The First Tier Tax Tribunal has held that HMRC must show deliberate behaviour on the part of a third party who has failed to file the return delegated to them, when determining penalties, which case is important to taxpayers who often delegate tax returns to tax advisers and accountants. If you are facing a penalty from HMRC and require legal advice on the same, contact our tax team.
The appeal in H Dhaliwal v HMRC  UKFTT 463 (TC) concerned penalty assessments issued against the Appellant, Mrs Dhaliwal for late filing of tax returns for the years 2010/11 and 2012/13. The penalties were issued pursuant to Schedule 55 of the Finance Act 2009 for deliberate withholding of information from HMRC by failing to make the returns. Schedule 55 sets out the various levels of penalty to be imposed depending on the taxpayer’s behaviour i.e. (i) deliberate and concealed; (ii) deliberate but not concealed; or (iii) not deliberate (careless).
The Appellant submitted an appeal against the penalty assessment.
What is a reasonable excuse?
Schedule 55 provides that penalties do not arise where the taxpayer is able to show that they had a reasonable excuse for failing to comply with a tax requirement such as:
- Late filing of returns
- Failing to make a payment on time
- Failing to file online
- Failing to notify chargeability
Reasonable excuse is expressly stated to exclude where the taxpayer relied on a third party to do anything i.e. third party defence therefore reliance on an accountant or tax adviser is unlikely to be a ground of defence.
Appellant’s reasonable excuse
The Appellant managed several restaurants across the UK and often travelled between them and when the business was sold in 2013, both the Appellant and her husband were made redundant. During this difficult time, the Appellant was also occupied with looking after her father and parents-in-law who were severely unwell. The Appellant had left financial matters including her tax affairs to her husband and their accountant. She claimed that she was unaware that her husband had not filed the tax returns and did not know why they had not been filed. She also argued that her work and family pressures amounted to a reasonable excuse for the failure to file the tax returns.
HMRC disputes taxpayer’s reasonable excuse
It was not disputed that the appellant had failed to file tax returns on time and made late payments and it was only for the Tribunal to consider whether the Appellant had deliberately withheld information from HMRC and whether the Appellant had a reasonable excuse. It is for HMRC to show that in failing to submit a return, the taxpayer deliberately withheld information.
HMRC contended that all other tax returns before, between and after the two years in question had been filed and the liability for the tax returns in question were substantially higher therefore argued that the Appellant was aware of her obligations and inferred that she had deliberately failed to file the relevant tax returns on time.
HMRC also argued that her delegation to her husband was irrelevant and the responsibility to file tax returns on time ultimately rested with her i.e. a third party defence was not available. Where tax returns were dealt with by an accountant, HMRC did not make any submissions as to who, other than the Appellant, may have acted deliberately.
Tribunal’s finding on deliberate behaviour in upholding a penalty
The Tribunal held that establishing whether behaviour is a subjective test and the courts will consider what the taxpayer’s knowledge and intentions were at the time of the error.
The Tribunal held that for deliberate behaviour to occur, there must be a conscious act on the part of the taxpayer to undertake that behaviour and where the Appellant had left tax matters to her husband and unaware of the failure to file, she did not deliberately withhold information by failing to file tax returns. It rejected HMRC’s inferences drawn from the Appellant’s conduct in the other tax years.
Although we note that the responsibility to file returns remains with a taxpayer where the taxpayer has delegated such filing to another person, we consider that in order for HMRC to satisfy the burden of proof upon them to show that the failure to file was deliberate, it would be necessary to show that such other person had deliberately failed to file the return if the appellant was unaware of the failure to file.’
HMRC had not discharged the burden of proof to show deliberate behaviour on the part of the Appellant however the Tribunal did not accept that the Appellant had shown a reasonable excuse. A penalty should still therefore be imposed albeit not based on deliberate error i.e. for a lower amount.
Accountants or agents managing tax affairs
This case is key for tax advisers and accountants who are often instructed to manage a taxpayer’s tax affairs and prepare and submit returns on their behalf. The burden of proof remains on HMRC to show deliberate behaviour but where actions have been delegated to a tax adviser or accountant, to show their conduct was also deliberate.
Read the full judgment for H Dhaliwal v HMRC  UKFTT 463 (TC).
My accountant failed to file my tax return
Whilst there may not be a third party defence in an appeal against a tax assessment or penalty, if your tax agent, accountant or tax adviser has failed to carry out your instructions i.e. file a tax return, prepared incorrect calculations, you may have a valid complaint or potential negligence claim against the individual or company.
Our professional negligence claim can assist and advise you on the suitable course of action.
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HMRC APPEAL DEADLINES – WARNING
HMRC decision letters containing penalties or imposing assessments offer time limited deadlines within which to appeal. Often these short deadlines (e.g. 30 days) can run from the date of the letter which means you have less time than you think. Your legal rights will become irreversibly time-barred if you fail to take legal action. Therefore, you should seek specific legal advice about your HMRC tax dispute at the very first opportunity so that you understand the time you have left. Failure to take advice or delay in taking action can be fatal to your prospects of success.