This case concerned the application of a first late payment penalty for a failure to pay income tax and capital gains tax on time for the year ending 5 April 2015. The taxpayer did not have sufficient funds to pay the tax liabilities at the time that they fell due as a result of what he described as circumstances outside of his control. The First Tier Tribunal had to consider whether the lack of funds and reasons were a “reasonable excuse” for not paying the penalty. The appeal by the taxpayer in this case was partially successful.

Background

Mr Crossley had a portfolio of buy-to-let properties which were funded by way of a loan from Royal Bank of Scotland (“RBS”). The loan was a flexible business loan secured by charges on each property. In September 2014, he sold one of the properties for £115,000 and received £112,816 into his hands after expenses were deducted. RBS insisted on full repayment of the gross sales proceeds before releasing the charge on the property.

Mr Crossley filed an electronic return on 30 January 2016 in respect of the year ending 5 April 2015 and while Mr Crossley was aware of the amount due, was unable to pay the full liability. His total tax liability that year was £16,766, of which £12,908 related to capital gains tax and £3,858 related to income tax. After 30 days of non-payment of the full amount due, a penalty of 5% was applied to the account. At the expiry of the 30 days, £14,367 of the tax liability remained unpaid.

Mr Crossley’s 25 year investment savings policy matured in February 2016 and he received funds of £21,555 on 7 March 2016. He paid HMRC £16,394 on 9 and 10 March 2016.

Mr Crossley disagreed with the application of the 5% penalty to the entire amount outstanding; rather he argues that the penalty should only apply to the late payment of capital gains tax because he had a reasonable excuse for non-payment of this tax.

The argument put forward in this instance was that while he was aware he would face a capital gains tax bill, RBS would only allow him to give a clean title to the purchaser once all of the sales proceeds were remitted to RBS, leaving him with no funds until his savings policy matured. Therefore Mr Crossley’s inability to pay the tax liability in full was entirely outside of his control.

The Court needed to examine whether insufficiency of funds is capable of being a reasonable excuse.

Paragraph 16 of Schedule 56 FA 2009 reads as follows:

1. Liability to a penalty under any paragraph of this Schedule does not arise in relation to a failure to make a payment if the person satisfies HMRC or (on appeal) the First-tier Tribunal or Upper Tribunal that there is a reasonable excuse for the failure.
2. For the purposes of sub-paragraph (1) –
   1. An insufficiency of funds is not a reasonable excuse, unless attributable to events outside the person’s control,
   2. …
   3. Where the person had a reasonable excuse for the failure but the excuse has ceased he/she is to be treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased.”

There is no statutory definition of “reasonable excuse”. In the case of “The Clean Car Co Ltd V Customs & Excise Commissioners [1991] VAT TR 234 HH Judge MEDD QC stated that

“the test of whether or not there is a reasonable excuse is an objective one … One must ask oneself: was what the taxpayer did a reasonable thing for a reasonable trader conscious of and intending to comply with his obligations regarding tax….?”

In this case, the Court held that “on the balance of probability”, it was likely that Mr Crossley had no other funds available to pay the tax liabilities as he was given little choice from RBS.

Given that the taxpayer paid his tax liability promptly once he was in receipt of funds from his savings, (the tax was paid 38 days late) it would appear that he did the best he could given the situation he found himself in.

The Court did not uphold the penalty in regards to capital gains tax given the restrictions imposed by RBS but upheld the penalty in respect of income tax.

Full judgement is available at from: http://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05535.html