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A3: Reasonable excuses, carelessness and deliberateness

See also​

Overlap of reasonable excuse and carelessness

 

"[36] Reasonable care and reasonable excuse are often considered to have the same material effect, with the exception of the last limb which requires, in the context of considering reasonable excuse only, use to consider whether the excuse was remedied without unreasonable delay. Therefore the first three limbs of the test, set out by the Upper Tribunal, in Christine Perrin v HMRC [2018] UKUT 156, are equally useful for establishing whether Mr Baron took reasonable care. Those first three steps are:

(1)          first, establish what facts the taxpayer asserts give rise to a reasonable excuse;

(2)          second, decide which of those facts are proven;

(3)          third, decide whether, viewed objectively, those proven facts do amount to an objectively reasonable excuse for the default, e.g. by asking the question "was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?";" (Baron v. HMRC [2024] UKFTT 102 (TC), Judge McGregor)

Overlap of reasonable excuse and carelessness

Carelessness must be clearly alleged as alternative to deliberate, if to be relied on

 

"[40] Following HMRC v William Ritchie and Hazel Ritchie [2019] UKUT 71 we can consider the issue of carelessness if HMRC specifically allege, as an alternative to deliberate behaviour, that the appellant had submitted inaccurate returns as a result of carelessness; and if they do so allege, that the appellant has then been given an opportunity to make submissions and provide evidence that that is not the case. 

[41] HMRC have clearly pleaded, in their statement of case dated 22 June 2023, that in the alternative to deliberate behaviour, it is their view that the appellant has failed to take reasonable care. The appellant has been on notice that HMRC are arguing careless behaviour in the alternative to deliberate behaviour and has been given ample opportunity to make submissions and provide evidence to the contrary." (Thompson v. HMRC [2024] UKFTT 138 (TC), Judge Popplewell)

Carelessness must be clearly alleged as alternative to deliberate, if to be relied on​

Carelessness is specific to an individual

 

"(3)          Given that careless behaviour is specific to an individual, we can see no basis on which we can accept HMRC’s contentions in respect of Mrs O’Neil and Mrs McCallum in the face of a total lack of evidence about their decision-making processes and no suggestion that we should look to Mr O’Neil as the person they relied on." (O'Neil v. HMRC [2023] UKFTT 290 (TC), Judge Short)

Carelessness is specific to an individual​

- Need to identify the person's abilities and circumstances

 

"[120] Whether acts or omissions are careless involves a factual assessment having regard to all the relevant circumstances of the case. There are many decided cases as to what amounts to carelessness in relation to the completion of a self- assessment tax return. The cases indicate that the conduct of the individual taxpayer is to be assessed by reference to a prudent and reasonable taxpayer in his position: see, for example, Atherton v HMRC [2019] STC 575 (Fancourt J and Judge Scott) at [37]." (HMRC v. Hicks [2020] UKUT 12 (TCC), Morgan J and Judge Brannan)

"[69] HMRC's guidance on careless inaccuracy its Handbook at CH81120 states:

Every person must take reasonable care, but 'reasonable care' cannot be identified without consideration of the particular person's abilities and circumstances. HMRC recognises the wide range of abilities and circumstances of those persons completing returns or claims.

So whilst each person has a responsibility to take reasonable care, what is necessary for each person to discharge that responsibility has to be viewed in the light of that person's abilities and circumstances.

For example, we do not expect the same level of knowledge or expertise from a self-employed unrepresented individual as we do from a large multinational company. We would expect a higher degree of care to be taken over large and complex matters than simple straightforward ones.

[70] At CH81140, HMRC acknowledge that:

People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances, taking into account the ability and circumstances of the person in question [...]" (Brown v. HMRC [2024] UKFTT 245 (TC), Judge Aleksander)

- Need to identify the person's abilities and circumstances

- Failure to check tax return contains all sources of income careless

 

"[46] But it is our view that the objectively prudent and reasonable taxpayer in the appellant's position, with the obvious intelligence possessed by the appellant, who had been asked to check and sign a tax return, would have reviewed, as a minimum, whether the tax return set out all of the sources of his income (irrespective of how naïve that individual might be about the intricacies of the tax system). Even a cursory examination of the appellant's 2014 tax return would have revealed that his employment income from Ciber had been included in it, yet his income from Atlas and BFB had not been. So, it should have put him on notice that income from a source from which tax and national insurance had been deducted (as was his view of the income from BFB and Atlas) might have needed including on the return. And generated an enquiry of his accountants as to why there was a difference in treatment between Ciber on the one hand and BFB and Atlas on the other. There is no evidence that the appellant did this. Indeed, as he said, he simply signed it and either sent it or allowed it to be sent to HMRC.

[47] Sadly, for the appellant, we think that this failure to carry out a review of his tax return to check out whether it included his known sources of income, demonstrates a failure to take reasonable care." (Thompson v. HMRC [2024] UKFTT 138 (TC), Judge Popplewell)

- Failure to check tax return contains all sources of income careless

Direct tax allowance for reasonable excuses

"(2)     For the purposes of this Act, a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within such further time, if any, as the Board or the tribunal or officer concerned may have allowed; and where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased." (TMA 1970, s.118(2))

Direct tax allowance for reasonable excuses

- Unreasonable delay does not prevent reasonable excuse having effect up to the time it ceases​

 

"[25] Mr Sokoya's legal avenues of appeal closed on 28 January 2008 on the refusal of his application to appeal to the Court of Appeal. In the absence of any other evidence of an excuse, in my view Mr Sokoya's excuse for failure to comply ceased on that date. I have considered whether this affects the operation of the reasonable excuse in relation to the penalty. The issue is whether the fact of the cessation of the excuse means that Mr Sokoya can at no time be regarded as not having failed to comply. I do not consider that would be the correct analysis of s 118(2). In my view there are two limbs of s 118(2). The first limb provides that the effect of a reasonable excuse is to deem non-failure up to the time that the excuse ceases, and separately the effect of the second limb is further to deem non-failure after the excuse has ceased if the person in question does what is required to be done without unreasonable delay after the excuse has ceased. Unreasonable delay can prevent something being deemed not to have failed to be done under the second limb, once the excuse has ceased, but cannot prevent the reasonable excuse from having effect up to the time the excuse ceases." (Sokoya v. HMRC [2009] UKFTT 163 (TC), Judge Berner)

- Unreasonable delay does not prevent reasonable excuse having effect up to the time it ceases​

- Relieves the consequences of the failure but does not deem compliance

 

"[41] Having made that decision, it isn't strictly necessary to consider the second point regarding the consequence of section 118(2) but given that Ms Hayes argued it, I provide a decision on it for completeness.

[42] Again, this matter was considered by the Court of Appeal in Raftopoulou:

"66. Second, the deeming effect of the second part is of central importance. It does not deem anything to have been done, either within a time limit or at all. It provides only that the person in question shall be deemed "not to have failed to do it". It relieves the person of the consequences of failing to do the thing, which in the context of the TMA 1970 is a financial penalty, but does not go further and provide the benefits of having in fact done the thing which the person has failed to do."

[43] On this basis, even if there had been an extension of time, the effect would not have been to deem Ms Hayes to have filed her return on time for the purposes of the time limits for enquiries." (Hayes v. HMRC [2024] UKFTT 118 (TC), Judge McGregor)

- Relieves the consequences of the failure but does not deem compliance

- But the reasonable excuse must exist at the time of the original failure​

 

"The important point here is that a reasonable excuse must be made out by reference to one or more circumstances which existed at the relevant filing date. As the Upper Tribunal explained in Matthew Harrison v HMRC, [2022] UKUT 00216 (TCC) (at [31]):

“Before us, the parties were agreed that a reasonable excuse must be made out by reference to one or more circumstances which existed as at the relevant filing date. We agree and consider this is clear from the legislation (where the penalty in respect of the “failure” is a reference to the failure to file by the deadline set out in the Schedule). Events which take place after that deadline would not therefore be relevant (except so far as, as a matter of evidence, they threw light on relevant circumstances existing at and before the filing date). Circumstances that existed after the filing date could of course be relevant to the second part of paragraph 23, namely whether the failure to file the return had been remedied without unreasonable delay.”" (Futcher v. HMRC [2022] UKFTT 401 (TC), Judge Baldwin)

"[18] A serious illness which prevents a person from submitted their return is the archetypical “reasonable excuse”. In this case, the excuse was not present at the time of the filing deadline, but occurred later, preventing the Appellant from submitting his return before daily penalties began to be charged. The question is whether a supervening excuse which is capable of being a reasonable excuse falls within paragraph 23 of schedule 55 so as to enable the tribunal to quash the penalties.

