Reasonable Excuse for Non-Compliance with Self-Assessment (Perrin v HMRC)
Private Client analysis: The case of Perrin v HMRC was the first opportunity the Upper Tribunal (UT) has had to consider the test for ‘reasonable excuse’. Joshua Carey of 2 Hare Court acted for HMRC (the respondents), and comments on the case.
Perrin v Revenue and Customs Commissioners  UKUT 156 (TCC)
This article was originally published by LexisPSL on 29th May 2018. Click here to view the original article. Joshua was interview by Anne Bruce of LexisNexis.
What are the practical implications of this case?
This case is important in that it has determined the test to be applied when a taxpayer is relying on the defence of reasonable excuse. While this arises in the context of this case in relation to a non- filing penalty, the reasonable excuse formulation is used across the spectrum of taxes to avoid liability for non-compliance. Perrin has settled the position that the test for reasonable excuse is objective, rather than subjective. The focus of the First-tier Tax Tribunal (FTT) when considering reasonable excuse will now be directed at four main questions:
- establish what facts a taxpayer asserts give rise to a reasonable excuse. This includes an assessment of the facts particular to the taxpayer (ie experience, honest and genuine belief, any relevant attributes and acts or omissions by the taxpayer)
- assess whether those facts are proven
- consider whether, when viewed objectively, those facts do amount to a reasonable excuse for the default and the time at which that excuse ceased to exist. The UT has suggested that the appropriate question would be ‘was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?’
- consider whether the taxpayer remedied the failure without unreasonable delay after the reasonable excuse ceased
It will be important to consider each of these aspects when advising clients to ensure that the circumstances the taxpayer found themselves in are appropriately put before the FTT and evidenced. This will be essential to ensure that when the FTT turns to consider whether a reasonable taxpayer would have acted the same way, they are weighing up the position of the taxpayer against the ‘reasonable taxpayer’ with those same or very similar circumstances.
What was the background?
The relevant facts can be summarised as follows.
Mrs Perrin attempted to file her self-assessment online prior to the 31 January deadline. However, she did not complete the final step and accordingly the self-assessment remained outstanding. She had been notified of a similar problem the previous tax year, and the penalty for that tax year had been cancelled.
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.
HMRC advised Mrs Perrin in May 2012 that she had failed to complete the final step in lodging her self-assessment return, and this was the reason the penalty had been imposed.
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 2010/11 self-assessment return in the 2011/12 year.
The consequence was that her 2010/11 self-assessment remained outstanding, with penalties accruing. Mrs Perrin was notified of this in July 2012.
In August 2012, HMRC wrote to Mrs Perrin and reminded her that her 2010/11 self-assessment had been incorrectly filed in 2011/12 form, and therefore her self-assessment for the previous tax year remained outstanding. 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 2010/11 tax year.
Mrs Perrin was appealing the FTT’s decision to uphold the penalties imposed on her for late filing of the 2010/11 self-assessment return. Mrs Perrin’s reasonable excuse was that she had received a ‘submission receipt’, and accordingly believed that she had in fact correctly filed her 2010/11 self- assessment return.
What did the court decide?
The UT agreed with Mrs Perrin that she did have a reasonable excuse. However, that excuse was not remedied without unreasonable delay because she was expressly advised on several occasions of the problem but failed to remedy it until later. This decision touched on and clarified a number of other matters relevant to the FTT when considering penalty cases.
It made clear that the standard to be applied in penalty cases was the balance of probabilities as opposed to some higher standard. It also made clear that it is, first, for HMRC to establish that a taxpayer is liable to the penalty. This aspect deals with the FTT’s criticism in recent months about the insufficiency of evidence showing that taxpayers in those cases were required to file tax returns.
The UT also attempted to slow the criticism by FTT judges of other FTT judge’s decisions on the topic of whether ‘ignorance of the law’ could amount to a reasonable excuse. It put beyond doubt that ignorance of the law comes in degrees, but some laws are so well known, in this case filing a self-assessment, that ignorance of the law would not amount to a reasonable excuse.
Following the judgment, what are the steps that should be followed to determine if there is a reasonable excuse?
Following the decision in Perrin, representatives would be well advised to explore with their client the circumstances in which the default occurred. This will include questions about what the client’s knowledge was at the time of the default, whether reliance was placed on anything said or done by HMRC or its systems, whether the client made any inquiries themselves or whether they were merely acting under a mistake as to their position. In respect of mistake, this could amount to a reasonable excuse depending on the basis of the mistake.
All of these types of queries will be important when it comes to the FTT assessing what a ‘reasonable person’ would have done if they were in the position of the client taxpayer being represented. As the UT said, the key question is likely to be: was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?
Without a solid understanding of how the error came about, it will not be possible to assess whether a reasonable taxpayer in the position of your client would have made the same error. It will then be difficult to advise about whether the defence of reasonable excuse can be made out.
Interviewed by Anne Bruce.