In 2017 the First-tier Tribunal turned down an appeal against a penalty for late payment of tax, despite criticising HMRC’s hackneyed argument as wrong. How can the judge’s comments help you counter penalties in similar situations?
In 2008 HMRC started to align the rules for penalties for most types of tax. A common and welcome feature was the concept of a “reasonable excuse”. Where you have one for, say, failing to submit a tax return on time, no penalty applies. In NSF Utilities v HMRC 2017 the taxpayer used the reasonable excuse argument to dispute a penalty for not paying its VAT on time.
NSF was late paying its VAT and so HMRC charged a penalty (a “default surcharge”). NSF appealed saying that it had a reasonable excuse, which was that HMRC owed it money in respect of excess construction industry scheme (CIS) deductions. HMRC accepted this, but said that NSF should have made other arrangements to pay its VAT. And while there was a long delay in refunding the CIS tax, this wasn’t unusual. NSF ought to have expected it and taken steps.
Trap. VAT rules specifically say that a lack of money can’t count as a reasonable excuse. However, some years ago the Court of Appeal ruled that it can amount to a reasonable excuse, but only where there are extraordinary circumstances. Note. While there’s no statute preventing a lack of money being a reasonable excuse for other types of late payment penalty, again there must be exceptional circumstances.
HMRC’s faulty argument
At the First-tier Tribunal (FTT) HMRC trotted out its usual argument that for an excuse to be reasonable it must be “unforeseeable and inescapable” despite the first element of this statement being discredited by the courts. They take the view that just because a problem is foreseeable it isn’t avoidable. For example, the failure of a major customer might be predictable and result in significant cash flow problems, but knowing that won’t help you get around it. The proper test for a reasonable excuse is whether a problem it relates to is inescapable.
Tip. There are a few judgments which debunk HMRC’s “unforeseeable” argument. If you’re faced with an inspector using this approach point this out (see The next step ).
The FTT’s decision went against NFS, not because of HMRC’s questionable argument, but because it offered no evidence to show it couldn’t avoid the shortage of funds. While HMRC’s delay in processing the CIS refund created a problem, NFS seemingly took no steps to work around it and so there was no proof that it was inescapable.
Tip. If you want to show that the problem which caused you to miss a deadline was unavoidable, you should at least try to avoid it. In NSF’s case, had it provided the FTT with evidence that, say, the bank wouldn’t lend it the money to pay its VAT bill, the FTT’s decision might have gone the other way. It should have contacted HMRC as soon as it realised it wouldn’t be able to pay on time. It may have agreed to instalment payments and even been prepared to forego late payment penalties.
The judge said that a problem which causes you to miss a deadline doesn’t have to be unforeseeable as HMRC maintains. It only has to be inescapable. Plus, if you expect to be late paying a tax bill, it will help your case if you let HMRC know ASAP and show it that you have tried to raise the funds.