In recent years, with the difficulties that many taxpayers have experienced in the current economic climate, the issue of 'time to pay' agreements with HMRC has become of greater concern. HMRC's Business Payment Support Service ('BPSS') exists to meet the needs of businesses and individuals who are experiencing difficulties in paying the tax due in full and on time. Taxpayers can contact the BPSS and enter into an agreement with HMRC, under which they are given additional time to pay any tax that may be outstanding. However, the recent decision of the First-tier Tribunal ('FTT') in Cornwallis Care Services Ltd v HMRC [2012] UKFTT 724, highlights the difficulties which taxpayers can experience when entering into such arrangements.

The facts

This was concerned an appeal against PAYE penalties imposed under paragraph 6, schedule 56, Finance Act 2009, in respect of the 2010/11 tax year amounting to £4,753.67, payable by Cornwallis Care Services Limited ('Cornwallis').

The penalties related to the following six periods of default: period 2 (period to 5 June 2010), period 5 (period to 5 September 2010), period 8 (period to 5 December 2010), period 9 (period to 5 January 2011), period 10 (period to 5 February 2011) and period 11 (period to 5 March 2011).

Paragraph 6, schedule 56, Finance Act 2009, sets out the penalties which are chargeable in respect of failure to pay PAYE on or before the date when it is due and payable. The level of the penalty is dependent on the number of defaults during a tax year. The first failure in a tax year does not trigger a penalty (paragraph 6(3)). If a person makes one, two or three defaults during a tax year, the amount of the penalty is 1% of the tax due (paragraph 6(4)); four, five or six defaults during a tax year leads to a penalty of 2% of the tax due (paragraph 6(5)).

These penalties cannot be applied during a period when there is an agreement for deferred payment between HMRC and the taxpayer (paragraph 10(1)). There is no liability for a penalty if the taxpayer can satisfy the tribunal that there is a 'reasonable excuse' for the failure to make the payment on time (paragraph 16(1)).

The arguments

Cornwallis' representative, Mr Barclay, explained to the FTT that Cornwallis ran four care homes in Cornwall and employed 100 people.

Cornwallis had faced financial difficulties during 2010 and had imposed a rolling programme of cost cutting. During this time it was under financial pressure from its bankers and it was slow in paying the PAYE that was due to HMRC.

Mr Barclay explained that one of the reasons for these financial difficulties was as a result of cash flow shortages caused by the delay in receiving payment for patient admissions from Cornwall Council. Payments from Cornwall Council, which could be up to nine months late, made up about one twelfth of the company's total income.

Mr Barclay had had a number of meetings with HMRC in June or July 2010, when he had come to an oral agreement with HMRC for a deferred schedule of PAYE payments for the following six months. There was no written evidence of this agreement and Mr Barclay accepted that not all of the payments for the next six months were made in accordance with the agreed deferred schedule.

Mr Barclay was not aware that any PAYE penalties had been incurred until he received a letter from HMRC on 17 October 2011. Mr Barclay responded to this letter and as a result, the penalties were reduced, initially to £8,944.35 (HMRC confirmed the removal of period 7 from their calculations on 15 November 2011) and then to £4,753.67 (HMRC confirmed the removal of period 12 from their calculations on 26 April 2012).

The arguments

HMRC argued that there was no written evidence of a time to pay agreement between HMRC and Cornwallis for the months in question. HMRC based their argument on a note of conversation with Mr Barclay held on 24 June 2010 and relied upon the fact that there was no evidence in HMRC's transcripts of phone conversations between Cornwallis and the inspector of any formal time to pay arrangements being in place in respect of the periods in issue. Cornwallis argued that it had an agreement with HMRC on the basis of a number of oral conversations which Mr Barclay had had with HMRC. Mr Barclay had believed that his conversations which he had had with HMRC in June and July 2010 covered the payments due for June to September 2010.

The FTT's decision

Having considered the evidence before it, the FTT concluded that Cornwallis' late payments for periods 2 and period 5 were indeed as a result of Mr Barclay's genuine belief that he had a deferred payment agreement with HMRC which was based on his conversations with HMRC in June and July of 2010.

The FTT was of the view that Cornwallis' genuine belief that it had been given time to pay in respect of the June and September payments should be treated as a 'reasonable excuse', for the purposes of paragraph 16(1), schedule 56, Finance Act 2009. The FTT concluded:
 

"20. There is no statutory definition of what constitutes a 'reasonable excuse' for these purposes, although paragraph 16(2) of Schedule 56 does state that neither an insufficiency of funds nor reliance on a third party should be treated as a reasonable excuse. HMRC's own guidance says that a reasonable excuse is 'an unexpected or unusual event, either unforeseeable or beyond the taxpayer's control'. We consider that HMRC's guidance gives a relatively restrictive interpretation of the legislation and that there are other types of circumstance which should be treated as giving rise to a reasonable excuse.

21. Previous decisions of this Tribunal have concluded that in some circumstances reliance on information or guidance from HMRC which turns out to be misleading, can constitute a reasonable excuse. (See for example Dental I.T Ltd (TC 1002) and Tower Leasing (TC 1334)). We consider that this is the case for Cornwallis in respect of the periods of default which were discussed with Mr Youngs in June and July."


The FTT did, however, confirm that the cash flow difficulties faced by Cornwallis could not be taken into account in determining whether there was a reasonable excuse for any of the periods of default.

Comment

This case illustrates the importance of taxpayers accurately documenting all important discussions that they have with HMRC. Any oral agreement that it is considered has been reached with HMRC should be confirmed in writing at the earliest opportunity so as to minimise the risk of disagreement between the parties as to whether an agreement has been reached, or the terms of any such agreement. If this had been done in the present case, the matter may not have come before the FTT for determination.

The case also provides helpful confirmation that what constitutes 'reasonable excuse' for the purposes of paragraph 16(1), schedule 56, Finance Act 2009, is not limited to what is contained in HMRC's guidance. It is unfortunate that HMRC's current guidance gives such a restrictive interpretation of the relevant legislation and it is to be hoped that given the comments of the FTT in this regard, HMRC will revise their guidance without undue delay so as to more accurately reflect the legislation in this very important area of the law.