satisfied based on the additional submissions made at the UT’s request, that such changes had been made and that there was appropriate support in place for taxpayers to try and prevent similar errors being made in future.

Discussion

There has been much debate about the proper standard of proof, the burden of proof and whether the test for “reasonable excuse” is subjective or objective. This decision will undoubtedly come as a welcome relief to assist in determining those issues. It is difficult to suggest that this decision is anything other than the UT’s attempt at quelling the discontent which is permeating through the FTT over those issues and others including “ignorance of the law”.

It is hoped that this decision might now ensure that where there has been a divergence of opinion at the FTT level that this will restore a uniformity of approach which has been absent in recent months. This has been particularly clear where income tax penalty cases have been considered either on the papers (i.e. a paper case) or in basic cases. However, this decision goes much wider and is likely to affect all cases where “reasonable excuse” is the test to be considered and applied.

Joshua was expertly instructed by Katherine Pleming and Joshua Wilson of the HMRC Solicitors’ Office.