Reasonable excuse - September 2012 update

The First Tier Tribunal case overturned a penalty for a 'careless error where the accountant was blamed


In the  First Tier Tribunal case of Mr J R Hanson v The Commissioners of HMRC FTT 314, the tribunal held that it is not 'careless' on the part of the taxpayer not to verify professional advice given by his accountant.

The taxpayer had submitted his tax return, which had been prepared by a firm of accountants, claiming relief from capital gains tax on the sale of loan notes that Mr Hanson had received as part of the consideration for selling his business.

HMRC launched an enquiry into Hanson's tax return and found that he was not entitled to the relief claimed and issued a penalty for 'carelessness' of £14,000 in addition to the CGT found to be due.

Mr Hanson appealed against the penalty, contending that ‘reasonable care’ could not entail checking that his accountants had given him sound professional advice.

HMRC defended its position on the basis that an error by an adviser was still the responsibility of the taxpayer. HMRC argued that it is the taxpayer's responsibility to ensure that advice provided by his or her advisers was indeed correct. 

The tribunal judge took the opposite view that the taxpayer had taken reasonable care by utilising the services of a professional adviser, even though it subsequently became clear that the accountant had been careless in his advice.

The judge concluded that clients must ensure that they make sure what they are signing is correct within their own ability and competence, but that ‘An ordinary person cannot be expected to challenge specialist professional advice on a complex legal point. But they ought to be able to recognise the complete absence of a major transaction.’

This case reinforces the decision in Rowland v HMRC Sp C [2006] SSCD 536 (Sp C 548). 

Application to appeal out of time

Mr Griffiths applied to the Tribunal for leave to appeal out of time two post-clearance C18 demands. The appeal should have been lodged by 30 October 2009, but was not made until 27 May, 2010.

The appellant understood the liability related to American Pick Up Company Ltd, which was in liquidation and was not personal to him. He claimed that he had not received any correspondence after the liquidation.

Mr Griffiths had consulted an expert who had contacted HMRC and said that Mr Griffiths had no authority to request an interview as the demand was against the company and, following the appointment of the liquidator, Mr Griffiths was no longer an officer of the company. Further C18s were addressed to Mr Griffiths in person.

There was some confusion in the advice received from HMRC as to whether Mr Griffiths had personal liability or not, and the Tribunal granted Mr Griffiths permission to appeal out of time.

For further commentary on this case, visit the 'Related links' section on this page.  

Cases where the appeal was successful

Blaze Group Holdings Ltd v Revenue & Customs [2011] UKFTT 616 (TC)

Mr Fred Allen, managing director of the appellant, gave evidence for the appellant. He had been telephoned by HMRC on 28 February 2011 and informed that the VAT returns for the past three quarters had not been submitted.

It was the first Mr Allen had heard of the matter and he immediately arranged for the returns to be submitted and the VAT paid.

He checked with his accountant, who said that the returns had been submitted but failed to produce the file.  She had previously been discovered misappropriating funds and had been moved to another position where she had no access to funds, but prepared the VAT returns. Prior to electronic filing, he would have seen and signed the returns.

Reliance on another person is not normally a reasonable excuse, but Mr Allen believed that her demotion had caused her to act maliciously. 

He also pointed out that had it not been for the change to electronic filing he would have known straight away.  

He also submitted that HMRC should have phoned him and not the accountant. As soon as he was informed, he dealt with the matter.

The Tribunal found that the accountant's malicious acts were an exceptional circumstance and a reasonable excuse for the late submission of the returns. They allowed the appeal and cancelled the surcharges.

For further commentary on this case, please visit the 'Related links' section on this page.

Zoe Hamar v Revenue & Customs [2011] UKFTT 687 (TC)

Mrs Zoe Hamar appealed against an assessment to capital gains tax for 2002/03. She was notified of the assessment under section 282 TCGA 1992 in a letter dated 18 August 2009.

Mrs Hamar's father had owned three flats, one of which he transferred to her in 2001/02 and two that he transferred in 2002/03. These transfers gave rise to a CGT liability which was unpaid at his death in June 2003.

Although payment of the liability was agreed by the executor, it remained unpaid.

Until 18 August 2009, when she received the letter from HMRC, Mrs Hamar was unaware of the liability. HMRC also claimed interest from 2002/03.

