What is a reasonable excuse for submitting a late tax return?
Annette Stone, Director and tax specialist at Thomas Westcott Chartered Accountants, discusses what HMRC might consider a reasonable excuse for a late tax return.
If you didn’t submit your Self Assessment tax return ahead of the deadline, you may be wondering if HMRC will consider your excuse reasonable. While HMRC has recently broadened its definition of a reasonable excuse, the onus is still on the taxpayer to make their case.
At Thomas Westcott, we asked our specialist tax team what they have heard taxpayers describe as being a reasonable excuse. Some were reminiscent of excuses typically associated with students who have failed to hand in homework on time. Unfortunately, HMRC will not accept ‘a pet has chewed my paperwork’. Telling HMRC that ‘I have not had time to employ someone to sort out my filing,’ or ‘HMRC forgot to remind me,’ will also not be deemed reasonable.
Failing to give a reasonable excuse for missing the deadline could leave you faced with paying a penalty.
When will HMRC raise a penalty for a late tax return?
While writing, HMRC has just sent out the first round of penalties for late submission of the 2021 Self-Assessment Tax Returns.
HMRC will raise penalties for:
- Failure to notify chargeability
- Failure to make payment on time
- Late filing of Tax Return
- Failure to report offshore liabilities
HMRC must establish that events have occurred which have resulted in an offence being committed and a penalty, therefore, being due.
The penalty can be between 100% and 150% of the tax underpaid for unprompted disclosure.
Tribunal decisions are often more generous towards the taxpayer. However, the onus is on the taxpayer to demonstrate that the excuse is reasonable.
What is a reasonable excuse?
If the taxpayer has a reasonable excuse for submitting a late tax return, the penalties may be mitigated. There is no statutory definition of a reasonable excuse. Instead, each case is considered on its own merits.
HMRC has recently expanded its definition of what constitutes a reasonable excuse and will generally consider the following:
- Mental health issues
- Ignorance of the law
- Reliance upon a third person, in the right circumstances. This could include following incorrect advice from a professional, or even from an HMRC telephone advisor
- Issues involving HMRC
It is regrettably still the case that HMRC sometimes continues to argue that the law requires any reasonable excuse to be based on some “unforeseeable or inescapable” event.
For example, an individual does not understand how to complete a tax return form. This is a foreseeable event. The taxpayer knows that they need to seek help or advice. In these circumstances, if your tax return was late, the tax tribunal on hearing an appeal will usually expect you to have taken reasonable steps in advance to get help with your tax affairs. They might also look at how difficult your tax affairs are and why, in your particular circumstances, you have found them too difficult to deal with.
A broader definition of a reasonable excuse
Previously, HMRC took a much narrower view on reasonable excuses. While this has now been expanded, individual officers may need to be referred to the above list in case it has not yet filtered down.
A tribunal held in 2018 has been helpful in establishing a guide to how HRMC may view a taxpayer’s claim of having a reasonable excuse for submitting a late tax return. In this case, Perrin v HMRC, the taxpayer simply failed to press the ‘submit’ button while filing her tax return.
This case highlights the significance of showing what a ‘reasonable taxpayer’ can be expected to understand about HMRC’s processes. This concept of a ‘reasonable taxpayer’ test is something I often use when appealing a penalty from HMRC on behalf of a client.
The case is also significant because it demonstrates the four-step process, which the courts use to make a decision:
- Establish the facts that there is a reasonable excuse
HMRC had not provided any evidence that a person filing online is told that an on-screen confirmation is always received at the end of the transaction. In addition, HMRC was not able to demonstrate that the absence of confirmation means the transaction is incomplete.
- Balance of probabilities
In this case, the courts ruled that a reasonable taxpayer should not have been expected to know that there would be an on-screen confirmation once the tax return is submitted without an on-screen warning in advance. Therefore, Mrs. Perrins should not have been expected to realise that she had not completed the filing process.
This case shows that, if a taxpayer can convince a tribunal that he or she honestly believes something which excused the failure, they would be exonerated from any penalty. This is regardless of how unreasonable that belief had been.
- Did the taxpayer remedy the failure after the reasonable excuse ceased?
The tribunal considered whether, once Mrs. Perrin was alerted to the failure, she remedied it “without unreasonable delay”.
Even if we accept that Mrs. Perrin’s failure to realise she had completed the wrong return form was itself reasonable, that excuse came to an end soon after she received HMRC’s letter notifying her of her error.
Mrs. Perrin did not remedy her mistake until 20 September 2012. This was about two months after she received HMRC’s letter, which was dated 13 July 2012.
- Unreasonable delay not time defined
Despite the remedy of a reasonable time delay being required, HMRC has not expressed a specific time period as a matter of days or months. Instead, they will take into account the taxpayer’s individual circumstances. That means that a family bereavement, for example, may excuse the taxpayer not responding promptly to a letter from HMRC highlighting their failure to submit.
Appealing a late penalty
If you want to appeal a penalty for a late tax return submission, it is important to be aware that HMRC’s decision will be based on the four-step process highlighted in the case of Perrin v HMRC.
For example, one excuse, such as having insufficient funds or reliance on a third party, will not itself constitute a reasonable excuse. Instead, a decision will be based on the interaction between the four factors.
Thomas Westcott can support you in appealing a late penalty. As an agent acting on behalf of the taxpayer, it is vital that we establish the facts and what happened leading up to it.
This will involve us:
- Establishing the timings of events
- Collating supporting documentation
- Presenting the facts to HMRC with supporting documents
If the response from HMRC is not positive, then there are alternatives. This could mean requesting a statutory review, applying for Alternative Dispute Resolution, going to a Tribunal, or applying for a reduced penalty.
Annette Stone is a Director in the tax team at Thomas Westcott Chartered Accountants. Based in the firm’s Plymouth office, she has more than 20 years’ experience of advising businesses and individuals on taxation. Annette regularly and successfully appeals tax return claims with HMRC on behalf of clients.