HMRC have recently announced that they will be relaxing penalties for late filings in connection with PAYE. This is welcome news but on closer examination it applies only to the penalties for missing the deadline for providing information. There is no such relaxation in respect of the payment of PAYE liabilities.
If you pay your PAYE late, there will be a penalty and the penalties can mount up quite quickly. However, you may have a reasonable excuse.
There is no definition of a reasonable excuse; it is something which has to be considered on a case by case basis. The reasonable excuse only protects you from the penalty – it does not absolve you from the tax or the interest. There is a statutory obligation to pay interest on unpaid tax under section 86 TMA 1970 and this cannot be relieved by the Tribunal on the grounds of reasonable excuse.
There are various tests of reasonableness, but they all amount to the same thing. The taxpayer has to behave in the way that any reasonable responsible person would behave in connection with their tax affairs – demonstrating that they seriously intend to honour their tax obligations.
However, before any argument arises about a reasonable excuse, HMRC must prove that a default has been committed in the first place. Sometimes they can be rather slack and turn up at the Tribunal without any evidence that a default has occurred. They might hope that in giving evidence the taxpayer will admit the default in the course of trying to justify why they should be excused. However, that is a bit optimistic if the taxpayer is professionally represented because the onus is on HMRC to prove its case and the taxpayer does not have to say anything.
There have been many cases relating to late PAYE penalties before the Tribunal and HMRC tend not to be particularly sympathetic to reasonable excuses. They seem to take the view that it is not for them to let the taxpayer off (particularly in the present critical climate) and this is something best left to the Tribunal. However, the Tribunals have found that HMRC are sometimes rather too vigorous in their approach. One can have some sympathy for HMRC because the figures are enormous. PAYE receipts were £140 billion last year and the smallest slippage in collections obviously represents serous money. However, the desire for money is never a good excuse for bad behaviour, particularly on the part of a public body.
A recent case on this subject, Optrack Distribution Software Ltd v HMRC TC 4471 included a number of interesting elements but it started with a complaint by the taxpayer that (for various reasons) the imposition of the penalty for the late payment of the PAYE was unfair. However, the Tribunal explained that:
“In the light of the Upper Tribunal’s decision in Hok, we have no choice but to find that unfairness cannot be a ground on which to allow the appeal.”
The taxpayer then argued that the penalty was disproportionate and unduly onerous. The Tribunal had sympathy for the appellant’s arguments but explained that a penalty cannot be set aside for being disproportionate or unduly onerous either.
Whatever the merits of this particular case, these conclusions are in stark contrast to the consultation paper on penalties published by HMRC in February in which they explained that the principle underpinning the system of penalties is that they ought to be fair and proportionate. Under the circumstances one wonders why HMRC felt it appropriate to have pursued the taxpayer in Optrack quite so vigorously.
HMRC take the view that illness and domestic problems do not count as valid excuses unless they are really serious and prevent the taxpayer from dealing with his affairs. They acknowledge that someone in a coma would have a reasonable excuse and a major heart attack would also be sufficient – but a lengthy stay in hospital is not enough because the taxpayer is expected to make arrangements for dealing with his affairs.
HMRC report some weird and wonderful reasons why people are late in making PAYE and other payments, like “I have been looking after a flock of escaped parrots” – but the most frequently claimed reasonable excuses are that the taxpayer has relied on his professional adviser; payment could not be made on time because of an insufficiency of funds; or that the cheque was delayed in the post.
The obstacle to every claim is section 55 FA 2009 which provides that:
- An insufficiency of funds is not a reasonable excuse unless attributable to events outside his control.
- Reliance on another person to do something is not a reasonable excuse unless he took care to avoid the failure.
The Tribunal has taken a sympathetic view where the taxpayer is faced with financial adversity. In the case of Stephen Brand v HMRC TC 2434, the taxpayer claimed a reasonable excuse for failing to pay the tax by the due date. He had sold a property but had not received the sale proceeds. He was planning to borrow the money and applied to HMRC for time to pay but they refused and he ended up paying the tax a month late. The Tribunal noted that he did not receive payment in respect of his disposal leaving him with the obligation to pay the tax but without the resources to do so. The absence of funds was not his fault and he had a reasonable excuse for assuming that HMRC would have allowed him sufficient time to raise the funds to make payment.
