The evidence in McGreevy, Hesketh and Welland reveals judicial diversity on what amounts to reasonable excuse; whether ignorance of the law can be a valid excuse for non-compliance; and when HMRC's failings exculpate a taxpayer (in the context of non-resident capital gains tax (NRCGT)). In Cannon, HMRC unsuccessfully argued that expertise raises the reasonableness bar. The Tax Law Review Committee (TLRC) questioned both whether HMRC's new powers were subject to any effective sanction (quis custodiet ipsos custodes?); and whether more certainty or clarity needs to be brought to what amounts to reasonable excuse. Time for a change?
The cases McGreevy  UKFTT 690, Hesketh  UKFTT 871, Welland  UKFTT 870 and Cannon  UKFTT 859, together with the recent IFS (Tax Law Review Committee (TLRC)) report on HMRC entitled The implications of recent additions to HMRC power and the shifting balance in the relationship with the taxpayers, may seem unlikely bedfellows. However, together I believe they should prompt taxpayers, HMRC and, most importantly, Parliament to consider what is expected of taxpayers – and of HMRC – in the digital age.
As readers know, initially when HMRC consulted on the introduction of the non-resident capital gains tax (NRCGT) it was contemplating a withholding tax. However, representations pointed out that any flat rate withholding was likely to be wrong, whether overestimating or underestimating the gain, or not giving credit for reliefs, e.g. the principal private residence (PPR) relief. The idea was therefore dropped but, crucially, the requirement to file returns quickly – necessary for withholding tax if tax was not to be lost – was not removed from what had become the final legislation. Rachel McGreevy, an Australian citizen accustomed to filing self-assessment returns by the usual filing date in January, failed to file an NRCGT return within 30 days of disposal. HMRC duly assessed a penalty, whereupon she claimed she had a reasonable excuse because she was ignorant of the accelerated deadline.
HMRC asserted that it expected a non-resident to follow the twists and turns of HMRC consultations and the Autumn Statement, and repeatedly access HMRC's website to find out the 30 day deadline. The tribunal judge's views on this were rather withering, as 'claptrap', 'nerdview' and demonstrating a 'serious deficiency in common sense, proportion and ability to consider the position of what HMRC calls its "customers"' are not frequent descriptions of HMRC's arguments, at least in published decisions. He concluded the taxpayer did have a reasonable excuse.
He also decided, having concluded there was either dubious policy or mere oversight on HMRC's part (paras 198 to 214), that, if needed, there were special circumstances enabling the tribunal to substitute a different penalty. Importantly, the judge also concluded that ignorance of the law being no defence was a maxim authoritatively reserved to the criminal courts and had only been extended to penalties in relation to tax compliance where a taxpayer claimed ignorance of a commonplace tax situation or point of tax law.
FTT decisions are not precedential so it is perhaps no surprise that a different tribunal judge found in Hesketh and Welland that other taxpayers who filed NRCGT returns late did not have a reasonable excuse. The tribunal concluded that ignorance of the law being no defence was a maxim that applied to civil matters too, quoting several other FTT decisions, albeit without revealing whether they related to commonplace tax matters (and a Court of Appeal decision).
In Hesketh, the tribunal uses an interesting expression in describing s 55, stating that it is 'imposing civil penalties' (para 61). Technically, a monetary amount could be regarded as a penalty and the breach as having no criminal consequences (in contrast to a fine or incarceration). However, 'civil penalties' to VAT lawyers have connotations of matters of seriousness: not perhaps the late filing of a return where in some cases no tax was due. And the fact that so many cases continue to come before the tribunal on reasonable excuse clearly suggests there is a gap in the understanding of taxpayers as to what the law currently requires of them and what they believe is required of them.
The policy reason for not permitting 'basic' ignorance in civil matters is articulated clearly in both McGreevy and Hesketh – persons who suspected that they had an obligation might not take the trouble to find it out. However, if you don't know or have reasonable grounds to suspect that you might be affected – an Australian resident affected by an ill-publicised change in UK tax law would seem to be a paradigm example – should 'Parliament ... expect [such] people to acquaint themselves with the law'? (Welland, para 88)
Then, revealingly, the tribunal judge in Hesketh acknowledged what is well known to practitioners (and is, in small part, a reason for the GAAR): Parliament may enact complex legislation that taxpayers without advice may not reasonably understand (paras 86-88 and 95). As a matter of policy, where a UK resident is aware in general terms (for example, because of widespread media discussion or publicity, perhaps even by HMRC, such as the first wider version of making tax digital) it would be reasonable to search UK websites or seek advice. Is it therefore reasonable for an overseas taxpayer used to a particular filing pattern to be expected to carry out research? (I need make no comment on the likelihood of Mr and Mrs Hesketh having reached HMRC's helpline after the Public Accounts Committee's recent report on telephone response times.) Or is it reasonable for the Heskeths to have to incur costs on professional advice, as was suggested at para 94 of the judgment?
Equally revealing, at para 138 the tribunal judge stated 'not even the administrative court of the High Court can take the Parliament to task for rushing through legislation without proper consideration'. But where, as a freedom of information request showed, over a third of NRCGT returns were filed late, that might cause a judge to pause to consider how reasonable it is for a taxpayer to be ignorant of the law in these circumstances. Clearly, in McGreevy another member of the tax judiciary thought it was not unreasonable; and, without arguing for a double reasonableness test for penalties or encouraging tribunal judges to ignore their judicial oath and decide cases not in accordance with the law, the judiciary is a bulwark between the citizen and the executive. While there is ample authority that HMRC cannot pick or choose which laws to enforce, including the laws imposing penalties, it does have a managerial discretion. It is not clear what purpose was served by asking the tribunal to impose flat rate penalties where citizens of another country were ignorant of the changes made in the UK Parliament.
