Late Tax Return Penalty Appeal Fails Overview
In Futcher v Revenue & Customs [2022] UKFTT 401 (TC) a late tax return penalty appeal failed.
The taxpayer, Mr Futcher, appealed on the basis of no deliberate conduct on his part and mitigating circumstances.
The Key Historical Events
On 6 April 2016, HMRC issued a Notice to File to Mr Futcher. Mr Futcher’s self-assessment tax return for 2015/16 was due by 31 January 2017 if filed electronically.
On 24 May 2016, Mr Futcher signed off on his company accounts showing that £500,000 of dividends were voted to him.
However, by 1 July 2019 as tax return figures had not been submitted an HMRC tax determination of £253,341 was issued.
On 16 August 2019, the taxpayer filed his return some two and half years late detailing a liability of £171,137.82.
HMRC’s Entitlement To Issue A Late Tax Return Penalty
If you do not flesh out your taxes and file a tax return by the deadline then HMRC has the right to flush out a penalty by virtue of Schedule 55 of the Finance Act 2009.
Failure to file a tax by the deadline arises under paragraph 1 of Schedule 55 of the Finance Act 2009. The fines escalate but start initially at £100.
Taxpayer Defence To Tax Return Penalty
To avoid a penalty you need a reasonable excuse and or special circumstances.
Reasonable Excuse
A reasonable excuse in light of paragraph 23 of Schedule 55 of the Finance Act 2009 is generally not:
- inability to pay
- delegating the matter to a third party
- delaying filing the return once the reasonable excuse no longer exists
It will be a potential defence if it can be shown you took reasonable steps when delegating to a third party such as a tax agent or accountant. So for example, if you instructed an accountant to file your return and perhaps you then asked him or her for confirmation that they had filed it and received confirmation to that effect, then if it transpired not to be the case then you might be deemed to have taken reasonable care. However, that position does not override the Katib principle that was considered in another post Reliance On Tax Agent Defence For Late Appeal To Tax Tribunal. The Katib case said that even an unreal failure by a tax agent would not give the taxpayer a defence for filing an appeal out of time to the Tax Tribunal.
However, on the other hand, if you for example had the misfortune of a heart attack in the month prior to your needing to file a tax return by 31 January but then you made a jolly good recovery such that rather remarkably you were able to run in the London Marathon but you still did not file your tax return until say 30 June long after you had recuperated from that 26.2-mile hike, then the prospect of your satisfying the test of having a reasonable excuse will conceivably have long plummeted. The point here has been slightly exaggerated to illuminate it, given whilst it might be improbable someone would be medically fit to run a marathon within four months of a heart attack, nevertheless, the point is this, that once the excuse no longer exists then with alacrity you need to crack on and file the tax return if indeed you want to maintain reliance upon the ‘reasonable excuse’.
In Harrison v HMRC [20222] UKUT 216 (TCC), the Upper Tribunal accepted that mental health problems might amount to a reasonable excuse, but whether they do will depend on the evidence before the tribunal.
Special Circumstances
Special Circumstances in light of paragraph 16 of Schedule 55 of the Finance Act 2009 are not:
- Inability to pay.
- Overpayment of tax by another taxpayer.
Special circumstances need to be ‘special’ not a sweeping up mechanism. An example of what is ‘special’ was highlighted as follows by the Tribunal:
In William McCullouch v HMRC, [2018] UKFTT 277 (TC), Mr McCulloch registered online with HMRC on 18 January and was awaiting activation details for his account (so that he could file his return online) when he was rushed into hospital on 7 February 2017. He stayed in hospital until 17 May and on his discharge immediately began to attend to his tax affairs, filing his return on 5 June. The tribunal found that the severity of Mr McCullouch’s illness prevented him filing his tax return while he was in hospital, and he submitted his return as soon after his discharge as the computer difficulties he was having with HMRC had been resolved. The tribunal held the Mr McCullouch’s illness, whilst not a reasonable excuse (it came after the submission date), was a special circumstance which justified the cancellation of the daily penalties.
Mr Futcher Inability To Pay
Mr Futcher said his position was rooted in his inability to pay and that he intended to delay filing the return by only a few months:
The return showed a large tax liability that he could not afford to pay and his initial decision to delay submission of the return was for this reason.
The taxpayer explained he was having business problems and health issues.
Why Did Mr Futcher Not Have Reasonable Excuse?
The reason Mr Futcher did not have reasonable excuse were summarised by the Tribunal as follows:
In determining whether Mr Futcher had a reasonable excuse for late filing we need to bear in mind when the relevant circumstances obtained. The important point here is that a reasonable excuse must be made out by reference to one or more circumstances which existed at the relevant filing date. As the Upper Tribunal explained in Matthew Harrison v HMRC, [2022] UKUT 216 (TCC) (at [31]):
“Before us, the parties were agreed that a reasonable excuse must be made out by reference to one or more circumstances which existed as at the relevant filing date. We agree and consider this is clear from the legislation (where the penalty in respect of the “failure” is a reference to the failure to file by the deadline set out in the Schedule). Events which take place after that deadline would not therefore be relevant (except so far as, as a matter of evidence, they threw light on relevant circumstances existing at and before the filing date). Circumstances that existed after the filing date could of course be relevant to the second part of paragraph 23, namely whether the failure to file the return had been remedied without unreasonable delay.”
At the filing date Mr Futcher was well aware of his obligation to file his 2015/16 tax return. The acute financial difficulties which followed Toys R Us’ publicised difficulties did not start until later in 2017. His physical and mental illnesses did not manifest themselves in an extreme form until 2019. Whilst we accept that mental and physical illnesses of the type Mr Futcher described do not spring up overnight, there is no evidence before us to suggest that Mr Futcher was suffering from these conditions in the period running up to the filing date or that at that time the business was making the acute demands on his time it did later. Indeed, it is clear from the letter Mr Futcher wrote to HMRC on 16th October 2019 that in January 2017 he had time to consider his tax position and made a conscious decision not to file his return on time. It was not illness or acute business pressures that prevented him filing his tax return in January 2017. He did not file his return because he had decided not to. In that letter he wrote:
“Back in January 2017 my intention was to file the return a few months late believing that my business would shortly generate the necessary cash as sales and cash flow were forecasted to improve by April/May. However, it turned out for various reasons that there was a shortfall in orders and the business made significant losses during the first half of that year.”
We also note that it was during the time of Mr Futcher’s illness, towards the beginning of the time when he was seeing Doctor Cosham in 2019, that he actually got round to filing his tax return and his own evidence is that he remembered the need to fill in his tax return from time to time (see [28] above). Because of our finding that Mr Futcher’s mental health and business issues did not present themselves until after the filing date and that he was (by his own admission) able to make a conscious decision about tax (non-)compliance at that point in time, we do not strictly need to come to a view on this point, but we record that we are far from satisfied that Mr Futcher’s mental health and business difficulties ever prevented him being aware of (and ultimately complying with) his obligations as far as his 2015/16 tax return was concerned.
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