Again, in Anaconda Equipment International Limited v HMRC TC 3521, the bank substantially reduced the taxpayer’s overdraft facility and in addition the company lost two material clients representing two thirds of their turnover. HMRC claimed that the taxpayer had a history of poor compliance but the Tribunal said that the appeal had to be considered on its merits. They concluded that the reduction in turnover and in the overdraft facility were events outside their control and constituted a reasonable excuse.
Paragon Precision Engineering Limited v HMRC TC 3542 also involved an appeal on the same grounds – but this was much more difficult because it was a VAT case and the rule for VAT is much stricter. Section 71(1)(a) VAT Act 1994 says that an insufficiency of funds is not a reasonable excuse but there is no reference to events outside the taxpayers control. However, undeterred, the company had an argument based on proportionality. They claimed that the Tribunal could strike down penalties which were out of all proportion to the default. The Tribunal agreed that this is possible and suspended their decision for 21 days to give the taxpayer the opportunity to provide evidence to demonstrate the lack of proportionality. We do not know if they did so – but the possibility of this further defence is interesting. (However this argument did not go so well in Optrak where the Tribunal said that a penalty cannot be set aside just because it is disproportionate or unduly onerous).
The decision in Award Framers International Limited v HMRC TC 3365 provides more hope. The taxpayer had a reasonable excuse for the failure to pay VAT because he was “elderly and prone to bouts of forgetfulness”. A similarly sympathetic approach was applied by the Tribunal in Wedgwood v HMRC TC 4148 where the mental health of the taxpayer was the determining factor.
It is now well established that where the taxpayer has relied professional advice, this does not represent negligence on his part. The taxpayer cannot be principally or vicariously liable for the negligence of his professional adviser. In Mariner v HMRC TC 3079 the Tribunal suggested that a person who perceives the need to take professional advice (and does so) is obviously taking reasonable care and cannot be negligent if they rely on that advice, even if it turns out to be wrong. However, this is not a get out of jail free card. If the taxpayer has reason to doubt the advice he cannot just close his eyes and hide behind the adviser.
In Litman and Newall v HMRC TC 3229 the Tribunal acknowledged that the taxpayer could not be expected to understand the technical details of a scheme, but he should be able to understand whether the transactions stood up to a basic level of commercial scrutiny.
A distinction was made in the case of Lithgow v HMRC TC 2296 between the circumstances where an adviser is acting in an advisory capacity and where he is acting merely as a functionary in filling in a document or making a claim. When the adviser is only acting as a functionary, the negligence of the adviser will not provide a defence to the taxpayer.
There are numerous cases where HMRC has imposed penalties for taxpayers whose tax payments have been delayed in the post. It seems now to be reasonably clear that if a taxpayer posts a cheque to HMRC it is reasonable to expect that it will arrive the following day. HMRC like to suggest that taxpayers should allow 3 days for payments to reach them, but this view has not been supported by the Tribunals. Section 7 Interpretation Act 1978 provides that a properly addressed letter is expected to arrive in the ordinary course of post and HMRC accept that the ordinary course of first class post is delivery the next day. Although HMRC rightly say that postal delays are not their responsibility, Aikman v White makes it clear that HMRC accepts the risk of postal delays because Section 115(2) TMA 1970 specifically envisages the submission of documents by post. However, this does not apply to bank transfers to which a longer period may well be appropriate – see Optrack v HMRC TC 4471.
The wide variety of circumstances and decisions makes it difficult to draw any firm conclusion about what is likely to be accepted as a reasonable excuse. However, the sympathetic approach taken by the tribunals does give the taxpayer genuine grounds for confidence if a sensible case can be put forward.
Even if a reasonable excuse cannot be sustained, there is also the possibility of having the penalty reduced by “special circumstances” under schedule 56, FA 2009 or having the penalty suspended under Schedule 24 FA 2007. These are discretionary reliefs available to HMRC and therefore unable to be claimed or appealed – but the Tribunal can intervene if HMRC has not given proper (or any) consideration to whether these reliefs should apply. These reliefs are every bit as good as a reasonable excuse in eliminating or reducing a penalty.
P S Vaines - Squire Patton Boggs UK LLP
Peter Vaines is a chartered accountant, barrister and chartered tax adviser and a partner in the international law firm of Squire Patton Boggs. The Legal 500 describe Peter as “the elder statesman of Residence and Domicile”. He received the Tax Writer of the Year Award for 2015.