Late Tax Returns: Expecting Sympathy From HMRC?

Mark McLaughlin points out taxpayers who file their tax returns late may get more sympathy from the tax tribunal than HMRC.

Most individuals are aware that if tax returns are not submitted to HM Revenue and Customs (HMRC) by the statutory filing date (normally 31 January following the relevant tax year), penalties will generally be payable. However, no penalty arises if the person satisfies HMRC (or the tax tribunals) that there was a reasonable excuse for the late return.

The penalty regime for failing to make returns, etc. (FA 2009, Sch 55) does not include a definition of ‘reasonable excuse’ for these purposes, except in negative terms. In other words, the legislation specifies what does not constitute a reasonable excuse. These include an insufficiency of funds (unless attributable to events outside the person’s control) and reliance on another person (unless the taxpayer took reasonable care to avoid the failure) (Sch 55, para 23(2)).

At one end of the spectrum, HMRC occasionally publishes ‘unusual’ excuses by taxpayers who failed to submit their tax returns on time (http://tinyurl.com/HMRC-TR-Excuses); most people would not regard excuses such as ‘My dog ate my tax return…and all of the reminders’ as being reasonable! 

At the other end, HMRC will normally treat a serious illness of the taxpayer (or a close relative or domestic partner) around the time when the person should have filed the tax return as a reasonable excuse (see HMRC’s Compliance Handbook manual at CH61560). However, what if (for example) a taxpayer suffers from a mental illness, which extends over a number of tax years, resulting in several late tax returns?

In Appellant v Revenue and Customs [2017] UKFTT 839 (TC), HMRC issued tax returns to the appellant for the tax years 2001/02 to 2005/06 in January 2007. However, the appellant did not submit the returns by the due date. HMRC subsequently made tax determinations for those years. The appellant later filed tax returns for 2002/03 to 2004/05 inclusive. Following enquiries into those returns, HMRC made assessments that displaced the figures in the appellant’s returns, and issued determinations up to and including 2008/09. HMRC also issued various penalties and surcharges in respect of the tax years 2001/02 to 2009/10 inclusive. The appellant appealed. 

The First-tier Tribunal noted that the appellant (who was given anonymity) was diagnosed with a severe and enduring mental illness (i.e. paranoid schizophrenia). The illness had commenced at the start of 2007. The tribunal found on the facts and evidence that the appellant was not capable of properly managing her affairs, submitting correct tax returns on time, and/or instructing a representative to act on her behalf to do those things, due to her mental illness. The tribunal granted the appellant permission to bring her appeals against the penalties and surcharges out of time, in view of the exceptional circumstances of the case.

As to whether the appellant had a reasonable excuse for her non-compliance, the tribunal concluded that her schizophrenia, which commenced in early 2007, was the cause of her failure to file the tax returns by the due date of 24 April 2007, and the subsequent failures to meet her tax obligations. The tribunal found she was incapable of doing it rationally herself or employing someone to do it on her behalf, and that had remained the position. The appellant therefore had a reasonable excuse for the entire period of default. The appellant’s appeal against all the penalties and surcharges was allowed.

Mental or physical conditions can both be a reasonable excuse for the late filing of tax returns. However, the tribunal made the following distinction: ‘It seems to me that, unlike with physical ill-health, the taxpayer with long-term mental health problems cannot necessarily be expected to make arrangements for someone else to act on their behalf during their incapacity: the mental health problems might make that difficult or even impossible.’ Previously, the Upper Tribunal had accepted that mental ill-health could provide a reasonable excuse for a number of years (Ms AZ v Revenue and Customs [2011] UKUT B17 (TCC)).

It is important to note that if a reasonable excuse has ceased, it only offers an escape from a late filing penalty if the failure is remedied without unreasonable delay thereafter (FA 2009, Sch 55, para 23(2)(c)). Unfortunately, there is no statutory definition of ‘unreasonable’, so each case will depend on the particular circumstances.