[19] This point was considered in the case of D R Sudall v HMRC [2017] UKFTT 0404 (TC), where Judge Richards decided that the reasonable excuse must exist at the time of the submission deadline. His reasoning was as follows:

“21. Paragraph 23 applies where there is a reasonable excuse for “a failure to make a return”. That raises a question of interpretation, namely whether Mr Sudall must establish a reasonable excuse for the initial failure to file by 31 October 2013, or whether Mr Sudall could argue that, even though there was no reasonable excuse for the original failure to file (so the £100 penalty is still due), he nevertheless has a reasonable excuse for filing more than six months late so that the six-month penalty is not due.

22. I consider that the scheme of the legislation makes it clear that, for the defence of reasonable excuse to be available, there must in all cases be a reasonable excuse for the initial failure to file on time. My reasons are as follows:

(1) Paragraph 1(1) and 1(2) of Schedule 55 make it clear that all penalties imposed by paragraphs 2 to 13 of Schedule 55 are imposed for a failure to submit a return by the filing date. The relevant “failure”, therefore, that triggers both a £100 penalty and a six-month penalty is, specifically, a failure to file by the filing date.

(2) Paragraph 5 of Schedule 55 imposes the penalty where the “failure” (namely the failure to file on time) continues more than six months after the penalty date. Paragraph 5 penalties do not, therefore, penalise a new “failure” (to file within six months of the penalty date), but rather the original “failure” to file on time, where that continues for more than six months.

(3) Therefore, the “failure” set out in paragraph 23 (which has to be the subject of a “reasonable excuse”) must be a reasonable excuse for the original failure to file on time. That is emphasised by paragraph 23(2)(c) of Schedule 55 which provides for an excuse to be treated as continuing in certain circumstances. If Parliament had not wanted to impose a requirement that a “reasonable excuse” must excuse the initial failure to file, paragraph 23(2)(c) would not have been drafted in the terms it is. The implication of paragraph 23(2)(c) is that, where there is a continuing failure to file a return, in order for the defence of “reasonable excuse” to be available, the excuse must both exist on the filing date and continue (within the terms of paragraph 23(2)(c)).

(4) If Parliament had wished to deal with the situation where there is no original “reasonable excuse” for late submission, but subsequently a reasonable excuse starts, it would have needed to explain when a reasonable excuse is treated as starting. However, Parliament has not done so, instead focusing its attention in paragraph 23(2)(c) on when a reasonable excuse ceases”

[20] A similar approach was adopted in the case of Buivydas v HMRC [2017] UKFTT 0557 (TC).

[21] I agree that the legislation requires that the excuse is present at the time of the original deadline. Once there has been a failure to file on time, penalties accrue by reference to the period during which the failure continues, but there is no new failure (to which a new reasonable excuse might apply) at the points where daily or six month or twelve month penalties become due." (McCulloch v. HMRC [2018] UKFTT 277 (TC), Judge McKeever)

Possible special circumstances

"[23] I recognise that this interpretation might be thought to produce harsh results. For example, a taxpayer may have no good reason for filing late, but two months and 30 days after the penalty date may have prepared a return and be on the verge of submitting it. If the taxpayer is subsequently struck ill, admitted to hospital and prevented from filing the return for a further month, the defence of “reasonable excuse” would not, on my interpretation of the legislation, prevent daily penalties from accruing. However, in such a case it would still be open to HMRC to mitigate the daily penalties because of “special circumstances” and, if HMRC’s decision on this issue was flawed, the Tribunal could change it." (Sudall v. HMRC [2017] UKFTT 404 (TC), Judge Richards)

- But the reasonable excuse must exist at the time of the original failure​

VAT limits on reasonable excuse

 

"(1)     For the purpose of any provision of sections 59 to 70 which refers to a reasonable excuse for any conduct—

(a)     an insufficiency of funds to pay any VAT due is not a reasonable excuse; and

(b)     where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse." (VATA 1994, s.71(1))

VAT limits on reasonable excuse

General approach to reasonable excuse

 

"[21] The standard to be adopted is that of the responsible trader, explained by Judge Medd QC in The Clean Car Co Ltd v C&E Commissioners [1991] VATTR 234 as follows:
"The test of whether or not there is a reasonable excuse is an objective one. In my judgment it is an objective test in this sense. One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time, a reasonable thing to do?"" (Archer v. HMRC [2023] EWCA Civ 626, §18, Whipple, Simler, Falk LJJJ)

"[81] When considering a “reasonable excuse” defence, therefore, in our view the FTT can usefully approach matters in the following way:

(1) First, establish what facts the taxpayer asserts give rise to a reasonable excuse (this may include the belief, acts or omissions of the taxpayer or any other person, the taxpayer’s own experience or relevant attributes, the situation of the taxpayer at any relevant time and any other relevant external facts).

(2) Second, decide which of those facts are proven.

(3) Third, decide 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. In doing so, it should take into account the experience and other relevant attributes of 35 the taxpayer and the situation in which the taxpayer found himself at the relevant time or times. It might assist the FTT, in this context, to ask itself the question “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”

(4) Fourth, having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time (unless, exceptionally, the failure was remedied before the reasonable excuse ceased). In doing so, the FTT should again decide the matter objectively, but taking into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times." (Perrin v HMRC [2018] UKUT 156 (TCC) and see Archer v. HMRC [2023] EWCA Civ 626, §18, Whipple, Simler, Falk LJJJ)

"In practice, most of the considerable volume of “reasonable excuse” cases before the FTT involve variations on a limited number of themes: typically, disputes about HMRC correspondence, difficulties with online filing, reliance on advisers, an incomplete awareness of statutory obligations, and health or financial problems. In such situations, while its application to the facts may not always be easy, the approach summarised in Perrin needs no gloss." (Sheiling Properties Limited v. HMRC [2020] UKUT 175 (TCC), Trower J and Judge Thomas Scott)

General approach to reasonable excuse

- No single reasonable course of action

"[103] The test to be applied is whether or not BPIL has a reasonable excuse for the default. We do not consider that an otherwise reasonable course of action necessarily becomes unreasonable as a result of another, arguably more reasonable, course of action being available. The question is a matter of fact and degree to be judged in all the circumstances of the case. The test is not that no other option was available, or that the course of action was the best course in the circumstances." (Bicester Property Interiors Limited v. HMRC [2023] UKFTT 13 (TC), Judge Frost)

"​The test is one of reasonableness. No higher (or lower) standard should be applied. The mere fact that something that could have been done has not been done does not of itself necessarily mean that an individual's conduct in failing to act in a particular way is to be regarded as unreasonable. It is a question of degree having regard to all the circumstances, including the particular circumstances of the individual taxpayer. There can be no universal rule; what might be considered an unreasonable failure on the part of one taxpayer in one set of circumstances might be regarded as not unreasonable in the case of another whose circumstances are different." (Nigel Barrett v HMRC [2015] UKFTT 329 (TC) (Judge Berner))

- No single reasonable course of action

- Mere existence of an inaccuracy does not establish carelessness

 

