Tax penalties - compliance failures - reasonable excuse
At a glance
- A taxpayer can appeal a tax penalty when he is able to prove that he had a reasonable excuse for not doing what he was supposed to do.
- The phrase reasonable excuse takes its everyday meaning.
- Reasonable excuse does not mean "exceptional circumstances".
- A taxpayer is expected to know which deadline applies and make a reasonable effort to meet those deadlines.
- Reliance on the acts of a third party, such as an accountant or adviser is no defence for VAT penalties, it is a defence for direct tax penalties in certain circumstances.
- Each case will be considered on its own merits.
Reasonable excuse or reasonable care?
To avoid any confusion in terminology:
- The defence of "reasonable excuse" applies to compliance failures.
- Late filing of returns
- Failing to file online
- Failing to make a payment on time
- Failing to notify chargeability
The defence of "reasonable care" is slightly different, although the two may cross over.
- Reasonable care mainly applies in the context of calculating tax geared penalties for error and mistake caused by careless behaviour.
What is a reasonable excuse?
"Reasonable excuse" is not defined by the legislation, so it takes its everyday meaning.
For a reasonable excuse to be made out there are only two requirements:
- The appellant must put forward an excuse.
- It must be decided whether, when viewed objectively, that excuse is reasonable in the context of the delay that has triggered the penalty.
HM Revenue & Customs (HMRC) take a view that an excuse is reasonable where some unforeseeable and exceptional event beyond the taxpayer's control is responsible for the compliance failure. Unsurprisingly the Tax Tribunal does not confine itself to such a narrow interpretation.
These sort of circumstances that might be reasonable will include:
Strike action or systems failure at HMRC
Accident or disaster:
- IT failure: the taxpayer's computer breaks down or catches a virus just before or during the preparation of an online return.
- Electrical failure or broadband failure.
Illness
- Serious illness: the taxpayer's or a member of his close family's has a new or worsening medical condition which means he is incapable of filing a tax return.
A late filing failure caused by the deliberate conduct of the taxpayer would not be covered by reasonable excuse. This also covers situations where the taxpayer:
- Found the online system too complicated to follow and did not try to seek any advice.
- Suffers from a long-term illness or condition and so was aware that he had on-going difficulties and so could have made alternative arrangements.
- Was let down by his accountant but then failed to seek advice elsewhere.
- Forgot about a deadline, or left it too late for an adviser to assist.
- Had an IT problem but did not try to re-submit a return on time once a problem with the IT system was put right.
Where a taxpayer had a reasonable excuse for a relevant act or failure but the excuse ceased; he is expected to remedy the situation without unreasonable delay. Failing to act promptly in those circumstances will deny relief on the grounds of reasonable excuse.
Reliance on others
VAT: reliance on “any other person” or third party is specifically precluded from being a reasonable excuse for VAT purposes by s 71 Value Added Tax Act 1994. This poses a few problems when one tries to rely on the advice of HMRC!
Direct tax: there is no specific provision (unlike VAT) that precludes reliance on a third party. Hence it is not unreasonable to rely on an accountant or a tax adviser.
Late payment
Insufficiency of funds is not a reasonable excuse for a failure unless it is attributable to events outside the taxpayer’s control. Circumstancds where an appeal is possible may include:
- Bankrupcy of a major supplier
- Sudden withdrawl or cut in bank funding
- Government cuts if affecting a supply chain
Making a successful appeal
A summary of successful and unsuccessful appeals against penalties on the grounds of reasonable excuse and reasonable care are discussed in more detail in Tax penalties: grounds for appeal.
For a reasonable excuse to be made out there are only two requirements:
- The appellant must put forward an excuse.
- It must be decided whether, when viewed objectively, that excuse is reasonable in the context of the delay that has triggered the penalty.
Small print and links
HMRC guidance and claim form: What counts as a reasonable excuse (of limited use as this is only HMRC's view)
Links to our guides on this topic are found in our Penalties & Compliance section:
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