Reasonable excuse – reliance on advice

The UK tax system provides for a penalty, often tax-geared in amount, where there has, inter alia, been a failure to notify a liability to HM Revenue & Customs, or to file a return or make a payment of tax on time.

Where the taxpayer can show that he has a reasonable excuse for the failure concerned, the penalty will not be charged. There can be many circumstances in which there is such an excuse, each of which will be dependent on the facts and will be up to the taxpayer to prove to HMRC or, on appeal, to the Tribunal.

If the failure can be shown to have arisen due to the reliance by the taxpayer on a third party, such a professional agent or adviser, and that the reliance was, in itself, reasonable in the circumstances, then the taxpayer will be able to assert he has a reasonable excuse for the failure concerned.

It is the reliance on the advice which, in the circumstances, must be shown to have been reasonable and not the quality of the advice given nor the conduct of the adviser. This will typically involve a consideration of the complexity of particular matters over which advice was sought, the qualifications and experience of the adviser, and the skill and knowledge of the taxpayer.

From 1 October 2018, reliance on certain advice will no longer be a reasonable excuse against the imposition of penalties charged for offshore tax non-compliance where the tax relates to a pre-2017 failure within the requirement to correct (RTC) provisions.

The advice will be disqualified from consideration if the advice was given to the taxpayer by an interested person or by another person acting for, or on behalf of, the interested person. An interested person is one who participated in, or was remunerated for, the offshore tax avoidance concerned.

This disqualification is aimed primarily at those who have availed themselves of tax schemes which were often sold with the supposed attraction of a counsel’s opinion which confirmed that the tax avoidance scheme in question was effective. The disqualification will also, however, apply to those taxpayers who relied on bespoke advice but where that advice was, nevertheless, given by interested persons or by persons who did not have the appropriate expertise (which HMRC has interpreted to mean persons who are not professionally qualified as accountants or lawyers).

If a reasonable excuse is now to be relevant to the avoidance of penalties under the RTC provisions, the advice must have been given directly to the taxpayer by a person who is independent of the planning arrangements, suitably expert to give such advice, and who is appraised of the particular taxpayer’s circumstances.

Where possible offshore tax non-compliance has been entered into by a taxpayer in reliance on advice which is disqualified, the opportunity exists until 30 September 2018 for the taxpayer to take further advice from a disinterested adviser. If that further advice confirms that the offshore arrangements are compliant, the taxpayer should then have a reasonable excuse against penalties should the planning or other tax avoidance arrangements subsequently be held to be ineffective.