TC09540 - [2025] UKFTT 00600 (TC)

Schedule 55 to the Finance Act 2009 contains provisions for the imposition of penalties for the failure to make tax returns (see s 106 Finance Act 2009). All subsequent references to paragraphs are, unless otherwise stated, references to the paragraphs of schedule 55 to Finance Act 2009.

In Barry Edwards v HMRC [2019] UKUT 131 (TCC) (“Edwards”) at [84], the Upper Tribunal observed that the “aim” behind the schedule 55 penalty regime “is to penalise taxpayers who fail to comply with their obligations” and:

“… to incentivise them to comply with future notifications that they must file a tax return (and pay any tax due) on time. In our view, a penalty regime which seeks to incentivise taxpayers to comply with a requirement to file a return is a legitimate aim, regardless of whether it is subsequently determined that any tax is due. …”

The Upper Tribunal continued, at [85], by confirming that there is a “reasonable relationship” of proportionality between this “legitimate aim” and the schedule 55 penalty regime which establishes:

“… a fair balance between the public interest in ensuring that taxpayers file their returns on time and the financial burden that a taxpayer who does not comply with the statutory requirement will have to bear.”

Turning then, to the provisions of schedule 55, paragraph 1 provides that a penalty is payable where there is a failure to make or deliver certain types of return. These are set out in a table in the paragraph and includes an ATED return as required by s 159 Finance Act 2013.

Paragraph 3 provides for an initial late payment penalty of £100 if an ATED return is submitted late.

Paragraph 4 provides for HMRC to issue £10 daily penalties for a period of 90 days from the date specified in a notice given by HMRC (which may be earlier than when the notice was given).

A further liability to a penalty of 5% of any tax due or £300 (whichever is greater) arises under paragraph 5 if the failure to make or deliver a return continues beyond six months.

If the failure continues beyond 12 months, a liability to a penalty of 5% of any tax due or £300 (whichever is greater) arises under paragraph 6.

However, paragraph 23 provides that if HMRC (or the Tribunal on appeal) are satisfied that there is a “reasonable excuse” for the failure to make a return, liability to a penalty “does not arise in relation to that failure”.

The legislation does not define “reasonable excuse”, which “is a matter to be considered in the light of all the circumstances of the particular case” (see Rowland v HMRC [2006] STC (SCD) 536 at [19]).

Paragraph 23 also provides that, unless it is attributable to events outside a taxpayer’s control, an insufficiency of funds is not a reasonable excuse (see paragraph 23(2)(a)). Neither is reliance on another person to do anything a reasonable excuse unless the taxpayer took reasonable care to avoid the failure (see paragraph 23(2)(b)). Provided the failure is remedied without unreasonable delay after it has ended, the reasonable excuse will be treated as having continued until the failure is remedied (see paragraph 23(2)(c)).

A penalty may also be reduced by HMRC, under paragraph 16, because of the presence of “special circumstances”. However, paragraph 16 specifically excludes the ability to pay, or the fact that a potential loss of tax from one taxpayer is balanced by the over-payment by another, from constituting special circumstances.

The Upper Tribunal in Edwards,cited the decision of the First-tier Tribunal (the “FTT”) in Advanced Scaffolding (Bristol) Limited v HMRC [2018] UKFTT 0744 (TC) (“Advanced Scaffolding”). The FTT in Advanced Scaffolding hadstated, at [101]-[102], that the scope of “special circumstances” should not be given a “narrow meaning” and that “what matters is whether HMRC (or, where appropriate, the Tribunal) consider that the circumstances are sufficiently special that it is right to reduce the amount of the penalty”.

The Upper Tribunal in Edwards agreed with the FTT in Advanced Scaffolding that “special circumstances” should not be narrowly construed and observed, at [74], that:

“… As the FTT went on to say at [105], special circumstances may or may not operate on the person involved but what is key is whether the circumstance is relevant to the issue under consideration.”

The Upper Tribunal in Edwards also confirmed, at [87], that the fact that no tax is ultimately found to be due cannot constitute a special circumstance to be taken into account by HMRC (and therefore the Tribunal on appeal) when considering the reduction of a penalty.

Paragraph 20 provides a right of appeal to the Tribunal against a decision of HMRC that a penalty is payable and/or the amount of any penalty.

On an appeal the Tribunal may, under paragraph 22, affirm or cancel HMRC’s decision. If the appeal is against the amount of a penalty the Tribunal may substitute HMRC’s decision with its own, provided it was within HMRC’s power to make such a decision. However, the jurisdiction of the Tribunal in regard to special circumstances is limited to cases where HMRC’s decision not to apply a reduction is “flawed” in a judicial review sense, eg where HMRC have taken an irrelevant matter into account or have failed to consider something relevant.

In Christine Perrin v HMRC [2018] UKUT 156 (TC) (“Perrin”), under the heading The correct test for “reasonable excuse”, the Upper Tribunal said:

“69.

Before any question of reasonable excuse comes into play, it is important to remember that the initial burden lies on HMRC to establish that events have occurred as a result of which a penalty is, prima facie, due. A mere assertion of the occurrence of the relevant events in a statement of case is not sufficient. Evidence is required and unless sufficient evidence is provided to prove the relevant facts on a balance of probabilities, the penalty must be cancelled without any question of “reasonable excuse” becoming relevant.

70.

Assuming that hurdle to have been overcome by HMRC, the task facing the FTT when considering a reasonable excuse defence is to determine whether facts exist which, when judged objectively, amount to a reasonable excuse for the default and accordingly give rise to a valid defence. The burden of establishing the existence of those facts, on a balance of probabilities, lies on the taxpayer.”

At [81 of Perrin the Upper Tribunal gave the following guidance to the Tribunal when considering a “reasonable excuse” defence, saying:

“81.

… 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.

The Upper Tribunal continued by recognising that difficulties could arise if a taxpayer’s asserted reasonable excuse is purely that he/she did not know of the particular requirement that has been shown to have been breached. It observed, at [82], that:

“It is a much-cited aphorism that “ignorance of the law is no excuse”, and on occasion this has been given as a reason why the defence of reasonable excuse cannot be available in such circumstances. We see no basis for this argument. Some requirements of the law are well-known, simple and straightforward but others are much less so. It will be a matter of judgment for the FTT in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long. …”

 In Nealv Customs and Excise Commissioners [1988] STC 131 (“Neal”) Simon Brown J, who dismissed an appeal by an appellant who had argued that she had a reasonable excuse for failing to register for VAT on the basis of her total ignorance of the law, observed, at 136, that:

“It seems to me essential to recognise a distinction between on the one hand basic ignorance of the primary law governing value added tax including the liability to register and on the other hand ignorance of aspects of law which less directly impinge upon such liability.”

Additionally, it is clear that the Tribunal does not have the jurisdiction and therefore cannot reduce or discharge a statutory penalty on the basis that it is unfair (see HMRC v HOK Limited [2012] UKUT 363 (TCC) (“HOK”) at [56]-[58]).