How’s The Family? Penalties And ‘Reasonable Excuse’

Mark McLaughlin wonders if HMRC properly considers whether penalties are appropriate when taxpayers file their tax returns late due to serious illness.

Every year, numerous appeals by taxpayers against penalties from HM Revenue and Customs (HMRC) for the late submission of tax returns reach the First-tier Tribunal. 

Those taxpayers are normally appealing to the tribunal for the penalties to be set aside, on the grounds that they had a reasonable excuse for filing their tax returns late. There is a statutory ‘let-out’ from a penalty, broadly, if the taxpayer can satisfy the tribunal that there is a reasonable excuse for the late filing of the return (although if the reasonable excuse has ended, the return must be filed without unreasonable delay thereafter (FA 2009, Sch 55, para 23)). 

Unfortunately, there is no statutory definition of ‘reasonable excuse’. However, it is commonly accepted that this ‘is a matter to be considered in the light of all the circumstances of the particular case’ (Rowland v HMRC [2006] STC (SCD) 536). 

What if the late submission of a tax return was caused by (say) serious illness? HMRC states (in its Compliance Handbook manual at CH61560): ‘We will normally treat the serious illness of the person or a close relative or domestic partner around the time when the person should have delivered the return or document as a reasonable excuse.’ 

However, HMRC may be reluctant to accept serious illness as a reasonable excuse for the late filing of tax returns in practice. If an appeal against a late filing penalty has reached the tribunal, invariably HMRC will have rejected the taxpayer’s reasonable excuse claim. Fortunately, the tribunal sometimes reach a different conclusion. 

For example, in Appellant v Revenue and Customs [2017] UKFTT 839 (TC), the appellant’s mental illness was held to be a reasonable excuse for the late filing of tax returns (and late payment of tax). Similarly, in Hindocha v Revenue and Customs [2017] UKFTT 373 (TC), the tribunal decided that anxiety, depression, and panic attacks suffered by the appellant constituted a serious mental illness, which provided the appellant with a reasonable excuse for the late submission of his tax return (and his late payment of tax).

The above cases were both concerned with late tax returns caused by the serious illness of the taxpayers themselves. Is HMRC any more sympathetic towards the serious illness of family members? Sadly, it appears not, although once again the tribunal may come to the rescue, depending on the circumstances.

For example, in McDonald v Revenue and Customs [2017] UKFTT 265 (TC), the appellant, a self-employed therapist and counsellor, failed to submit her return for the tax year 2010/11 until 17 September 2012 (the latest filing date for the return was 31 January 2012). HMRC imposed late filing penalties. The appellant appealed. She pointed out that her mother had suffered a succession of strokes and spent the last 15 months in hospital prior to her death. Furthermore, the appellant’s father was diagnosed with terminal cancer and she had provided care to him. The appellant’s mother died in April 2010 and her father died in September 2010. The appellant then had to deal with her bereavement and her late parents’ affairs (including probate on her father’s estate, which was still ongoing in November 2012), as well as bringing her tax affairs up-to-date. HMRC refused her appeal on the grounds that it was out of time. 

However, the First-tier Tribunal considered that the appellant had clearly gone through a prolonged period of difficulty and it was understandable that during this period the appellant omitted to give proper attention to her tax affairs. HMRC argued that the appellant was able to continue her business, so there was no reasonable excuse (or special circumstances). However, the tribunal disagreed, stating that the appellant had to work to support herself and pay the everyday expenses of keeping her home. The tribunal held that the appellant had established a reasonable excuse for the late submission of the tax return. Her appeal was allowed.

HMRC considers that a reasonable excuse is normally ‘an unexpected or unusual event that could not be reasonably foreseen or is beyond the person’s control’, which prevents the person from filing the return on time (see HMRC’s Compliance Handbook manual at CH61540). However, that phrase was taken from a dissenting judgment in another case (Customs and Excise Commissioners v Salevon Ltd [1989] STC 907). The tribunal in McDonald therefore considered HMRC’s use of that phrase to be inappropriate. This was not the first time that a tribunal objected to its use (e.g. see Shuttari t/a Shuttari Paul & Co. v Revenue and Customs [2017] UKFTT 314 (TC)). Taxpayers and advisers should, therefore, point this out if HMRC tries to use the phrase against them in a reasonable excuse context.