It should perhaps be no surprise given the circumstances of the pandemic that individuals and businesses might have incurred penalties for late tax payments.
But the penalties charged by HM Revenue & Customs can be mitigated if the taxman accepts what is a ‘reasonable excuse’ for failing to meet a payment deadline.
HMRC guidelines have now been updated, but there is no statutory definition of ‘reasonable excuse’ or ‘unreasonable delay’.
Each case must be considered on the facts, and in view of the person’s abilities and circumstances, which could include problems caused by the pandemic.
What might amount to a reasonable excuse for one taxpayer may not for another, but in certain circumstances a penalty could be incurred for:
- Failure to give notice of chargeability to tax
- Failure to on time
- Failure to pay on time or to meet certain other time bound obligations
A person will not be liable to a penalty for a failure if they have:
- A reasonable excuse, and
- Put the failure right without unreasonable delay after the excuse had ended.
HMRC’s reasonable excuse guidance (CH160100-CH160950) which was recently updated, now states that the “law does not require that a reasonable excuse is based on an unforeseeable or inescapable event”.
Instead, HMRC considers a reasonable excuse “to be something that stops a person from meeting a tax obligation despite them having taken reasonable care to meet that obligation.”
A reasonable excuse does not have to be a single event or issue. In certain instances, a combination of factors can amount to a reasonable excuse when considered together.
There are sections of HMRC’s Compliance Handbook that discuss reasonable excuses in particular situations, including:
- Mental health
- Physical illness
- Ignorance of the law
- An unexpected stay in hospital that prevented them from dealing with their tax affairs
- Computer or software failed just before or while they were preparing their online return
- A fire, flood or theft prevented the person from completing their tax return
- Delay caused by HMRC
- Members of Armed Forces on active service overseas.
Determining if there is a reasonable excuse
To successfully challenge a penalty on the grounds of reasonable excuse, generally the taxpayer must demonstrate that they had a reasonable excuse and they put their failure right without unreasonable delay following the end of the reasonable excuse.
What is not a reasonable excuse
The updated HMRC guidance provides some examples that do not usually amount to a reasonable excuse on their own, including pressures at work, a lack of information, or not being reminded by HMRC about a tax obligation.
Additionally, two situations are given in statute that do not amount to reasonable excuse:
- An insufficiency of funds
- Reliance on a third person.
There are exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where it is a result of events outside the person’s control.
Reliance on third party expert, such as an accountant may, in certain circumstances, may amount to a reasonable excuse.
When reasonable excuse fails
Sometimes, HMRC may not accept that a taxpayer has a reasonable excuse. Where that does happen, the taxpayer may still be able to request a statutory review and may also be able to appeal against the penalty at tribunal.
Depending on the circumstances, a penalty reduction on the grounds of special circumstances may also have merit.
For help and advice on related matters please contact our expert team.