Reasonable Excuse Revisited
Just over six months on from Christine Perrin -v- The Commissioners for HM Revenue and Customs [2018] UKUT 0156 (TCC) the Upper Tribunal (Tax and Chancery Chamber) (“the Upper Tribunal”) has revisited the issue of “reasonable excuse” in the decision of Timothy Raggatt QC -v- The Commissioners for HM Revenue and Customs [2018] UKUT 0412 (TCC) which was released on Tuesday.
Through the most gritted of teeth, Upper Tribunal Judges Herrington and Greenbank dismissed an appeal by the taxpayer against a finding that he did not have a reasonable excuse for the non-payment of tax. They specifically said at [45]:
“45. In common with the FTT, we have considerable sympathy for the predicament that Mr Raggatt found himself in. We cannot say that a differently constituted tribunal might not have come to a different decision. A differently constituted FTT might have placed more weight on the effect of the legal aid cuts when weighing up that factor against the fact that Mr Raggatt had adopted a practice of seeking to meet his tax obligations out of current income as and when he could. We cannot, however, say that it was not open to the FTT to place the weight that it did on the latter factor.”
The Issue
The issue in this case centred around whether the taxpayer had a reasonable excuse in circumstances where he had habitually failed to pay his tax on time and had paid it as and when his professional income permitted. The excuses put forward included, amongst other things, cuts to criminal legal aid and a financial institution not extending further credit.
The Arguments
The taxpayer urged the Tribunal that the circumstances at the time the payments were due, which included cuts to criminal legal aid and his financial institution not extending further credit, had resulted in a “perfect storm”. It was said that this amounted to a reasonable excuse because a reasonable taxpayer exercising reasonable foresight and due diligence and a proper regard to the fact that the tax liabilities concerned would become due on a particular date would not have avoided the insufficiency of funds.
The Revenue submitted that if a taxpayer chooses to spend the income tax that they had been paid, they would be “hard put” to pray in aid “reasonable excuse” because effectively they decided to spend the money that they knew was destined for the Revenue at the end of the tax year. It was said that support for this proposition derived from the dicta in Customs and Excise Commissioners -v- Salevon Ltd [1989] STC 907 (per Nolan LJ) and Customs and Excise Commissioners -v- Steptoe [1992] STC 757 (also per Nolan LJ). It was also argued that a reasonable taxpayer in the position of this taxpayer would have set aside a reserve which allowed for the payment on time.
The outcome
The Tribunal, in finding for the Revenue, did not accept that a taxpayer would be “hard put” to persuade a Tribunal that they had a “reasonable excuse” where they had spent the money subject to income tax (rather than setting it aside). It was said that reliance on what was said in Steptoe and Salevon was misplaced because those cases dealt with VAT which was money that belonged to HMRC. However, despite rejecting this argument the Upper Tribunal went on to find that:
“…although there is no legal requirement on the part of a self-employed professional person to reserve for his or her tax liabilities, in our view, a person with such an episodic life would be well advised to take reasonable steps to make some provision for tax liabilities or to ensure that he or she has appropriate bank facilities available to meet his or her expected tax liabilities if he or she subsequently wishes to rely on a reasonable excuse defence.
Taking such reasonable steps might not in the event prevent the taxpayer being able to deal with unforeseen events, but if it appears that the taxpayer did all that could be reasonably expected of someone in his or her position then the tribunal may well take a sympathetic view if nevertheless the taxpayer could not meet his or her liabilities when due.”
The Upper Tribunal did accept [at 40] that 40% cuts in real terms to legal aid in the periods under appeal were exceptional and “not one that has been faced by very many taxpayers even during a period of austerity where many have seen their real incomes decline”.
Discussion
The Upper Tribunal have again confirmed that an appeal against a decision relating to “reasonable excuse” must be one that is perverse or so unreasonable that no other reasonable tribunal could have reached it before it will interfere. It is relatively clear that in this case it was thought that the First-tier Tribunal had made a harsh decision, but not one that was outside the generous ambit afforded to it. The Upper Tribunal accepted that the First-tier Tribunal had placed considerably more weight on the fact that the taxpayer had, even before the periods under appeal, habitually paid his income tax late. Against that background, the fact that the taxpayer continued with that established practice after the introduction of the Penalty Regime, to which the appeal related, resulted in the issuing of the late payment penalties.
It might also be thought that the Upper Tribunal has drawn a relatively artificial line between what was said in Salevon and Steptoe and what they found in this case. In rejecting an obligation to set aside money to pay the Revenue (i.e. the obligation that arises with VAT and which would result in a taxpayer being “hard put” to argue reasonable excuse if they had spent it) the Upper Tribunal then went on to suggest that a reasonable person in the position of a self-employed person would have set aside reserves to make sure the tax could be paid on time if they wish to rely on the “reasonable excuse” defence. With respect it really appears to be two sides of the same coin which is to say that if you wish to rely on the “reasonable excuse” defence a reasonable taxpayer in the position of the taxpayer would set the money aside and not spend it so as to ensure that it was available for payment at the appropriate moment.
Click here to read the coverage of the case in The Times
Joshua Carey acted for the Revenue in this case (and for the Revenue in Christine Perrin -v- HMRC). He is regularly instructed for and against the Revenue in direct and indirect tax matters.
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