"[27] The Tribunal does not accept the Respondents' case that where the taxpayer cannot show that it qualified for a given relief then it follows that the taxpayer will have been careless, since that would entail the mere existence of an inaccuracy determining that the same inaccuracy was careless. In the absence of the Respondents setting out any other case on careless inaccuracy, and in the absence of the Respondents taking specific issue with the assertions made out in the Appellant's Grounds of Appeal that are subject to Mr. Thomas' declaration of truth, the Tribunal is not prepared to conclude that what the Appellant has said in them is inaccurate." (H&H Contract Scaffolding Ltd v. HMRC [2024] UKFTT 151 (TC), Judge Watkinson)

- Mere existence of an inaccuracy does not establish carelessness

- Assess based on circumstances existing at time of default

 

"[31] Before us, the parties were agreed that a reasonable excuse must be made out by reference to one or more circumstances which existed as at the relevant filing date. We agree and consider this is clear from the legislation (where the penalty in respect of the “failure” is a reference to the failure to file by the deadline set out in the Schedule). Events which take place after that deadline would not therefore be relevant (except so far as, as a matter of evidence, they threw light on relevant circumstances existing at and before the filing date). Circumstances that existed after the filing date could of course be relevant to the second part of paragraph 23, namely whether the failure to file the return had been remedied without unreasonable delay." (Harrison v. HMRC [2022] UKUT 216 (TCC), Judge Raghavan and Judge Andrew Scott)

- Assess based on circumstances existing at time of default

- Assess by reference to a reasonable and prudent person in the taxpayer's position

 

"[120]...The cases indicate that the conduct of the individual taxpayer is to be assessed by reference to a prudent and reasonable taxpayer in his position: see, for example, Atherton v HMRC [2019] STC 575 (Fancourt J and Judge Scott) at [37]." (HMRC v. Hicks [2020] UKUT 12 (TCC), Morgan J and Judge Brannan)

- Assess by reference to a reasonable and prudent person in the taxpayer's position

- Experience and attributes of the taxpayer

 

"[19] Reasonableness is to be determined in each case depending on the facts. The analysis of Judge Berner in Barrett v HMRC [2015] UKFTT 329 (TC) at [161] is of assistance:
"The test is one of reasonableness. No higher (or lower) standard should be applied. The mere fact that something that could have been done has not been done does not of itself necessarily mean that an individual's conduct in failing to act in a particular way is to be regarded as unreasonable. It is a question of degree having regard to all the circumstances, including the particular circumstances of the individual taxpayer. There can be no universal rule; what might be considered an unreasonable failure on the part of one taxpayer in one set of circumstances might be regarded as not unreasonable in the case of another whose circumstances are different."" (Archer v. HMRC [2023] EWCA Civ 626, §18, Whipple, Simler, Falk LJJJ)

"[80]...HMRC emphasise that although Mr Wood was not a VAT expert, he did have tax expertise and submitted that we should, accordingly, hold Marlow to a higher standard. We agree his background is relevant and accordingly take account of it together with the directors’ role as charity trustees in evaluating the terms in which advice was sought and acted upon." (Marlow Rowing Club v. HMRC [2020] UKUT 20 (TCC), Judge Raghavan and Judge Poole)

"[61] This tax liability was due by 7 March 2014.  Had he filled in the return correctly the penalty for non-payment would have been £0.  Although the delay in seeking to rectify the position was extreme, I have dealt with that above.  I do accept that it was Mr Jama’s naïveté and inexperience that led to the penalty as imposed.  I do consider that given Mr Jama’s lack of experience and personal circumstances, and the fact that he found himself in a baffling situation without the skills to rectify it, that his actions in failing to pay the tax - on monies that he had not received - was reasonable." (Jama v. HMRC [2020] UKFTT 336 (TC), Judge Hudson)

- Experience and attributes of the taxpayer

Witness evidence of subjective reason for non-compliance not necessarily essential

"[68] It is not right, however, to suggest that the taxpayer is required to file witness evidence to support his case. A taxpayer will very often want to put evidence in the form of a witness statement before the tribunal to explain the reason for non-payment. This is particularly so where the reason is personal (a death in the family, or a difficulty in the business, as examples). But it is up to the taxpayer to decide how they wish to present their case on reasonable excuse and what evidence they wish to rely on in support of it; much will depend on the particular circumstances of the particular case. Further, there is no requirement that a taxpayer must give evidence to the tribunal to establish that the reason they put forward for non-payment is the real reason, and that other reasons (such as impecuniosity) can be discounted. It is open to the taxpayer to invite the tribunal to draw an inference that the reason advanced, whether or not that is evidenced by a witness statement in support, is the real or causative reason for non-payment. Tribunals have power to regulate their own procedure (noting in particular rule 5 of the Tribunal Procedure (FTT) (Tax Chamber) Rules 2009, SI 2009/273) and should not find themselves constrained as to the sort of evidence they can accept when it comes to reasonable excuse, or any other sort of appeal." (Archer v. HMRC [2023] EWCA Civ 626, §18, Whipple, Simler, Falk LJJJ)

Relying on evidence of litigation as reason for non-payment

"[69]...The appellant's case before the UT was that judicial review proceedings were the reason for non-payment; there was plenty of evidence about that judicial review in the form of the various orders and judgments of the Administrative Court and the Court of Appeal, as well as the agreement with HMRC in December 2017; the appellant was entitled to rely on that body of material to demonstrate his reason for non-payment. He was not required to file a witness statement giving his personal views of the merits of the judicial review or referring to professional advice received. It is questionable in any event what weight his personal views of the merits would have had. Further, it was open to the appellant to invite an inference that the judicial proceedings were indeed the cause of his non-payment (although I acknowledge that the appellant has only developed that aspect of his case in this Court, so the UT can hardly be criticised for not addressing it). Whether the UT accepted the appellant's case based on the "external" evidence before it is a different matter going to the merits. My concern is that the UT dismissed the appellant's case in limine solely and simply on the basis that the appellant had failed to provide subjective evidence by way of witness statement. If it did that, I think it was in error." (Archer v. HMRC [2023] EWCA Civ 626, §18, Whipple, Simler, Falk LJJJ)

Subjective evidence may be required where no external evidence of merits of judicial review

"[70] In fairness to the UT, their approach seems to have followed HMRC's invitation to rely on [81] of Sheiling (see UT [137]-[138]) to conclude that it was necessary to take account of the taxpayer's subjective belief as part of the assessment of reasonable excuse (see [140(2)]) and that it was "inevitable" that the taxpayer should give evidence of his or her subjective beliefs (see [144]). But the background facts in Sheiling were very different. In that case, the taxpayer's judicial review had been stayed behind other claims and it appears that no decision on permission for judicial review had been made, so that by the time of the reasonable excuse appeal in the tribunal there was no "external evidence" of the merits of the judicial review (see [10] of Sheiling). It was for that reason that the UT in Sheiling appears to have shifted its focus to the reasonableness of the taxpayer's belief that the APN issued to him was procedurally invalid, in order to avoid a mini-trial of the merits of the taxpayer's case on judicial review (see [81]). This case is different because by the time the reasonable excuse appeal was adjudicated, the judicial review proceedings had concluded. It was on the "external evidence" about the judicial review that this appellant relied; he was entitled to do that. The approach to the evidence advocated in Sheiling [81] was not apposite. Further and in any event, Sheiling is an APN case, and I am not persuaded that it assists in the resolution of this case, for reasons I will discuss further below." (Archer v. HMRC [2023] EWCA Civ 626, §18, Whipple, Simler, Falk LJJJ)

Witness evidence of subjective reason for non-compliance not necessarily essential

- Reasonable belief that the required action had been taken

 

"[17] We find that the Appellant believed that she had submitted the return, hence why she then submitted the payment shown on it. We find that, bearing in mind that this was the first time that the Appellant had submitted a return online, the Appellant reasonably believed that she had submitted the return by submitting the “check your return/results” section and then viewing the tax calculation summary. The Tribunal does not accept the Respondents’ submission that the presence of the warning about the tax return being 90% complete, and the tax calculation stating that it was estimated mean that this Appellant could not reasonably had believed that she had submitted the return. The Appellant’s evidence, which we accept, is that she did not see those parts on the screen.

