With critical staff being furloughed, many taxpayers falling ill or businesses having lack of access to key documents due to lockdown; it is not a surprise that COVID-19 is accepted by HM Revenue and Customs (HMRC) as being a “reasonable excuse” for defaults by taxpayers.
However, when we are not in the midst of a global pandemic, being able to meet the “reasonable excuse” defence is very important for taxpayers who find themselves at odds with HMRC.
What is a “reasonable excuse”?
HMRC’s definition of reasonable excuse is “something that stops a person from meeting a tax obligation despite them having taken reasonable care to meet that obligation”.
Clearly issues arising from COVID-19 will meet that definition. More broadly, however, HMRC accepts that the following personal circumstances may be qualify as a reasonable excuse:
- The death of a spouse or another close relative shortly before the tax return or payment deadline;
- An unexpected stay in hospital that prevented the completion of the relevant tax affairs
- A serious or life-threatening illness or accident; and
- Delays related to an existing disability.
In addition, the following system issues may also qualify as a reasonable excuse.
- Computer or software failure during, or immediately prior to the preparation of an online return;
- Service issues with HM Revenue and Customs (HMRC) online services;
- A fire, flood or theft that prevented completion of the tax return;
- Postal delays that could not have predicted.
What is not a “reasonable excuse”?
There are many legitimate reasons that may result in a delayed submission of a tax return or payment of a tax liability. However, HMRC may not accept that these constitute a reasonable excuse for their purposes.
HMRC list the following as examples of what they would not necessarily consider on their own to be a reasonable excuse:
- The reliance on others to submit a return;
- Failed payments resulting from insufficient funds in the bank account; and
- Not receiving a reminder from HMRC.
It should also be noted that, although accepted for an initial default, HMRC are less likely to accept that the same excuse is reasonable for second and subsequent defaults.
Why is having a “reasonable excuse” important?
If HMRC accept that a taxpayer has a reasonable excuse for a default, any penalty or surcharge arising from the default would be waived.
COVID-19 related defaults
Although in normal circumstances it can often be difficult to get HMRC to accept that an excuse is reasonable; as outlined above, for COVID-19 the position is much more straightforward.
Due to the pandemic and lockdown, HMRC has confirmed that COVID-19 will be considered as a reasonable excuse for defaults. However, they will not apply a blanket waiver during this period. Rather, on receipt of a penalty or surcharge, the taxpayer will still need to appeal against the penalty citing COVID-19 as a reasonable excuse.
In particular, the taxpayer must explain to HMRC how COVID19 affected them and impacted on their ability to meet their tax obligations. The taxpayer should also demonstrate that steps have been taken as soon as possible to rectify the default.
Under normal circumstances, the timescale for making a formal appeal to the First Tier Tribunal against a penalty or surcharge is 30 days. However, HMRC has announced that those impacted by COVID-19 will have an extra three months to submit their appeal in relation to any decision dated February 2020 or later.
How can AAB help?
If you have received a VAT surcharge or penalty from HMRC which you wish to challenge, AAB’s Indirect Tax Team has significant experience in supporting businesses. We can assist in preparing any “reasonable excuse” argument and support you throughout the negotiations with HMRC.
Equally as important, however, is that, where you are aware of circumstances which are likely to lead to a default, contact is made with HMRC prior to the default. Reaching agreement with HMRC on a rectification plan, including time-to-pay arrangements, will also help avoid surcharges and penalties.
If you require any further information or support with VAT surcharges and penalties, please contact Suzanne Yule, Indirect Tax Assistant Manager, or your usual AAB contact.