United Kingdom Special Commissioners of Income Tax Decisions

Rowland v Revenue & Customs [2006] UKSPC SPC00548 (14 June 2006)

SPC00548

SURCHARGE – Taxes Management Act 1970 559C – whether reliance on specialist accountant could be a reasonable excuse – held yes in the particular circumstances -- appeal allowed

THE SPECIAL COMMISSIONERS

MRS A M ROWLAND Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Special Commissioner: ADRIAN SHIPWRIGHT

Sitting in public in London on 8 May 2006

Richard Bramwell QC and Michael Collins, counsel, instructed by Baker Tilly, for the Appellant

Philip Coppel, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Introduction

1. This is an appeal by Angela Margaret Rowland (formerly Dawes) ("Mrs Rowland") against the imposition of a surcharge under section 59C(2) Taxes Management Act 1970 ("TMA"). The surcharge was imposed in respect of an underpayment of tax which fell due on 31 January 2001. There is no dispute as to the amount of tax that should have been paid or that it was not paid on the due date.

The Issue

2. The sole issue in this case is whether or not Mrs Rowland has a "reasonable excuse" are not paying the tax due within section 59C(9)TMA.

The Law and Authorities

Statute

3. The relevant law is found in section 59C,TMA. It is headed "Surcharges on unpaid income tax and capital gains tax" and provides, so far as is relevant:

"(1) This section applies in relation to any income tax or capital gains tax which has become payable by a person (the taxpayer) in accordance with section 55 or 59B of this Act.

(2) Where any of the tax remains unpaid on the day following the expiry of 28 days from the due date, the taxpayer shall be liable to a surcharge equal to 5 per cent of the unpaid tax.

(3) Where any of the tax remains unpaid on the day following the expiry of 6 months from the due date, the taxpayer shall be liable to a further surcharge equal to 5 per cent of the unpaid tax…

(5) An officer of the Board may impose a surcharge under subsection (2) or (3) above; and notice of the imposition of such a surcharge—

(a)     shall be served on the taxpayer, and

(b)     shall state the day on which it is issued and the time within which an appeal against the imposition of the surcharge may be brought…

(7) An appeal may be brought against the imposition of a surcharge under subsection (2) or (3) above within the period of 30 days beginning with the date on which the surcharge is imposed…

(9) On an appeal under subsection (7) above section 50(6) to (8) of this Act shall not apply but the Commissioners may—

(a)     if it appears to them that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax, set aside the imposition of the surcharge; or

(b)     if it does not so appear to them, confirm the imposition of the surcharge.

(10) Inability to pay the tax shall not be regarded as a reasonable excuse for the purposes of subsection (9) above…

(12) In this section—

"the due date", in relation to any tax, means the date on which the tax becomes due and payable;"the period of default", in relation to any tax which remained unpaid after the due date, means the period beginning with that date and ending with the day before that on which the tax was paid".

Authorities etc

4. I was provided with a bundle of decisions and materials. The most useful were Thorne v General Commissioners for Sevenoaks (1989) 62 TC 341 and Enterprise Safety Coaches VCCE [1991] VATTR 74 discussed below. I was also provided with an extract from the Tax Bulletin for August 2001 dealing with Anticipated Income Tax Loss Claims.

Evidence

5. The parties had agreed a Statement of Facts which was admitted in evidence.
6. Mrs Rowland gave evidence and was cross-examined. A witness statement was provided for Mrs Rowland which was admitted as her evidence in chief.
7. A bundle of documents was produced none of which are objected to. They were all admitted in evidence.

Findings of Fact

8. From the evidence, Statement of Facts and documents I make the following findings of fact.

a. Mrs Rowland sold shares in a company on which a gain of some £15.6 million arose in the year of assessment 1999–2000.

b. Mrs Rowland received advice from her then accountants concerning the possible mitigation of the gain. This involved her becoming a member of a film partnership if the suggestion were implemented.

c. On 6 October 2000 Mrs Rowland became a partner in "Evolution Films Partnership Number 6" ("the Partnership"). The promoters of the Partnership were closely connected with her then accountants. There was also insurance concerning the tax position associated with this. I was not provided with any detail concerning the insurance.

d. The promoters of the Partnership wrote to Mrs Rowland on 18 December 2000 telling her that she was entitled to set off her share of the estimated loss of the Partnership against the capital gains for the preceding year of assessment i.e. 1999–2000.

e. Her then accountants informed Mrs Rowland by letter dated 25 January 2001 that her share of the estimated loss of the Partnership for 2000–2001 was to be set against her income and capital gains. The result was that the tax payable on 31 January 2001 would be reduced £5,592,982.91 to £861, 250 .07.