...

[25]   The Tribunal finds that the Appellant has proved that she had a reasonable excuse for the failure. The Tribunal finds that it was objectively reasonable for the Appellant to have believed that she had filed the Self Assessment return until HMRC’s letter of 2.8.21, and thereafter the default was remedied swiftly." (Watt v. HMRC [2022] UKFTT 329 (TC), Judge Watkinson)

- Reasonable belief that the required action had been taken

- Cannot rely on beliefs that the taxpayer did not hold

 

"[69]...irrespective of whether a belief of the taxpayer in the invalidity of the APN on particular grounds might in principle form an objectively reasonable excuse, in the present case the FTT found as a matter of fact that Mr Jones did not have any understanding of the merits of the claim, and specifically did not have any knowledge of the designated officer points. In other words EPL's decision not to pay the amounts specified in the APNs did not, as a matter of fact, rely on a belief as to the invalidity of the APNs on the designated officer grounds. Instead, Mr Jones simply relied on a belief that the judicial review would succeed based on trust in the expertise of his advisors. That was, the FTT found, not reasonable for a person in Mr Jones' position; and in any event that belief was not tenable after 12 December 2017 (when the Court of Appeal's judgment in Rowe was handed down).

...

[79] ... In the absence of any findings of fact that Mr Jones believed that the effect of the interim relief order meant that the judicial review would succeed, or that EPL was no longer liable to pay by the due date, or that EPL would escape liability for penalties for non-payment if the judicial review claim failed, the FTT was bound to find that EPL did not have a reasonable excuse." (Exclusive Promotions Limited v. HMRC [2023] UKUT 269 (TCC), Bacon J and Judge Sinfield)

- Cannot rely on beliefs that the taxpayer did not hold

Reasonable excuse not the same as mistake

 

“Whilst the Appellant’s misunderstanding regarding the due date could be considered a genuine error, it does not amount to reasonable excuse.” (Disaster Recovery Northampton Ltd v. HMRC [2017] UKFTT 672 (TC), §38, Judge Connell).

 

“Applying what I regard as the correct test, I conclude that a mere oversight is insufficient to amount to a reasonable excuse, and that the penalties are not precluded from arising by reason of the asserted oversight on the part of LCPM.” (LC Property Management Ltd v. HMRC [2017] UKFTT 511 (TC), §26, Judge Berner).

 

“We agree with the Tribunal in Garnmoss Limited t/a Parham Builders v HMRC [2012] UKFTT 315 (TC) (Judge Charles Hellier and Ms Hewett) that the VAT Act does not provide shelter for mistakes, only for reasonable excuses: see Para [12] of that decision.” (Bromley v. HMRC [2016] UKFTT 758 (TC), §36, Judge McNall).

 

“We all make mistakes. This was not a blameworthy one. But the Act does not provide shelter for mistakes, only for reasonable excuses.” (Garnmoss Ltd v. HMRC [2012] UKFTT 315 (TC), §12).
 

Reasonable excuse not the same as mistake

Scope of reasonable mistake depends on legislative purpose

 

"[78]... However, we have concluded on balance that it would be unduly restrictive to determine that a belief as to procedural invalidity could never be a reasonable excuse in respect of a penalty for non-payment of the APN. In our opinion, there is a difference between substantive invalidity and procedural invalidity, because in relation to procedural invalidity the policy considerations considered in Beadle and in other cases cannot simply be assumed to apply in undiluted form. Where the taxpayer’s belief is essentially that what purports to be on its face an APN is not an APN at all, because it does not satisfy the statutory conditions, the policy considerations driving the APN code are necessarily less persuasive in determining the objective reasonableness of that belief."(Sheiling Properties Limited v. HMRC [2020] UKUT 175 (TCC), Trower J and Judge Thomas Scott)
 

Scope of reasonable mistake depends on legislative purpose

Reasonable excuse must continue until default/omission ends

 

"[50]  We consider that, on receipt of that letter, Mr Baron became aware of the potential for HICBC to apply to him. The terms of the paragraph set out above are very clear. In our view, it was not objectively reasonable for Mr Baron to take no further action other than speaking to his partner at this stage. His first action to remedy the issue was not taken until after the June letter.

[51]  As a result, we find that Mr Baron did not take action to remedy the failure without unreasonable delay and therefore we cannot find that he had a reasonable excuse for the failure to notify." (Baron v. HMRC [2024] UKFTT 102 (TC), Judge McGregor)

“It is well-established and clear from the wording of this provision that the Tribunal must consider whether there was a reasonable excuse for the entire time that the taxpayer failed to do what was required of him to be done.” (Bryne v. HMRC [2017] UKFTT 144 (TC), §48, Judge Mosedale).
 

Reasonable excuse must continue until default/omission ends

Successive reasonable excuses

 

“…however, we accept that s 118 should be treated as encompassing successive reasonable excuses as that is consistent with Parliament’s intention to relieve a taxpayer of liability where he acted reasonably.” (Bryne v. HMRC [2017] UKFTT 144 (TC), §51, Judge Mosedale).

Successive reasonable excuses

Ignorance of the law

Depends on the circumstances

"[82] One situation that can sometimes cause difficulties is when the taxpayer’s asserted reasonable excuse is purely that he/she did not know of the particular requirement that has been shown to have been breached. It is a much-cited aphorism that “ignorance of the law is no excuse”, and on occasion this has been given as a reason why the defence of reasonable excuse cannot be available in such circumstances. We see no basis for this argument. Some requirements of the law are well-known, simple and straightforward but others are much less so. It will be a matter of judgment for the FTT in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long.  The Clean Car Co itself provides an example of such a situation.” (Perrin v. HMRC [2018] UKUT 156 (TCC), Judge Herrington and Judge Poole)

See examples at A3a. Reasonable excuse examples

Ignorance of the law

- Query whether reasonable to be ignorant of need to notify HMRC of liability to HICBC

 

"[81] Taking into account the lack of guidance in the Child Benefit claim form for those in Mr and Mrs Hextall’s position and the absence of any subsequent communications, either by way of a general campaign aimed at those in their position or direct correspondence, we have concluded that it was objectively reasonable, in the circumstances of the case, for Mr Hextall to have been unaware of the requirement to notify HMRC that he had become liable to the HICBC in the 2015-16 tax year.  We also find that, as nothing changed in relation to Mr Hextall’s awareness of his obligation to notify until HMRC sent him the ‘nudge’ letter in November 2019, Mr Hextall has established that he had a reasonable excuse for failing to notify and did not fail to take reasonable care in relation to the 2016-17 tax year.  Accordingly, the assessments in relation to in relation to the 2015-16 and 2016-17 tax years were made out of time." (Hextall v. HMRC [2023] UKFTT 390 (TC), Judge Sinfield)

However

"[63] Furthermore, in Johnstone v HMRC [2018] UKFTT 689 (TC) (‘Johnstone’), Judge Poon summarised the judicial position in respect of whether HMRC have a duty to notify all taxpayers potentially affected by the HICBC, at [49]:

 “(1) HMRC do not have a statutory duty to notify all taxpayers potentially affected by HICBC. By statutory duty, we mean a duty that is provided by Parliament and laid down by statute. For example, HMRC have a statutory duty to issue a notice of assessment for any tax liability to be enforceable.

(2) What initiatives or measures HMRC had taken to raise awareness of HICBC were matters of internal policy decisions, over which the Tribunal has no jurisdiction.

(3) The cohort of taxpayers likely to be affected by HICBC is not readily identifiable from the information held by HMRC, especially when the recipient of the child benefit and the taxpayer liable to HICBC are not the same person, as is the case here.

