Mark McLaughlin warns that injury and illness may not be accepted as reasonable excuses for failing to meet tax obligations.
Everyone suffers illness (or injury) from time to time. Covid-19 is a stark reminder of how fragile life can be.
For tax purposes, illness can result in tax compliance failures. However, penalties for late tax returns and payments do not apply if there is a reasonable excuse for the compliance failure, provided the failure is remedied without unreasonable delay after the excuse ceased.
Is that ‘reasonable’?
There is no statutory definition of ‘reasonable excuse’ (although insufficiency of funds is specifically excluded unless attributable to events outside the person’s control).
However, In Perrin v Revenue and Customs [2018] UKUT 156 (TC) (regarding a late filing penalty), the Upper Tribunal (UT) suggested a four-step approach when considering whether there is a reasonable excuse, which broadly involves:
- Establishing what facts the taxpayer asserts give rise to a reasonable excuse.
- Deciding which of those facts are proven.
- Deciding whether, viewed objectively, those proven facts do, indeed, amount to an objectively reasonable excuse for the default and the time when that objectively reasonable excuse ceased. The UT commented it might assist the First-tier Tribunal (FTT) to ask itself: ‘was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?’.
- Having decided when any reasonable excuse ceased, deciding (once again objectively, based on the circumstances, etc.) whether the taxpayer remedied the failure without unreasonable delay after that time (unless, exceptionally, the failure was remedied before the reasonable excuse ceased).
Whether a reasonable excuse exists will depend on the facts and the tribunal’s judgment in each case.
Injury to company owner
For example, in Ryden Contractors Ltd v Revenue and Customs [2020] UKFTT 462 (TC), HMRC issued penalties for the late filing of a corporation tax return. An appeal was filed, which was late. The company’s sole director had been injured at work and needed two operations. However, HMRC objected to the late appeal.
Unfortunately, the FTT considered that the company should have made provision for its sole director in the event of ill health, which was ‘a common enough hazard of life’, perhaps especially in the construction industry. Insurance was the prudent course. Unfortunately, the company had no backup and did not act quickly enough to get help. The FTT concluded there was no reasonable excuse and refused permission to admit the late appeal.
Alternatively, penalties may be reduced (i.e. a ‘special reduction’) because of ‘special circumstances’.
Covid-19 and penalties
In Cherwell Optical Ltd v Revenue and Customs [2020] UKFTT 374 (TC), HMRC issued the appellant company with a penalty notice for the late filing of real-time information returns. The company requested a ‘special reduction’ in penalties due to ‘special circumstances’ (i.e. the company was non-operational and in negative cash flow, owing to the Covid-19 lockdown).
The FTT agreed with HMRC’s refusal of a special reduction. The Covid-19 pandemic could justify a special reduction in some cases. However, if the appellant had been affected by the pandemic restrictions, it could have contacted HMRC’s Covid-19 helpline to explain its predicament.
Practical tip
The message from these cases is: be prepared. A contingency plan for dealing with unexpected emergencies could prevent or mitigate tax compliance failures and reduce the possibility of penalties.
