The reasonable excuse of, say, a “force majeure” appears to confound HMRC in penalty disputes, probably because tax advisers should look at the test criteria objectively, applying impersonal and legal standards to a particular set of facts and circumstances. Generally, the reasonable excuse criteria should include the hypothetical question about what a reasonable person would have done in those circumstances and what reasonable care was exercised?
First-tier Tax Tribunal – decisions not used as case law principles
Whilst First-tier Tax Tribunal (FtTT) cases may give an indication of an approach undertaken in the particular circumstances at issue, those cases are not regarded as providing universal case law principles. I believe that this was particularly emphasised, and well illustrated with references, in the recent FtTT case of Barrett v HMRC (TC04514). The appeal was about penalty mitigation on the grounds of reasonable excuse.
When delegation to an Accountant may be considered as a Reasonable Excuse
Perhaps it is a taken that a taxpayer does not have a reasonable excuse when, knowing of a tax obligation, he merely delegates a third party accountant to submit a tax return without taking reasonable care to inform that accountant. For instance, if the taxpayer paid subcontractors off-record and did not inform the accountant, no suspicions would necessarily be raised and no need to for the accountant to suspect any other tax advice was required. Of course, if the turnover of work was unusually high for one person to do all the work himself, or the expenditure was disproportionate, then an experienced accountant may suspect mischief.
However, where the taxpayer informed his accountant that he did engage and pay others which resulted in a deduction of labour costs in the tax return, it would not be unreasonable for that taxpayer, as was in Mr Barrett’s case, to rely on the accountant to alert him about the operation of HMRC’s Construction Industry Scheme (“CIS”) and of course the CIS monthly filing obligations.
This appears to be the key to Mr Barrett’s appeal being upheld: having engaged his accountant to deal with both accounting and tax matters; PAYE; and, having provided all relevant business information, I believe that the FtTT Judge decided that Mr Barrett would have been entitled to rely on his accountant to draw to his attention any relevant CIS operations and filing obligations. It was also considered that it would have been reasonable for the taxpayer to have concluded, from his accountant’s silence, that there were no such obligations outstanding and consequently he would not be expected to go looking for something he did not know about – for example CIS contractor obligations and trawling through HMRC’s Internet which publishes a vast library of numerous tax guidelines etc.
The imposition of penalties by HMRC is an extremely important area for taxpayers who struggle to comply with ever more complex regulatory regimes, especially in Mr Barrett’s case where he relied on an accountant.
Cleary, the penalty regime contained in Schedule 24 of the Finance Act 2007 should be operated fairly and in accordance with the intention of parliament. The mere fact that HMRC regarded that something could have been done does not necessarily mean that the taxpayer’s conduct in failing to act in a particular way should have been regarded as unreasonable.
There is not a universal rule - what might be considered an unreasonable failure on the part of one taxpayer in one set of circumstances might be regarded as reasonable in the case of another taxpayer whose circumstances are different.