(4) The ‘Child Benefit’ is not a means-tested benefit, and as such, the Child Benefit Agency does not hold data to enable any identification of the recipients that may be affected by HICBC.

(5) The proposition that the Child Benefit Agency makes para 21 provisions relevant is completely misguided. Paragraph 21 of Sch 41 addresses situations wherein the taxpayer has relied on an agent, such as an accountant, to notify HMRC of a liability to tax…

(6) …Under para 21, the reliance on an agent to notify a liability to HMRC gives rise to a defence for the taxpayer because there is a contractual relationship between the taxpayer and the agent for such a responsibility to be discharged. The CBA has no contractual relationship with Mr Johnstone to undertake to notify HMRC of his liability to HICBC.

(7) Mr Johnston has also suggested that the process whereby taxpayers get sent the awareness letter by HMRC was unfair, as it clearly had left some affected taxpayers out. Such a challenge can only be done by way of a judicial review at the High Court, as this tribunal has no general supervisory jurisdiction by way of judicial review.

 [64] Similarly, in Lau v HMRC [2018] UKFTT 230 (TC) (‘Lau’), at [33], Judge Anne Scott held that HMRC are under no obligation to notify individual taxpayers." (Cooke v. HMRC [2023] UKFTT 369 (TC), Judge Manyarara)

- Query whether reasonable to be ignorant of need to notify HMRC of liability to HICBC

- Lay person not expected to be aware of retrospective legislation

 

"[124] Whilst I have concluded that the Appellants were aware of the “primary law”; that SDLT was chargeable on purchases of property, and that they were aware that they were entering into a scheme to avoid all or most of the SDLT which should have been paid, there is no evidence that they understood the technical detail of how the scheme was supposed to work. Nor would one normally expect a layman to be aware of the introduction of retrospective legislation or to be able to analyse its legal effects. A lay person who is unaware of retrospective legislation and/or who fails to realise the retrospective legislation applies to them cannot be regarded as failing to take reasonable care in failing to do what the legislation requires.

[125] In the case of the Shaw Appellants, HMRC informed them about the retrospective legislation but they were advised by ELS that it did not apply to them. A person who relies on the advice of someone they reasonably believe to be competent to give advice will normally be regarded as taking reasonable care (see Atherton above). The question whether the individual is liable because of a failure to take reasonable care by the advisor is a separate issue, which I consider below.

[126]  In any event, the burden lies on HMRC to prove, on the balance of probabilities that the Appellants were negligent. Mr Goulding has produced no evidence to this effect. He asserts that the Appellants ought to have been monitoring the position after completion and the fact that the Appellants failed to file amended returns amounts to acting in a negligent way.  

[127] I prefer [the taxpayer's] contentions. Using the distinction in Neal, this is not a case of basic ignorance. The possibility that retrospective legislation might require you to revisit a transaction that had been returned under advice and disclosed is not something that a reasonable lay taxpayer would reasonably be expected to be aware of." (G C Field & Sons Ltd v. HMRC [2021] UKFTT 297 (TC), Judge McKeever)

- Lay person not expected to be aware of retrospective legislation

Tax avoidance schemes

Packaged tax avoidance scheme not per se negligent: what would reasonable taxpayer entering into scheme do?

 

“It was accepted by HMRC that entering in to a packaged avoidance scheme is not in itself a negligent act and the Tribunal accepts that the Taxpayers could not be expected to understand the legal and tax implications of the trust arrangements and the Capital Redemption Policy acquisition and redemption, the order in which documents needed to be signed, or the basis on which HMRC might argue that the transactions should not be respected for tax purposes. In each of these instances we accept, as reflected by the previous decisions in this area, that these are matters for which a reasonable taxpayer might properly be expected to rely on its professional advisers…The critical question for this Tribunal is how much enquiry should a sophisticated taxpayer be expected to make in respect of a packaged scheme in which advice has been provided by professional advisers and all documents have been drafted by them.” (Litman v. HMRC [2014] UKFTT 89 (TC), §§36…38, Judge Rachel Short).

 

Client not expected to consider technical soundness of scheme in detail

 

“We have concluded that the level of due diligence required of a taxpayer in respect of the technical and legal aspects of such a scheme is low, when professional advisers are involved and the relevant areas of law are technical, as is the case here. In that respect, we do not think that the Taxpayers were negligent in not understanding the details of the acquisition and disposal of the Capital Redemption Policies, the timing of the signing of the relevant documents or how the tax losses were actually being generated.” (Litman v. HMRC [2014] UKFTT 89 (TC), §38, Judge Rachel Short).

 

But expected to take steps to ensure important commercial aspects implemented

 

“In conclusion, it is this Tribunal’s view that the failure to enquire into the basic commercial reality of the transactions entered into by these Taxpayers is negligence for these purposes and that a reasonable taxpayer, including one prepared to enter into a packaged scheme like this, would have ensured that the commercial elements of the transaction, including the loan in particular, stood up to some commercial scrutiny and had been properly implemented. The Taxpayers should not have claimed the capital losses on their tax returns without at least understanding that an actual transaction had been entered into, that some money had moved and that the transaction was not a sham.” (Litman v. HMRC [2014] UKFTT 89 (TC), §47, Judge Rachel Short).

Tax avoidance schemes

Reliance on an adviser

Reliance on an adviser

Whether advice sufficient to give reasonable excuse depends on facts

"[81]...As set out in the Clean Car test the hypothetical appellant will be taken to share such attributes of the particular appellant as the tribunal considered relevant to the situation – whether and what advice it is considered appropriate to seek and from whom will depend on the particular facts pertaining to the particular appellant." (Marlow Rowing Club v. HMRC [2020] UKUT 20 (TCC), Judge Raghavan and Judge Poole)

- Whether advice sufficient to give reasonable excuse depends on facts

Advice by email exchange is a commonplace of commercial legal practice

"[157] [Counsel for HMRC] criticised the Appellant for the apparent informality of an email exchange with its legal advisers. We do not agree that such an exchange was inappropriate - indeed, it is a commonplace occurrence of commercial legal practice, of which this Tribunal has considerable experience, that tax advice is frequently given by email." (Canadian Solar EMEA GmbH v. HMRC [2024] UKFTT 85 (TC), Judge Brannan)

- Advice by email exchange is a commonplace of commercial legal practice

Reason for taking advice relevant: genuine aim of clarifying tax position and acting accordingly

"[82] Moving on to evaluating the advice Marlow actually sought and obtained, we agree the question of the objective of seeking that advice will be a relevant factor. However, we disagree with HMRC that, on the facts of this case, the reason for seeking counsel’s advice was simply to mitigate a penalty that it was feared might be imposed. It is clear from the terms of the instructions sought that the appellant was genuinely seeking advice on the question of liability. Both the terms of the instructions and the proposal that counsel should advise in stages (giving a written opinion, only if counsel thought the strategy of standing behind the principles in Longridge “had legs”) is consistent with Marlow appreciating that there was a risk that counsel might not advise in the way they were hoping for. It is correct that there was also an objective on the part of Marlow to mitigate the risk of a penalty – we agree with HMRC that it does not matter whether this was erroneously thought to be a penalty in the vein of Corporation Tax rather than a s62 VAT penalty – but that does not detract from the main objective in seeking advice being to ascertain whether the supplies would be zero-rated taking account of the FTT’s reasoning in Longridge. Furthermore, we do not consider that the additional objective of seeking to mitigate a penalty which might be imposed is necessarily objectionable. Part of the intention of a penalty is to incentivise certain behaviour – and in this case the concern over a penalty played a part in incentivising Marlow to seek specialist professional advice (which could have gone either way in terms of the conclusion on liability). We see no reason why that should be held against Marlow; if it were, that might in turn encourage taxpayers to be less transparent about their reasons for seeking advice. What is relevant is that the taxpayer is seeking advice which is appropriate to their circumstances with the genuine aim of clarifying their tax position and acting accordingly.(Marlow Rowing Club v. HMRC [2020] UKUT 20 (TCC), Judge Raghavan and Judge Poole)

- Reason for taking advice relevant: genuine aim of clarifying tax position and acting accordingly

- Not required to take advice from another adviser where there is scope for different views

"[119] It is, unfortunately, far from unusual for a particular piece of  tax legislation to contain a “grey area”. It is commonplace for there to be more than one tenable interpretation of a provision or its application and for an advisor to “take a view” as to which interpretation should be adopted. That will generally be the interpretation which is most favourable to the taxpayer. It may be acknowledged that that interpretation is not beyond challenge, but provided the view is a reasonable one, the advisor is entitled to take it and to advise the taxpayer on that basis and the taxpayer is entitled to rely on that advice.