The Tribunal held that, given that the liability had arisen on the donor and subsequently his estate, HMRC was entitled to raise an assessment on Mrs Hamar in 2009/10.

The assessment was raised for 2002/03 and was not valid, as ‘it is impossible to say that an assessment for one specified fiscal year can ever be or take effect as an assessment for another fiscal year’.

A consequence of this conclusion was that the interest assessment was also not valid; if it were, it would be possible for interest to be paid for a period before any liability to pay CGT had arisen. The appeal was allowed.

For further commentary on this case, please see visit the 'Related links' section on this page.

JMS Aggregate Supplies v Revenue & Customs [2011] UKFTT 426 (TC)

JMS Aggregate Supplies appealed against nine default surcharges in relation to late payment of VAT. All returns were completed on or before their respective dates.

The Tribunal accepted that the business had difficulty in recovering money due to it, from both customers and a tenant who owed it £18,000. It had applied to the court for redress and received little success in recoveries.

It is established that lack of funds is not a reasonable excuse for late payment of VAT, but the leading case of Customs & Excise v Steptoe [1992] STC 757 established that the cause of that insufficiency might be.

The Tribunal also concluded that the lack of money was not due to lack of foresight and the Appellant’s exercise of reasonable foresight, due diligence and proper regard for the fact that the tax had become due on a particular date must have led to payment of the tax due as soon as the insufficiency of funds could be overcome.

They concluded that the appellant had a reasonable excuse. 

For further commentary on this case, please see visit the 'Related links' section on this page.



Cases where the taxpayer was unsuccessful

Claranet Ltd v Revenue & Customs [2011] UKFTT 603 (TC)

Claranet Ltd made an appeal against VAT default charges. The appeal was made late and an application for it to be heard out of time had been granted. 

The appellant did not argue that it had a reasonable excuse for the period 10/09 but, due to the cumulative nature of the rate of penalty, a reasonable excuse for 07/09 would reduce the penalty for the following period.

There was some confusion over the VAT payments, as the company had been making stage payments and payments had been made and repayments received.

Unfortunately, there was no one available to give evidence in respect of this as the persons concerned were no longer employed by the company. 

The Tribunal took the view that the company did not take prompt action to resolve the matter and dismissed the appeal. 

For further commentary on this case, please visit the 'Related links' section on this page.

Hall Safety & Environmental Ltd v Revenue & Customs [2011] UKFTT 636 (TC)

Hall Safety and Environmental Ltd appealed against a penalty of £800 for late submission of its end of year return (P35) for 2009/10.

It should have been filed by 19 May 2010, but was not. The return was finally submitted on 7 February 2011.

When asked why the return had not been filed immediately following receipt of the penalty notice, Mr Hall said that he had assumed that his accountant would deal with it.

The Tribunal took the main argument to be that the penalty was disproportionate to the default, but were unable to agree that it was unfair.

The appeal was dismissed and the penalty confirmed. 

For further commentary on this case, please visit the 'Related links' section on this page. 

Carnbrook Convenience v Revenue & Customs [2011] UKFTT 585 (TC)

Carnbrook Convenience appealed against the first fixed penalty for the late filing of the partnership return. The normal filing date for a paper return was 31 October 2009; the return was received on 26 November 2009. The basis of the appeal was that the appellant had been given an extension to submit the return and the return was filed within the extended time limit.

They referred to a letter from an administrative assistant within HMRC to their accountant and another, giving an extended time limit for a return which omitted partners’ personal details. However, there was no evidence that either letter related to Carnbrook Convenience and the appeal was dismissed.

For further commentary on this case, please visit the 'Related links' section on this page.

D & H Developments v Revenue & Customs [2011] UKFTT 582 (TC)

D&H Developments, a case heard in Edinburgh, concerned a contractor who failed to deduct VAT. The company was contacted by Mr Kean, trading as Kean Slaters, to quote for a contract for new offices for Mr Kean.

Mr Kean indicated that the whole contract was to be treated as zero rated on the basis that the building was to double up as a dwelling house to promote the lack of council housing in the area. This was accepted by the appellant.

D&H’s accountant suggested that the partnership register for VAT. The accountant and the partners met Mr Kean and the accountant queried whether the contract should be positively rated for VAT. Mr Kean confirmed that there was no VAT element to the contract.