As the tribunal judge said in Hesketh, it would be advantageous if the Upper Tribunal could make a binding ruling on whether ignorance of the law can be a reasonable excuse so that inconsistent First-tier decisions are avoided (para 109). Unfortunately, given that the amounts at stake in Hesketh and Welland are low and, as the judge is required to warn, the taxpayer would be at risk on costs, two cases which contain useful factors to enable the Upper Tier to rule authoritatively are unlikely to be before it.
The taxpayer in Hesketh had another argument (that the tribunal could not entertain); namely, where HMRC is aware of a body of taxpayers (e.g. non-residents already within the self- assessment system), particularly those who, even if they knew about the change at all, might reasonably expect to provide details of disposal at the time they filed their normal tax return, should HMRC not inform them? The tribunals in McGreevy and Hesketh could agree that HMRC as tax collector should publicise a change in law and the new reporting requirement; however, they disagreed as to whether it was enough, to render the taxpayer's ignorance unreasonable, if HMRC did no more than that.
In Hesketh, the tribunal points out reasonably enough that 'it must be impossible for HMRC to identify and notify every possibly affected taxpayer of every possible relevant change in the law'; and finds it equally predictable that few taxpayers would pay attention to all those communications. However, the tribunal dismissed Mr Welland's claim that, where HMRC knows of a group of taxpayers likely to be affected, that is not an unreasonable burden. This dismissal is debatable, as it relies on the usual floodgates argument: 'If HMRC were obliged to warn non-resident landlords ... it would follow that HMRC would have an obligation to individually warn all potential taxpayers.' The taxpayer was not arguing this: his contention was a balancing act that, where HMRC can readily identify a class of taxpayers, that it should do so; and, as was pointed out in McGreevy (para 217), HMRC does already focus on groups of taxpayers when it suits it to do so. Perhaps if HMRC shared the tribunal's concern that the obligation went wider, it could explain why such a course of action was justified in a particular case. For good measure, Mr Hesketh was not, in contrast to para 108, saying it was unlawful that HMRC had failed to write to him; merely, that this provided a reasonable excuse.
This may seem to be an over-extended case review but the case reveals much about the way in which Parliament makes laws and the diffi cult balancing act that members of the tax judiciary have in such circumstances. This is particularly relevant, as many advisers believe HMRC's approach to penalties is driven by the fact that it has had to be seen to reduce its costs following the merger of Inland Revenue and Customs & Exercise; and as there is therefore less chance of returns being examined, so sanctions need to be imposed in the form of penalties. (The sorry state which HMRC has reached is evident from evidence given in the PAC report, where it almost offers to lobby ministers on behalf of HMRC: see, for example, the exchange of oral evidence between members of the PAC and Jon Thompson and HMRC colleagues, in particular at questions 200–202 on page 43 of the report.)
Cannon raises a simpler issue: is the duty of care of a taxpayer who is professionally knowledgeable about tax (even if it is not his specialist area) higher than that of a less fiscally knowledgeable person? The proposition is that if a professional relied upon the advice of an adviser which turned out to be wrong, that reliance could be careless; whereas for another less qualified taxpayer who had relied upon such advice, the same error was not negligent, even though in both cases they took professional advice. The tribunal concluded that this is not the case. One slightly wonders why this argument was run, dismissing the thought that it was a response to Mr Cannon's refusal to accede to an invitation to stop advising on SDLT schemes (paras 8-12).
The TLRC's view on what it calls the 'new powers' (including follower notices, APNs and GAAR penalties) is that taxpayers have relatively limited legal protection and have to rely on assurances by HMRC that the powers will only be targeted on the 'the recalcitrant few'. Furthermore, the very diversity of judicial view evidenced by McGreevy and Hesketh can play against taxpayers in follower notices situations. While currently HMRC may anticipate issuing follower notices only where there are almost identical situations, it is not clear that such an approach will continue.
As the TLRC report points out, HMRC has been known at times to decide it will not follow a court decision (particularly one in the FTT) because it disagrees with the outcome; and yet there is no ability for a taxpayer to question HMRC's conclusion that a decision is 'relevant' to his particular dispute. Instead, the taxpayer has to take his chances before the tribunal as to whether the principles laid down or a reason given in the ruling could apply to his particular arrangements, and so deny the advantage that he claimed. Indeed, the case (of another taxpayer) may be regarded as 'relevant' for the follower notices legislation, even if the tribunal or a higher court decision subsequently concludes there are suffi cient distinguishing features.
Even more relevantly, features which drove different members of the judiciary to come to different conclusions on the relevant taxpayer's reasonableness or otherwise in being ignorant of the NRCGT legislation could have much graver consequences when it comes to follower notice penalties. McGreevy and Hesketh clearly demonstrate the correctness of the TLRC's conclusion that: 'The line between what is and what is not a reasonable excuse is imprecise, consequently constantly shifting and a source of large volume of litigation. There is a huge range of varying penalty provisions for safeguards, which led to HMRC issuing a discussion document considering the general approach to penalties in February 2015' (TRLC report, page 17).
Quite ignoring the issues on the appropriate level of funding to be given to public services and whether inappropriate decisions are being driven by how aggregate PSBR will appear, rather than whether the best outcome is being served for taxpayers, it cannot be effi cient for HMRC, taxpayers or their advisers for the compliance burden to be excessive. This only leads to breaches where a taxpayer does not feel it is appropriate for penalties to be due, with consequent appeals and/or requests for reviews by HMRC staff and the tribunal judiciary applying uncertain law in widely different circumstances to try and do justice despite the legislation with which they are dealing.
Has the time come for a radically different approach to compliance failings with sanctions restricted to the serial offender, and the exercise of more – not less – judgment on the part of HMRC?
Originally published by Tax Journal.
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