HMRC branded ‘akin to a credit card company making indebtedness worse’ over refusal to accept mitigating circumstances
We’ve long suspected HMRC are a bunch of, well, tax inspectors, but now a bunch of lawyers are calling them out for unfair treatment of taxpayers who face fines and penalties for late payment of tax or filing of returns.
According to McGrigors, HM Revenue & Customs (HMRC) has lost more than half a dozen cases in the last few months alone where they have been criticised by the courts for wrongly fining taxpayers. But that isn’t the worst of it-the majority of taxpayers do not even bother appealing fines because they assume that HMRC issues fines strictly in accordance with the law, and HMRCs guidance is crystal clear on what will and will not constitute ‘reasonable excuse’.
Jason Collins, Partner at McGrigors, says: “The spate of recent cases suggests that HMRC has been imposing penalties far too harshly on taxpayers who have genuinely tried to comply with the law. Thousands of taxpayers are likely to have been wrongly fined, yet very few challenge these fines. This is because the way in which HMRC’s guidance is worded makes taxpayers think they would stand little chance in a Tribunal. Taxpayers who feel they have been unfairly fined really should challenge HMRC... [who] should revise its guidance because at the moment taxpayers are being misled.”
In actual fact, as shown by the recent cases below, the courts are taking a far more lenient view of the law than HMRC. The law says that taxpayers should not be fined if they have a ‘reasonable excuse’ for late payment of tax or an overdue tax return, but ‘reasonable excuse’ is not defined. However, the string of recent rulings against HMRC has made it clear that HMRC’s official interpretation is too narrow. “The courts have made it clear that HMRC’s guidance on fines is at odds with the law, and that its definition of ‘reasonable excuse’ should not be taken at face value” adds Collins.
The most interesting case shows that even running out of cash to pay your tax could constitute ‘reasonable excuse’, directly contradicting what is stated in HMRC’s official guidance.
Collins continues: “Many taxpayers are financially stretched at the moment. Lack of funds is likely to be an excuse put forward by many taxpayers to justify the late payment or non-payment of tax – particularly with the July 31 tax payment deadline looming. If HMRC issues fines over-zealously, it will be akin to a credit card company charging penalties for non-payment and making the cardholder’s indebtedness even worse.”
“Surely, litigating against diligent taxpayers who have endeavoured to comply with their obligations but have failed for a good reason, cannot be the best use of HMRC's resources” he concluded.
Recent cases in the last few months in which HMRC’s interpretation of ‘reasonable excuse’ has been successfully challenged:
Failing to file returns on time. A taxpayer who posted his return four days before the deadline was fined when the return arrived late. The Tribunal ruled that HMRC had been wrong to impose a penalty despite HMRC guidance stating that postal delays could only be considered ‘reasonable excuse’ in the most extreme circumstances
In another case, the taxpayer’s solicitor posted an SDLT return which was not received by HMRC. On telephoning HMRC to ask for the certificate of payment, the solicitor discovered that the return was not received. She immediately filed the return online and paid the tax by electronic transfer. The judge, on overturning the fine, pointed out that ‘the Tribunal is not bound by HMRC’s construction of reasonable excuse’
In yet another case, the failure of HMRC to send a taxpayer a paper return was considered ‘reasonable excuse’ for late filing – even though the taxpayer could have filed online. Interestingly, the failure of HMRC to send a reminder is specifically listed by HMRC Tax Bulletin 34 as not constituting a reasonable excuse!
Online filing difficulties. A taxpayer who had set out to file his return online expecting to be able to use HMRC's advertised online filing facility subsequently discovered that he required additional software (a fact not highlighted by the advertising campaign) and so filed a paper return and was late in the payment of the tax. The Tribunal ruled that HMRC had been wrong to impose a penalty.
Genuine mistake. A taxpayer who was fined for failing to file a P35 under the mistaken belief that his accountant would do so had the fine overturned by the Tribunal which ruled that a genuine mistake can constitute a ‘reasonable excuse’
In another case reliance on advice given by staff on an HMRC helpline was considered ‘reasonable excuse’ for a mistake in a tax return
Insufficiency of funds. Tax Bulletin 34 says: ‘Taxpayers are expected to have set money aside to pay tax. The law says that not having the money to pay is not a reasonable excuse.’
In a recent case, however, the Tax Tribunal took a different view. The taxpayer was unable to pay tax on time because of cashflow difficulties – partly caused by HMRC changing the taxpayer’s status – under the Construction Industry Scheme. The Tribunal sided with the taxpayer against HMRC’s written guidance resulting in fines being cancelled
HMRC have not commented on the accusation, but neither have they revised their guidance. A case of quis custodiet ipsos custodes perhaps? In any case, if you have received a penalty from HMRC and you do have an excuse with an element of reasonableness, it could be worth fighting your corner.