Is HMRC Being Un-‘Reasonable’?

Taxpayers are under threat of penalties if they fail to comply with their various tax obligations. This article focuses on penalties for filing tax returns late.

There is an important exception from late filing penalties, which applies if the taxpayer satisfies HM Revenue and Customs (HMRC) (or the tribunals) that there is a ‘reasonable excuse’ for the late filing, provided that the failure is remedied without unreasonable delay after the excuse has ceased (FA 2009, Sch 55, para 23). However, the law states that an insufficiency of funds is not a reasonable excuse unless it is attributable to events outside the person’s control. In addition, reliance on another person (e.g. an agent) is not a reasonable excuse unless the taxpayer took reasonable care to avoid the failure.

Let’s be reasonable!

There is no statutory definition of ‘reasonable excuse’. This has resulted in numerous disputes between taxpayers and HMRC reaching the tribunal on whether there was a reasonable excuse for the taxpayer’s compliance failure. What amounts to reasonable excuse will depend on the facts and circumstances. A combination of circumstances, which in isolation may not amount to a reasonable excuse, may seemingly amount to a reasonable excuse when taken together.

For example, in Scott Building Contracts Ltd v Revenue and Customs [2017] UKFTT 630 (TC), the appellant company submitted nine monthly construction industry scheme (CIS) returns late, for periods between May 2014 and January 2015. HMRC imposed late filing penalties. However, a company director argued that there was a reasonable excuse for the defaults, for the following reasons: (1) she had just moved home, having had a baby. The baby was not sleeping (day or night), and she also had an older child to take care of; (2) she and her partner had suffered a burglary, and her car and her partner’s van (together with all his tools) were stolen. Consequently, her partner could not work for months thereafter, and he became depressed; (3) the business had recently started on a large new contract; and (4) they had problems with their accountant, who was difficult to contact and did not respond promptly to them (they had since engaged a new accountant).

Looking at all the factors in the round, the tribunal was satisfied that the company had a reasonable excuse for the failure to file the CIS returns on time. While any one of the circumstances taken in isolation may not have amounted to a reasonable excuse, the tribunal was satisfied that the cumulative effect of all the circumstances overwhelmed the director and amounted to a reasonable excuse. The tribunal pointed out that reliance on an accountant could not be a reasonable excuse unless the taxpayer had taken reasonable care to avoid the failure, but it was satisfied that the company had done so.

HMRC’s incorrect statement

Until recently, HMRC’s guidance (in its Compliance Handbook manual) interpreted ‘reasonable excuse’ in the following terms (CH61540): ‘a reasonable excuse is normally an unexpected or unusual event that could not be reasonably foreseen or is beyond the person’s control, and which prevents the person from complying with an obligation to file on time’ (emphasis added). HMRC argued this point in Scott Building Contracts. However, the tribunal pointed out that the tribunals had, on many occasions, held that HMRC’s statement of what amounts to a reasonable excuse was not a correct statement of the law.

The above HMRC statement about reasonable excuse apparently originates from an earlier case (C&E Commissioners v Salevon [1989] STC 907), where the judge referred to a person having a reasonable excuse by reason of “unforeseeable and inescapable misfortune”. However, in the later case C&E Commissioners v Steptoe [1992] STC 757, the same judge (Nolan LJ) stated that this “cannot be regarded as an all-purpose test of what constitutes a reasonable excuse”.

In Steptoe, a different judge (Scott LJ) endorsed the view that to be a reasonable excuse there must be an “unforeseeable or inescapable event”. However, it is important to note that the judgment of Scott LJ was a dissenting judgment. In Electrical Installations v R&C Commissioners [2013] UKFTT 419 (TC), the tribunal stated:

“As regards the doctrine of precedent, a dissenting judgment of a member of the Court of Appeal has no precedent value other than as a potentially persuasive authority…the reasoning which led Scott LJ to his conclusion cannot be regarded as a precedent, or indeed as correct, since it contradicts the reasoning of the majority.”

Other cases in which HMRC was criticised for seeking to rely on the above statement on reasonable excuse include Perrin v Revenue and Customs [2014] UKFTT 488 (TC) and Barrett v Revenue and Customs [2015] UKFTT 329 (TC). The Perrin case was subsequently heard in the Upper Tribunal ([2018] UKUT 156 (TC)), where the judge put forward a useful four-step approach when considering a reasonable excuse defence.

Interestingly, the above passage has now been removed from HMRC’s guidance at CH61540. However, there may be ongoing penalty disputes where HMRC has continued with its previous line of argument.

Practical point

Just because HMRC considers that there is no ‘reasonable excuse’ does not necessarily mean that none exists. Be prepared to challenge HMRC’s view, if necessary.

The above article was first published in Tax Insider in February 2018 (

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