Schedule 8 of the VAT Act 1994 provides that zero rating can apply to a built solely as a dwelling house, but this did not apply, as the plans submitted referred to ‘offices’.

The Tribunal accepted that D&H had acted in good faith, but it had been its responsibility to deduct and pay VAT at the then rate of 17.5%. Accordingly, the 7/47 of the VAT-inclusive payments should be paid.

The appeal was dismissed.

For further commentary on this case, please visit the 'Related links' section on this page.

Riaz Datoo and others (The Datoo Partnership) v Revenue & Customs [2011] UKFTT 595 (TC)

Riaz Datoo and others (The Datoo Partnership) appealed against the imposition of default surcharges for late payment of VAT.

There was no dispute that the payments were made late, but they had not received paper VAT returns.

The Tribunal considered that the non-receipt of blank returns is not a reasonable excuse for failure to pay the tax. The appeal was dismissed. 

For further commentary on this case, please visit the 'Related links' section on this page.

Westbeach Apparel UK Ltd v Revenue & Customs [2011] UKFTT 561 (TC)

Westbeach Apparel UK Ltd appealed against penalties of £500 imposed in respect of the late filing of its P35 employer’s annual return for the year 2009/10. The due date for submission was 19 May 2010.

Its agent had submitted the form in ‘test mode’ and received a confirmation of submission. Apparently, the confirmation in test mode is the same as in real submission and the real return was not submitted until October 2010, following the imposition of the penalty by HMRC.

In contrast to the case in Hicharms (UK ) Ltd, the Tribunal upheld the penalties, confirming that HMRC demands are not reminders and that reliance on a third party does not amount to a reasonable excuse. The appeal was dismissed. 

For further commentary on this case, please visit the 'Related links' section on this page.


Partial success

Thomas Hardy v Revenue & Customs [2011] UKFTT 592 (TC)

Thomas Hardy appealed against a penalty assessment for £31,971 and a decision not to suspend the penalty imposed. He had an impeccable record for filing returns and paying tax due. 

In 2008,09, his employment ceased. He was personally involved in the negotiations, as well as receiving legal advice.

In October and November 2008, in accordance with the negotiations, Mr Hardy received cash payments of £1m, from which the bank deducted tax at 20 per cent.

Neither of the payments was disclosed on Mr Hardy's 2008/09 tax return. His employer’s end-of-year return showed the payments and HMRC launched an inquiry.

The taxpayer did not receive a statement of income and tax deducted until 12 May 2010. He had found it extremely difficult to obtain information from his former employer.

HMRC imposed a penalty of 15% of the tax due, the standard penalty for a careless error where the adjustment is prompted by an investigation. The taxpayer’s accountant appealed and the appeal was rejected. 

A further appeal was made to the Tribunal. It was not disputed that Mr Hardy had made a ‘prompted disclosure’ but Schedule 24 Finance Act 2007 provides (at paragraph 11) for a reduction where there are special circumstances. This includes staying a penalty and agreeing a compromise.

The Tribunal agreed that the taxpayer had been careless and dismissed the appeal against the penalty. They also accepted that there were special circumstances, that the taxpayer had been confused and that the decision not to reduce the penalty was flawed.

It ordered that the penalty be reduced to 2.5%. It did not consider that the decision not to suspend the penalty was flawed.

For further commentary on this case, please visit the 'Related links' section on this page. 





David Collis appealed against a penalty assessment issued on 28 January 2011 on a careless inaccuracy in his self assessment return. There was no suggestion that the omission was deliberate, only that it was careless. Mr Collis had submitted his tax return on time, but had omitted to include his benefits in kind, although he had known that they should have been included. The Tribunal concluded that this was a careless inaccuracy on his part.

HMRC had decided that they could not suspend the resulting penalty, but had neglected to inform the taxpayer, who only found out when he received a bundle of papers for the hearing. This deprived him of the opportunity to make representations on the subject.

HMRC can reduce a penalty below 15% if ‘special circumstances’ exist. They claimed they were not aware of such circumstances. Mr Collis had appealed because it thought it was too harsh for a ‘first offence’. The Tribunal agreed and the appeal was dismissed.

For further commentary on this case, please see David Collis v Revenue & Customs [2011] UKFTT 588 (TC)