[120] A taxpayer who consults an advisor he reasonably believes to be competent and experienced in the relevant field, and who is advised that his tax return may properly be completed on the basis of a particular view of the legislation, would normally be regarded as having taken reasonable care to submit an accurate return, even if he understood that there were other possible interpretations of that legislation. This would not be the case if  the taxpayer should have realised that the return had been completed on the basis of a view that was obviously untenable,

[121] We do not consider that  a taxpayer is obliged to take advice from another advisor in this situation.  Where there is scope for different views about a provision, there is no guarantee that another advisor’s opinion will be the “correct” interpretation. We are, by definition, considering a situation where there is uncertainty which may ultimately need to be resolved by the tribunals or the courts; different people may well take different views, all of which are tenable." (Gedir v. HMRC [2016] UKFTT 188 (TC), Judge McKeever)

- Not required to take advice from another adviser where there is scope for different views

​Not obliged to seek advice from HMRC

"[122] Nor is a taxpayer obliged to seek advice from HMRC. There may be occasions when it is helpful to ascertain HMRC’s view on a particular provision, but the taxpayer does not necessarily have to agree with it! In a case where a range of views are possible, HMRC would be expected, and entitled, to take the view which is most advantageous to it in the same way as the taxpayer would be expected, and entitled, to take the view which is most in his favour." (Gedir v. HMRC [2016] UKFTT 188 (TC), Judge McKeever)

- ​Not obliged to seek advice from HMRC

​Consider caveats in advice

"[88] So, while although he expressed initial reservations about giving an “absolute” decision, counsel then dealt with the key issues of concern regarding whether a zerorating certificate could be issued and proceeded to give advice that it could. (As an aside we note that given that there was an opportunity for counsel to request and obtain further information from Marlow prior to giving advice (Mr Wood’s statement refers to exchanges on 19 August, 6 September and 12 September) and Marlow was charged a not insignificant sum for the advice, it might be expected that Marlow might understandably feel short-changed if, as a client, it turned out that what it received was not advice on the point it had sought)." (Marlow Rowing Club v. HMRC [2020] UKUT 20 (TCC), Judge Raghavan and Judge Poole)

- ​Consider caveats in advice

- Reasonable taxpayer would update advice on domicile

"[343] We therefore agree with Mr Stone that the reasonable person in Mr Strachan’s position would not have assumed he continued to be non-domiciled, but instead would have refreshed the advice he had received over a quarter of a century earlier." (Strachan v. HMRC [2023] UKFTT 717 (TC), Judge Redston)

- Reasonable taxpayer would update advice on domicile

Even if no express advice consider if there was implicit reassurance

"[61(1)] The FTT had made detailed findings at [81] as to the care that Mr Wightman took to select an appropriate practitioner to prepare documentation in full knowledge that the documentation would need to meet specific requirements. The FTT should have gone on to consider, when formulating its conclusions at [88], whether even in the absence of specific advice, BFL obtained implicit reassurance that the loans would qualify which was enough to amount to the taking of reasonable care. By analogy, a person who instructs a lawyer to act on the purchase of a house might be said to obtain implicit advice to the effect that the documents will operate to convey title simply from the fact that the lawyer prepares those documents and identifies no problem with them.

...

[85] ... (2) Although Mr Wightman did not obtain express advice from PPCL that the Falken 1 loan was an authorised employer loan (see [89] of the Decision), BFL did rely on PPCL to produce documentation and make necessary filings to achieve that outcome. When PPCL produced loan documentation that was reasonably detailed, in the absence of any suggestion that it was defective, Mr Wightman concluded that the documentation would achieve the desired result.

(3) It was reasonable for Mr Wightman to derive that reassurance in the circumstances." (HMRC v. Bella Figura [2020] UKUT 120 (TCC), Nugee J and Judge Richards)

- Even if no express advice consider if there was implicit reassurance

Query the relevance of Katib

"[34] We add that it is  also rare for reliance on an adviser to provide a person with a reasonable excuse, both because such reliance is prevented by Sch 5 para 23(2)(b) from providing such an excuse unless the person can show he took reasonable care, and for the reasons given by Ward LJ in Hytec Information Systems v Coventry City Council [1997] 1 WLR 666 at p 1675..." (Purple Sunset Limited v. HMRC [2023] UKFTT 659 (TC), Judge Redston)

"[70] In HMRC v Katib [2019] UKUT 189 (TCC) (“Katib”), the Upper Tribunal had to consider the extent to which reliance on an adviser was a justifiable reason for failing to make an appeal on time.  However, Katib is also relevant in the context of penalties in considering whether there is a reasonable excuse for the inaccuracy.  In that case, the adviser did not provide competent advice to Mr Katib, misled him as to what steps were being taken to appeal and failed to appeal on his behalf.  That is more extreme than the situation in this case.

[71] On the facts of that case, the Upper Tribunal concluded that the failings by the appellant’s agent could not be relied upon by the appellant." (Beesley v. HMRC [2023] UKFTT 650 (TC), Judge Anne Scott)

- Query the relevance of Katib

Careless adviser/professional

Careless adviser/professional

- Judge by reference to standard of reasonable competent person in professional's role

"[94] Given my findings regarding Mr Callen’s perception of what Mr Bevis was doing as well as what Mr Bevis was holding himself out as doing and in fact did, I am clear that Mr Bevis took on the role of a tax adviser to Mr Callen and, applying Hicks, I must therefore judge Mr Bevis by the standard of a reasonably competent tax adviser giving advice to a taxpayer." (Callen v. HMRC [2022] UKFTT 40 (TC), Judge Bowler)

- Judge by reference to standard of reasonable competent person in professional's role

- Need evidence of what a reasonably competent adviser would have done

 

"[151] HMRC asserted that ELS was negligent in not advising the Appellants to amend their returns, but as Mr Chacko said, they have not provided any evidence as to what a reasonably competent tax adviser would have done or whether a reasonably competent tax adviser would have taken the view, at the time, that section 194 applied to this scheme.  HMRC have not discharged the burden of proving on the balance of probabilities that ELS were negligent." (G C Field & Sons Ltd v. HMRC [2021] UKFTT 297 (TC), Judge McKeever)

- Need evidence of what a reasonably competent adviser would have done

Seeking HMRC's opinion

 

Not necessary if HMRC would be in no better position to advise on interpretation of the law than a professional adviser

"[93] ... More crucially there would be little point, in these circumstances, in approaching HMRC because what they would receive from HMRC would, in any case amount only to HMRC’s view of the law – and HMRC would be in no better position to advise on what the correct position was as to the interpretation of the law than a professional adviser. As an aside we note the relevance of whether or not advice is sought or not from HMRC will depend on the facts. There may well be cases where seeking advice from HMRC might be a necessary component of a “reasonable excuse” defence – but it will very much depend on the taxpayer’s situation and the relevant legal issue. We are satisfied, on the facts of this case, that there was nothing to be gained in approaching HMRC for a view and that the fact this was not done should not count against Marlow.

