TC09554 - [2025] UKFTT 00747 (TC)

The Schedule 26 provisions are relatively new. However, paragraphs 12 and 13 are based on, and virtually identical to, provisions found in Schedules 55 and 56 to the Finance Act 2009 which concern penalties for late tax returns and late payments (Footnote: ¹) (respectively). Indeed, the reasonable excuse provision in paragraph 12(2)(a) and (b) is similar to provisions enacted as section 33(2) of the Finance Act 1985 and which were considered by the Court of Appeal in HM Customs & Excise v Steptoe [1992] STC 757, [1992] BVC 142, a case which also concerned a form of penalty for the late payment of VAT.

The Court of Appeal put the question before it in the following way (with statutory references updated to reflect the equivalent Schedule 26 provisions):

“The question which has arisen for decision on this appeal can be very shortly stated. It arises in connection with para. (a) of [para. 12](2), but a corresponding point might well arise in connection with para. (b). Does the direction that ‘an insufficiency of funds to pay any tax due is not a reasonable excuse’ prevent the taxpayer from putting forward as a reasonable excuse the reason for the insufficiency of funds? It is obvious that an insufficiency of funds cannot, without more, be a reasonable excuse. But can [HMRC] go behind the insufficiency of funds and, if satisfied that the reason for the insufficiency is a ‘reasonable excuse’ for the default, apply [para. 12(1)]?

“This is an issue of statutory construction. If the right answer is that an insufficiency of funds, however caused, can never be a reasonable excuse, it is undeniable that the potential for great hardship to taxpayers is produced. Suppose a trader prudently sets aside in a deposit account in a bank a sum sufficient to meet his expected liability for VAT. And suppose shortly before the due date on which the trader must make a return and pay the tax the bank were to fail, leaving the trader with insufficient funds to pay the tax on the due date. Does [para. 12](2)(a) disqualify the bank failure from constituting a reasonable excuse? If so, the hardship to the trader is apparent. But, of course, the potential for hardship is mitigated by the commissioners’ discretionary power to decline to impose a surcharge.”

The Court was divided on that occasion with Lord Justice Nolan (as he then was) and Lord Donaldson MR dismissing the appeal, whereas Lord Justice Scott (as he then was) would have allowed the appeal. However, all three judges agreed on the question of principle:

“… on its true construction, para. (a) does not prevent the reason for an insufficiency of funds being put forward as a ‘reasonable excuse’ …”

The difference between the judges was as to how that agreed principle should be applied. In the judgment of the Master of the Rolls, the two competing approaches were considered with the learned judge siding with Lord Justice Nolan:

“Nolan LJ, as I read his judgment explaining and expanding on his judgment in the Salevon case, is saying that, if the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, then the taxpayer may well have a reasonable excuse for non-payment, but that excuse will be exhausted by the date upon which such foresight, diligence and regard would have overcome the insufficiency of funds.

“Scott LJ on the other hand is of the opinion that the underlying cause of the insufficiency of funds must be an ‘unforeseeable or inescapable event’. I have come to the conclusion that this is too narrow in that (a) it gives insufficient weight to the concept of reasonableness and (b) it treats foreseeability as relevant in its own right, whereas I think that ‘foreseeability’ or as I would say ‘reasonable foreseeability’ is only relevant in the context of whether the cash flow problem was ‘inescapable’ or, as I would say, ‘reasonably avoidable’. It is more difficult to escape from the unforeseeable than from the foreseeable.

“It follows that if I have correctly interpreted the two judgments, I am in agreement with Nolan LJ rather than Scott LJ On the other hand, if I have incorrectly interpreted either or both, my views are those that I have attributed to Nolan LJ.”

The wording in Schedule 26 differs slightly from that considered in Steptoe because paragraph 12(2)(a) expressly permits an insufficiency of funds to form a reasonable excuse if “attributable to events outside the [taxpayer]ʼs control”. We do not consider that that limits the continuing relevance of the Steptoe judgment – if anything, it slightly extends the scope of what can constitute a reasonable excuse in cases of insufficiency of funds.

In Perrin v HMRC [2018] UKUT 156 (TCC), a case where a tax return was submitted late, the Upper Tribunal gave the following guidance in relation to claims for reasonable excuse:

“81.

When considering a “reasonable excuse” defence, therefore, in our view the FTT can usefully approach matters in the following way:

(1)

First, establish what facts the taxpayer asserts give rise to a reasonable excuse (this may include the belief, acts or omissions of the taxpayer or any other person, the taxpayer’s own experience or relevant attributes, the situation of the taxpayer at any relevant time and any other relevant external facts).

(2)

Second, decide which of those facts are proven.

(3)

Third, decide whether, viewed objectively, those proven facts do indeed amount to an objectively reasonable excuse for the default and the time when that objectively reasonable excuse ceased. In doing so, it should take into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times. It might assist the FTT, in this context, to ask itself the question “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”

(4)

Fourth, having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time (unless, exceptionally, the failure was remedied before the reasonable excuse ceased). In doing so, the FTT should again decide the matter objectively, but taking into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times.”

That case built on the decision of the VAT Tribunal in The Clean Car Co Ltd v HMCE [1991] VATTR 234 which posed the following question:

“One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself in at the relevant time, a reasonable thing to do?”