f. Mrs Rowland's tax return for 1999–2000 was filed by her then accountants together with payment of £861,250.07 on 29 January 2001.

g. The tax return had been completed in the sense of the figures being filled in by her then accountants on the basis of their advice. Mrs Rowland had seemingly signed the return in October 2000. I find that this was purely for convenience and was in effect held "in escrow" by her then accountants subject to Mrs Rowland's direction as to its contents and release. I further find that there are no adverse conclusions to be drawn from this and that nothing turns on it. What she did seems sensible and practical.

h. The tax return claimed an estimated loss as the Partnership's accounting period had not ended.

i. An amended returned claiming loss relief was submitted on 9 April 2001. It is common ground that this was a valid loss relief claim and I find it to be such.

j. Mrs Rowland received a letter from her former accountants informing her that there was an issue about the timing of the loss claim on 4 July 2001.

k. Mrs Rowland had appointed other accountants to act for her in place of her then accountants but retained her then accountants to act in the Partnership loss matter.

l. An amended return for 1999–2000 was submitted on 12 July 2001.

m. The surcharge was imposed on Mrs Rowland on 23 October 2001.

n. Mrs Rowland had been a director of a British company for more than 10 years. She accepted that she was aware of company's accounting periods and company directors fiduciary duties.

o. I find that Mrs Rowland's accounts experience was of corporate accounts. It was not exposure to partnership accounts still less to the arcane matters of film finance partnerships and the special rules concerning tax on British Qualifying Films (see the Tax Bulletin extract for confirmation of the difficulty). I find this as a fact. I also find that her experience as a company director would not have assisted her to any appreciable extent in the context of film partnerships and the timing of deductions for income tax purposes particularly where an earlier year was in question (compare the 2001 Tax Bulletin).

p. I find as a fact that Mrs Rowland trusted her then accountants at the time the arrangements were put in place and her tax return was completed and filed and the underpayment made and that she relied on them implicitly as supposed specialists in this difficult and complicated area of tax law in which she had understood them to be specialists.

q. I find as a primary fact that as Mrs Rowland did not have the specialist knowledge and expertise herself she employed and relied upon persons whom she reasonably believed to have such specialist knowledge and expertise. I find that this was a reasonable and responsible way of behaving.

r. I further find that there was no reason for Mrs Rowland to believe that her then accountants would act otherwise than properly and in accordance with tax law and practice.

Submissions of the Parties in outline

Mrs Rowland, the Appellant' s Submissions

9. In essence, the Appellant's submissions were that she had a reasonable excuse within section 59C TMA in the particular circumstances. It was accepted that she had a personal duty to pay the tax.
10. In more detail they were broadly as follows:

a. Mrs Rowland relied on her then accountants who were regarded as specialists in the very complex area of tax and film finance;

b. it was reasonable for her to do so in the particular circumstances;

c. the excuse is personal to the taxpayer (see section 59C TMA). It does not matter whether those on whom she relied got it right or not. The question is whether such reliance was such as to give a reasonable excuse in the circumstances;

d. there is no limitation in section 59C TMA as respects reliance on another person to perform a task;

e. that reliance on a third party may constitute a reasonable excuse is confirmed by Thorne. There reliance on information provided by the Bank gave a reasonable excuse.

HMRC's Submissions

11. In essence, HMRC's submission was that as a matter of law there was no excuse possible for a person where that person had relied on a third party who was negligent. In more detail it was said that there were three tiers to this:

Tier 1 – The duty was personal to the taxpayer and could not be delegated to a third party. It was possible that externally provided information such as by a bank could nonetheless provided a reasonable excuse.

Tier 2 – There might sometimes be a reasonable excuse provided that there was no negligence or neglect. Here there was negligence by the adviser so there could be no reasonable excuse.

Tier 3 – It could not be reasonable to rely on a third party in circumstances such as those in this case. Accordingly there could be no reasonable excuse here.

Discussion

Introduction

12. It is common ground that the right amount of tax was not paid at the right time. The tax was due on 31 January 2001. The balance was paid on 9 April 2001.
13. By section 59C TMA I am given "…(a) if it appears to [me] that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax, [power to] set aside the imposition of the surcharge…".
14. This requires me to consider two questions. These are:

a. What was the period of default? and

b. Did Mrs Rowland, the taxpayer, have a reasonable excuse for not paying the tax throughout the period of default?

What is the period of default?

