A special commissioner found that a taxpayer had a ‘reasonable excuse’ for not paying tax on the due date within the TMA 1970, s. 59C(9) where she had relied on the advice of third party reputable specialist accountants who had prepared her tax return that she only had to pay a lower amount.

Facts

The taxpayer sold shares in a company on which a gain of some £15.6 million arose in the year of assessment 1999–2000. She received advice from her then accountants concerning the possible mitigation of the gain which involved her becoming a member of a film partnership. The promoters of the partnership were closely connected with her then accountants. There was also insurance concerning the tax position. The promoters of the partnership wrote to the taxpayer on 18 December 2000 telling her that she was entitled to set off her share of the estimated loss of the partnership against the capital gains for the preceding year of assessment i.e. 1999–2000.

Her accountants informed the taxpayer by letter dated 25 January 2001 that her share of the estimated loss of the partnership for 2000–2001 was to be set against her income and capital gains with the result that the tax payable on 31 January 2001 would be reduced from £5,592,982.91 to £861,250.07. Her tax return for 1999–2000 was filed accordingly on 29 January 2001. The tax return claimed an estimated loss as the partnership's accounting period had not ended and an amended return claiming loss relief was submitted on 9 April 2001. It was common ground that that was a valid loss relief claim. The taxpayer was subsequently informed that there was an issue about the timing of the loss claim on 4 July 2001. An amended return for 1999–2000 was submitted on 12 July 2001. A surcharge was imposed on the taxpayer on 23 October 2001.

The taxpayer appealed against the imposition of a surcharge by the Revenue under TMA 1970, s. 59C(2) in respect of the underpayment of tax which fell due on 31 January 2001. There was no dispute as to the amount of tax that should have been paid or that it was not paid on the due date.

The taxpayer contended that she had a reasonable excuse within TMA 1970, s. 59C(9) in the particular circumstances since she was entitled to rely on the advice of specialist accountants. The Revenue argued that, as a matter of law, there was no excuse possible for a person who had relied on a third party who was negligent.

Issue

Whether the taxpayer had a ‘reasonable excuse’ within TMA 1970, s. 59C(9) for not paying the tax due.

Decision

The special commissioner (Adrian Shipwright) (allowing the appeal) said that the taxpayer's experience as a company director would not have assisted her to any appreciable extent in the context of film partnerships and the timing of deductions for income tax purposes particularly where an earlier year was in question. The taxpayer had trusted her accountants at the time the arrangements were put in place and her tax return was completed and filed and the underpayment made and she relied on them implicitly in a difficult and complicated area of tax law in which she had understood them to be specialists. As the taxpayer did not have the specialist knowledge and expertise herself she employed and relied upon persons whom she reasonably believed to have such specialist knowledge and expertise which was a reasonable and responsible way of behaving. Furthermore, there was no reason for the taxpayer to believe that her accountants would act otherwise than properly and in accordance with tax law and practice. The advice given by the accountants seemed not to have been correct. However, that did not of itself prevent the taxpayer having a reasonable excuse. In the circumstances, it had been reasonable for the taxpayer to rely on her accountants and it was that reliance that led to the underpayment. That was an excuse for making the underpayment and as the reliance was reasonable the excuse was at first blush reasonable.

The issue then arose whether reliance on a third party was prevented from being a reasonable excuse. For VAT purposes there was specific provision that where reliance was placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied on was a reasonable excuse. There was also specific provision that insufficiency of funds was not reasonable excuse (VATA 1994, s. 71). The legislation in this case was passed after the VAT legislation but only contained a provision that insufficiency of funds was not a reasonable excuse. There was no equivalent provision that reliance on a third party was not a reasonable excuse for direct tax purposes. In the direct tax context reliance on a third party could be a reasonable excuse.

The issue then became whether the taxpayer had an effective reasonable excuse. Having found that it was reasonable for her to rely on her then accountants and that it was that reliance which led to the underpayment, that was an excuse for making the underpayment and as the reliance was reasonable the excuse was reasonable. Further, the conclusion that reliance on a third party could be a reasonable excuse meant that the taxpayer had a reasonable excuse in the particular circumstances of the case for not having paid the tax on time and had that reasonable excuse throughout the period of default.

(2006) Sp C 548. Decision released 14 June 2006.