In James Ronaldson Scott v HMRC[1], a case in which the taxpayer appealed HMRC's refusal to grant "special relief" under paragraph 3A, Schedule 1AB, Taxes Management Act 1970 (TMA 1970),  the First-tier Tribunal (FTT) has confirmed that it can only decide whether HMRC's refusal was unreasonable, in the Wednesbury sense[2], it cannot substitute its own view on whether to grant relief.

Background

HMRC made a determination of tax for the two years ending 5 April 2007 and 2008, pursuant to section 28C TMA 1970, for failure to deliver a return.

The taxpayer made a claim for special relief, pursuant to paragraph 3A, Schedule 1AB, TMA 1970. Under paragraph 3A, HMRC can allow a claim for relief of overpaid tax when more than four years have elapsed since the end of the relevant tax year. The relief is available if certain conditions, set out in paragraph 3A(4)–(6) are satisfied (these are referred to as Conditions A, B and C). Condition A  is that it would be 'unconscionable' for HMRC to seek to recover the amount.

The taxpayer's explained that the returns were late due to the serious illness and subsequent death on 17 June 2012 of his previous accountant. The taxpayer had been assured that his previous accountant had been dealing with his tax affairs and returns and had nothing to worry about. The taxpayer also argued that the determinations were excessive in relation to the amount of tax due.

HMRC refused the taxpayer's claim for special relief, on the basis that he had previously been non-compliant in submitting tax returns prior to the special relief claim, and had also been subject to legal proceedings by HMRC. This decision was upheld following an internal review and the taxpayer appealed to the FTT.

The FTT's decision

The FTT began by considering the special relief decisions of William Maxwell v HMRC[3] and Donald Fitzroy Currie v HMRC[4].  

In Maxwell the FTT allowed the taxpayer's claim and considered afresh whether it would be 'unconscionable' for HMRC to enforce the determinations. In the circumstances of that case, it held that, as the taxpayer had not known of his accountant's ill-health, it was unconscionable for HMRC to pursue the tax due and special relief applied. This approach was contrasted with that taken by a differently constituted FTT in Currie. In that case the FTT adopted a narrower approach and held that the primary decision of whether it would be 'unconscionable' was HMRC's. They concluded that the FTT's jurisdiction was limited and they could only set aside HMRC's decision if it was held to be unreasonable 'in a judicial review sense' i.e. Wednesbury unreasonable.

Whilst the FTT in the present case were not bound by either of these two earlier decisions, it considered that the narrower approach taken by the FTT in Currie was to be preferred. In the view of the FTT, its function was not to review the merits of HMRC's decision, but rather the lawfulness of the decision-making process i.e. was HMRC's decision 'unreasonable', in a judicial review sense. The original decision made by HMRC could therefore only be challenged on Wednesbury principles, as articulated in that case. What has to be considered is the lawfulness of the decision-making process and whether all relevant factors were taken into account, and non-relevant factors ignored, in reaching the decision.

Applying these principles to the facts, the FTT concluded that it was clear on the evidence that the amounts of tax determined for each year were 'unreasonably excessive' of the amount due from the taxpayer. On two occasions the taxpayer's representative had pressed HMRC on this point, and the disparity between the self-assessments and determinations required further inquiry. Crucially, however, HMRC had failed to provide further explanation and did not engage in this process, instead preferring to focus on the taxpayer's tax history. In treating the matter as it did, the FTT was of the view that HMRC had failed to take account of a material factor and its decision was therefore unreasonable in a judicial review sense.

The FTT also concluded that HMRC's decision was unreasonable as it had erred in taking into account the taxpayer's tax history and behaviour when considering his claim for special relief. In the FTT's view, neither were material factors relevant for assessing 'conscionability' for the purposes of Condition A.

Given the above conclusions the FTT did not need to consider whether the accountant's illness would have justified the claim for special relief. It did, however, comment that in the present case it was sceptical that it would have done so. Taxpayers are personally responsibility for making sure their tax affairs are in order and up-to-date. It should have been clear to the taxpayer that his previous accountant was not doing all that was necessary to ensure that his tax affairs were kept up to date and in order.

Having adopted the approach taken in Currie and concluded that HMRC's decision was unreasonable, the FTT considered what relief, if any, to grant. On this point the FTT again agreed with the approach taken in Currie that the FTT's jurisdiction is limited to allowing or dismissing the appeal. The FTT cannot substitute its own view on special relief for that of HMRC. Accordingly,  the appeal was allowed, with the effect that the claim for special relief must be allowed.

Comment

This decision is important as it demonstrates that HMRC must consider all relevant factors, and not consider irrelevant factors, when deciding whether to allow a claim for special relief.

The disparity between the sums determined and the sums due was so great that further explanation from HMRC was required. By not considering this disparity, HMRC had failed to take account of a material factor which was relevant to the question of unconscionability. HMRC had also taken into account an irrelevant factor, namely, the taxpayer's tax history. It followed, therefore, that HMRC's decision was unreasonable in the Wednesbury sense.

For the full judgment click here.