[The taxpayer] referred us to the Upper Tribunal’s decision in Commissioners for Revenue and Customs v Greenisland Football Club [2018] UKUT 440 (TCC). In that case HMRC were appealing against the decision of the FTT that the football club was not liable for a s62 VAT penalty in respect of a zero-rating certificate given in relation to a new clubhouse. The FTT held the supply was zero-rated and even if it was not, that the football club had a reasonable excuse as it accepted the club’s evidence that it had sought professional third-party advice. As explained by Horner J (at [65] onwards) HMRC disputed the FTT’s acceptance of the club’s oral evidence to that effect. In their skeleton for the UT appeal they argued the appellant ought to have taken professional advice and/or advice from HMRC. Horner J noted HMRC’s position changed to arguing that the club should have sought advice from HMRC in any event. That change in position received short shrift and the judge went on to note there was no mention on HMRC’s VAT Notice 708 which advised a taxpayer to seek advice direct from HMRC..." (Marlow Rowing Club v. HMRC [2020] UKUT 20 (TCC), Judge Raghavan and Judge Poole)

Seeking HMRC's opinion

Carefully taking a view contrary to HMRC's published advice not careless

"[65] Considering all of the evidence before me, HMRC have not established that the insufficiency was brought about carelessly.  There were two different inaccuracies which resulted in the insufficiency, namely a failure to put the redress in one of the taxable income boxes (and they had drawn attention to this in the “white space” and by including the attachments) and the incorrect calculation of the liability in those attachments (which, whilst wrong, was carefully and knowingly based on Mr and Mrs Rosser’s position as to how the tax should be calculated).  Assessing their conduct by reference to the actions of reasonable and prudent persons, the insufficiency was not brought about carelessly by them. " (Rosser v. HMRC [2022] UKFTT 106 (TC), Judge Zaman)

Carefully taking a view contrary to HMRC's published advice not careless​

Reasonableness of non-payment of tax pending judicial review​

 

Reasonable to await outcome of first-instance court

"[92] For the first period, which runs from the service of the closure notices, through the issue of the judicial review claim on 29 March 2016, up to the point at which Jay J dismissed the judicial review, I would accept that on a balance of probability the appellant had an objectively reasonable excuse for non-payment. There was an obvious problem with the closure notices which did not contain amendments to the taxpayer's self-assessed returns. The appellant's judicial review was described by Kerr J as having a real prospect of success and by me as being arguable. Kerr J granted interim relief to prohibit HMRC from seeking to enforce the tax debt while the judicial review proceeded. The whole point of the judicial review was to establish whether the tax was payable at all, and there was a risk that the judicial review would be undermined or rendered nugatory if the tax was paid.
[93] I would not have required any more evidence than is currently before this Court to reach that conclusion. Specifically, I would have been willing to infer that the judicial review was the appellant's reason for non-payment. There is evidence, in the form of the appellant's statement in the judicial review, to establish that he had the funds available to pay, at least at this stage." (Archer v. HMRC [2023] EWCA Civ 626, Whipple, Simler, Falk LJJJ)

Additional evidence required to show it is reasonable to await outcome of CoA appeal

"[90] I consider next the second period (ie, from the decision of Jay J until the hand-down of the Court of Appeal's decision on 30 November 2017). There was a short time of around 2 weeks in February/March 2017 when no permission or interim relief was in place, but I would not base my decision on the existence of that relatively short gap which can, I think, be bridged by section 118(2). The key feature of this period is that the appellant now had a judgment against him, expressed by Jay J in trenchant terms, suggesting that he should pay up because one way or another he was going to lose. It is true that by 7 March 2017 he also had an order granting permission to appeal (on the standard necessary for a second appeal) as well as interim relief, and that Henderson LJ's order was expressed in terms which might have given cause for optimism. It is also true that the risk remained that the judicial review (now on appeal) might be jeopardised by payment of the tax, although that was surely now a smaller concern, simply because success in the judicial review looked less likely.
[91] There are factors going both ways in this period. I have concluded that on balance the loss of the case at first instance meant that it was no longer permissible for the appellant simply to point to the existence of the judicial review, without more. If, however, the appellant had adduced some further evidence for this period, to fill in the gaps and explain why payment was not made, and to establish that the judicial review as it was ongoing really was the reason for non-payment, it might have been possible to reach a conclusion in his favour." (Archer v. HMRC [2023] EWCA Civ 626, Whipple, Simler, Falk LJJJ)

Not reasonable to fail to pay whilst waiting for UKSC decision on permission

"[87] On any view, the appellant should have paid the tax by, say, mid-December 2017. In fact, the appellant paid the tax on 22 June 2018, over six months later. That is fatal to this appeal, because that period of delay cannot be viewed as reasonable. On 17 November 2017, the Court of Appeal concluded that the defects in the closure notices were cured by section 114(1); interim relief was discharged and permission to appeal was refused. At that point the tax was due pursuant to the closure notices as validated pursuant to section 114. It might have been reasonable for the appellant not to have paid the tax forthwith, not least because section 118(2) envisages a taxpayer having a reasonable time to make the payment once the reasonable excuse ceases, and a period of a week or two would not seem unreasonable in the context of this long-running case and given the amounts involved. But after that, the appellant's arguments run dry. The appellant was not reasonably entitled to rely on HMRC's agreement not to enforce the debt as a basis for continued non-payment. That agreement amounted to an administrative act by HMRC, reached on a pragmatic basis. It carried no assurance that surcharges would not be imposed. The marking of his account as "payment suspended" was consequential on HMRC's agreement, and was simply an internal measure, again for administrative purposes. It carried no assurance that surcharges would not be imposed.
[88] In this period, the appellant was seeking permission for a second appeal to the Supreme Court, to try to overturn a unanimous and compelling judgment of the Court of Appeal which told him in clear terms that he owed the tax. He was entitled to seek that second appeal of course, but it does not provide him with a reasonable excuse for continued non-payment.

[89] By mid-December 2017, a responsible taxpayer, especially one who benefited from expert legal advice as this taxpayer did, would have paid the tax. Any concerns which the appellant might at one point have harboured about the judicial review becoming nugatory in the event of success had receded in significance, given that the prospects of success in the judicial review were now looking remote. Further, HMRC had offered to repay the tax if the appellant was successful in the Supreme Court and at the very least, investigation of alternative ways of safeguarding the appellant's position in the event of success was required. It was not reasonable or responsible simply to sit back and wait for the Supreme Court's permission decision. These were not the actions of a responsible trader conscious of and intending to comply with his obligations regarding tax, applying Clean Car. Further, it could not simply be inferred by this point that the real reason for non-payment was the continued understanding or belief that the tax was not payable because of the defective closure notices; there was a real possibility that the appellant just did not want to pay the tax or that he wished to retain the cashflow benefit of keeping hold of the money for a bit longer." (Archer v. HMRC [2023] EWCA Civ 626, Whipple, Simler, Falk LJJJ)

Reasonableness of non-payment of tax pending judicial review​

Reasonable cause not the same as reasonable excuse

“But while it makes sense for a doctor who has failed to appeal a decision which could prejudice their career or a member of the GMC who fails to turn up to sufficient meetings that their membership is in danger of being terminated to be required to offer an excuse, in regulation 6 HOBDAR the claimant is seeking something to their advantage, not seeking to show why they should not be prejudiced, and it is odd to talk about the claimant in this situation having a reasonable excuse for failing to ask for their advantage in time. It makes more sense to say they have to give reasons or grounds for the failure…I therefore approach this case with no preconception that any decisions of the Upper Tribunal or a Court on the term "reasonable excuse" are binding on me, and nor are any of the qualifications found in some reasonable excuse provisions. But I do approach it on the basis that "for reasonable cause" means "on reasonable grounds".” (Sibleys Fuel and Marine Services v. HMRC [2016] UKFTT 777 (TC), Judge Thomas, §§82…83).

Reasonable cause for late claims where HMRC accepted 11 previous claims late

“This conduct by HMRC in letting 11 late claims be paid when there was no let out available would have led the appellant (the partnership, whether Clive or Ian was administering the scheme) to think that the 30 day rule that had been notified to the appellant, was not taken seriously by HMRC… In my view this conduct of HMRC's is a reasonable ground for having the claims admitted and therefore the claimant has shown that its failure was for reasonable cause.” (Sibleys Fuel and Marine Services v. HMRC [2016] UKFTT 777 (TC), Judge Thomas, §103).
 

Reasonable cause not the same as reasonable excuse

Information notices

 

See I-7: Compliance and non-compliance

Deliberate

- Should have known of connection to fraud is not deliberate

"[256] We do not agree with Mr Watkinson’s submission that an inaccuracy which is based on a finding that OWD should have known of a connection to the fraudulent evasion of VAT constitutes a deliberate inaccuracy.  We gratefully adopt the explanation of a deliberate inaccuracy set out in Auxilium.  As the Tribunal in Auxilium went on to explain, the question of whether there is a deliberate inaccuracy is a subjective test; it is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time. 

...

[260] Mr Watkinson submitted that the description by Moses LJ of what is caught by “should have known” goes beyond carelessness.  We agree that the description is such that someone who is found to meet this threshold will almost inevitably be found to have been careless; but the ease with which that conclusion can be reached does not mean that they should be treated as having knowingly provided HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document.  Our conclusion was that OWD should have known that this was the case; but that is not actual knowledge.

[261] We have concluded that the inaccuracy in OWD’s returns was not deliberate." (Bachra v. HMRC [2023] UKFTT 91 (TC), Judge Zaman)

- Should have known of connection to fraud is not deliberate

Fraud/dishonesty

Fraud/dishonesty

- Judge by reference to the standards of ordinary decent people

"[15] The tests required to show dishonesty were summarised in Byers v Revenue and Customs Commissioners [2019] UKFTT 310 (TC) ("Byers") as follows:

[142]  ....  Following Ivey v Genting, the test for dishonesty to be applied in both criminal and civil proceedings is Lord Nicholls' test in Royal Brunei v Tan, as clarified by Lord Hoffman in Barlow Clowes.

[143]         Lord Nicholls' test was applied in determining "dishonest" in the context of a penalty under s 60 VATA by Judge Pelling QC (sitting as a High Court Judge) on Sahib Restaurant Ltd v HMRC (Case M7X 090,9 April 2009, unreported):

     "in my view, in the context of the civil penalty regime [contained in what was then s 60 of the Value Added Tax Act 1994] at least the test for dishonesty is that identified by Lord Nicholls in Tan as reconsidered in Barlow Clowes. The knowledge of the person alleged to be dishonest that has to be established if such an allegation is to be proved is knowledge of the transaction sufficient to render his participation dishonest according to normally acceptable standards of honest conduct. In essence the test is objective - it does not require the person alleged to be dishonest to have known what normally acceptable standards of honest conduct were."

[144]         That the civil test of dishonesty is essentially objective is confirmed by Lord Hoffman is Barlow Clowes, where it is stated at [10]:

"Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards."

[145]         While the test for dishonesty is primarily objective, Lord Nicholls has remarked on the subjective element that remains relevant to the test as follows:

     "Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart, dishonesty, are mostly concerned with advertent conduct, not inadvertent conduct."

[146]         In respect of how this 'subjective element' is to be taken into account by the court, Lord Nicholls' guidance is:

"Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances know to the third party at the time. The court will also have regard to the personal attributes of the third party such as his experience and intelligence, and the reason why he acted as he did."

[147]         A s.61 penalty is predicated on a s.60 penalty being imposable on the body corporate in the first place. Section 60(1) of VAT provides:

"(1)(a) for the purpose of evading VAT, a person does any act or omit to take any action, and (b) his conduct involves dishonesty ..."

[148] It is clear from the statutory wording under sub-s 60(1)(a) that the conduct involving dishonesty is not restricted to the commission of an action, but includes an omission to act. The statutory wording in this regard accords with case law authority on the meaning of dishonesty, as Lord Nicholls in Royal Brunei stated at p106;

'Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless"." (Hanlon v. HMRC [2024] UKFTT 175 (TC), Judge Tilakapala)

"[134] However, both of those cases applied the test to determine dishonesty in R v Ghosh [1982] 1QB 1053 which has subsequently been superseded (as acknowledged by both parties) by the test set out in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 at para 74:

“When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.”

[135] Notably, Ivey makes clear that there is no requirement that the taxpayer in a case such as this must appreciate that what he has done is, by the standards of ordinary decent people, to be dishonest." (Grantham Ceilings & Interiors Limited v. HMRC [2022] UKFTT 99 (TC), Judge Bowler)

- Judge by reference to the standards of ordinary decent people

- Reclaiming VAT which taxpayer had not paid and knew supplier would not be able to pay is fraud/dishonest

[158] We were repeatedly told that those involved thought that if the disputes were settled GC would pay Holdings, but that was a very significant caveat.  We readily accept that if the disputed money had been received the outstanding amounts would have been paid by GC to Holdings.  Furthermore, this is not a case of a pre-planned fraud or an MTIC arrangement.  However, making the GC reclaims for VAT which had not been paid to Holdings and which GC knew Holdings would be unable to pay to HMRC given the deep-rooted financial problems was dishonest when the approach required by Ivey v Genting is applied of that of the ordinary decent person." (Grantham Ceilings & Interiors Limited v. HMRC [2022] UKFTT 99 (TC), Judge Bowler)

- Reclaiming VAT which taxpayer had not paid and knew supplier would not be able to pay is fraud/dishonest

- Wilful blindness as dishonesty

 

"[30] Here, the Appellant's position is, essentially, that he did not know that VAT evasion was taking place. This is, he says, because he entrusted the running of his Company to third parties and assumed and was, at times, told by those third parties, that they were taking the steps necessary to ensure the Company's compliance with its obligations including its VAT obligations. He asks us to believe that he was naive and overly trusting but not at any time dishonest.

[31] Having taken into account the evidence made available to us, we find that HMRC has satisfied us that on the balance of probabilities, the Appellant either (a) was aware of the Company's excise duty and VAT evasion activities, or at the very least (b) chose not to investigate whether the Company was in compliance with its tax obligations (including its VAT obligations) in case he learned something that he would rather not and then proceeded regardless. In either event his behaviour was, we consider, dishonest by ordinary standards or the normally accepted standards of honest behaviour." (Hanlon v. HMRC [2024] UKFTT 175 (TC), Judge Tilakapala)

- Wilful blindness as dishonesty

Exceptional circumstances

 

"[179] Albeit relating to completely different legislation, Lady Justice Arden, as she then was, in R (oao) Rowe & Others v HMRC [2017] EWCA Civ 2105 said in relation to the phrase “exceptional circumstances” that “In my judgement, the circumstances which are likely to constitute exceptional will be varied and case specific …”.  Looking at the case law to which we have been referred, we agree.

[180] We also note that The New Shorter Oxford English Dictionary defines “exceptional” as being “Of the nature of or forming an exception; unusual, out of the ordinary; special”.

[181] Exceptional is not the same as unique." (Ocean Choice International Limited v. HMRC [2023] UKFTT 289 (TC), Judge Anne Scott)

Confusing situation created by HMRC

"[200] The facts of that case are completely different to the facts in this case because there is no fraud in this instance and the appellant has acted in good faith. Nevertheless we consider that it is relevant in the sense that the very confused information disseminated by HMRC, which appears to have confused even their own officers, has undermined the system and contributed to the reason that the customs debt was incurred. Therefore the situation for the appellant was certainly beyond the normal commercial risk relating to its business." (Ocean Choice International Limited v. HMRC [2023] UKFTT 289 (TC), Judge Anne Scott)

Exceptional circumstances
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