15. The tax was due on 31 January 2001. The balance was paid on 9 April 2001. There was therefore a default between those two dates. I find as a primary fact that the period of default was from 31 January 2001 to 9 April 2001 (inclusive).

Did Mrs Rowland, the taxpayer, have a reasonable excuse for not paying the tax throughout the period of default?

16. This question raises two issues. These are:

a. Did the excuse (if there was one) exist throughout the period of default? and

b. Was there a reasonable excuse?

Excuse throughout.

17. Mrs Rowland's circumstances and state of knowledge did not change during the period of default. I find this as a fact. Accordingly if she did have a reasonable excuse it would have continued throughout the period of default and I so find as a fact.

Reasonable excuse?

18. The question here is "Did Mrs Rowland have a reasonable excuse?" I am not concerned whether the accountants have a reasonable excuse. I am solely concerned with whether the taxpayer (Mrs Rowland) had a reasonable excuse.
19. This is a matter to be considered in the light of all the circumstances of the particular case.
20. I have carefully considered all the circumstances of this case. In particular, I have considered the following matters:

a. Mrs Rowland did not pay the tax on the due date because she had been advised by reputable specialist accountants who had prepared her tax return that she only had to pay a lower amount.

b. It was sensible and reasonable for Mrs Rowland to employ and rely upon persons whom she reasonably believed to have the relevant specialist knowledge and expertise that she did not possess personally.

c. Mrs Rowland had entered into arrangements intended to reduce her tax bill. There was nothing improper or illegal in her so doing.

d. The advice given by the then accountants seems not to have been correct. However, this does not of itself stop Mrs Rowland from having a reasonable excuse.

21. In these circumstances I consider that it was reasonable from Mrs Rowland to rely on her than accountants and it was this reliance that led to the underpayment. I consider that this was an excuse for making the underpayment and as the reliance was reasonable the excuse was at first blush reasonable. I find this as a primary fact.
22. The issue arises as to whether reliance on a third-party is prevented from being a reasonable excuse. For VAT purposes there is specific provision that where "reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied on is a reasonable excuse." There is also specific provision that insufficiency of funds is not a reasonable excuse (see section 71 VATA). The legislation that I am concerned with in this case was passed after the VAT legislation but only contains a provision that insufficiency of funds is not a reasonable excuse. There is no equivalent provision that reliance on a third party is not a reasonable excuse for direct tax purposes.
23. Whilst in the VAT context it was thought necessary to exclude reliance on a third party as presumably otherwise it could be a reasonable excuse in the direct tax context it is, at most only a indication that reliance on a third party can be a reasonable excuse. However, I consider it a very telling indication especially as it is a limited exclusion for VAT (see Enterprise Safety Coaches notwithstanding GB Capital Ltd).
24. The Thorne case and Enterprise Safety Coaches are clear authority that reliance on a third party can be a reasonable excuse.
25. I conclude that in the direct tax context reliance on a third party can be a reasonable excuse.
26. The issue then becomes, did Mrs Rowland have an effective reasonable excuse? Having found that it was reasonable from Mrs Rowland to rely on her then accountants and that it was this reliance that led to the underpayment, I consider that this was an excuse for making the underpayment and as the reliance was reasonable the excuse was at first blush reasonable. Having further concluded that reliance on a third party can be a reasonable excuse I conclude that Mrs Rowland has a reasonable excuse in the particular circumstances of this case for not having paid the tax on time and had this reasonable excuse throughout the period of default.

Conclusion

27. On the basis of the facts I have found and for the reasons set out above I find that Mrs Rowland has a "reasonable excuse" for not paying the tax due within section 59C(9) TMA.
28. Accordingly the appeal is allowed with costs.

ADRIAN SHIPWRIGHT

SPECIAL COMMISSIONER

RELEASE DATE: 14 June 2006

SC/3295/2005

Authorities referred to in skeletons and not referred to in the decision:

Pleasants v Atkinson (1988) 60 TC 228

Clixby v Poutney (1968) 44 TC 515

Norton v Thompson [2004] STC (SCD) 163

Dalton v Angus (1881) App Cas 740

Wilson and Clyde Coal Co v English [1938] AC 57

McDermid v Nash Dredging and Reclamation Co [1987] AC 906

The Pass of Ballater [1942] P 112

Bancroft v Crutchfield [2002] STC (SCD) 347

Dawes v Income Tax General Comissioners [1965] 1 All ER

Gladders v Prior [2003] STC (SCD) 245

Blackburn v Keeling (2004) 75 TC 608

Jones v O'Brien (1988) 60 TC 706

Frank Galliers Ltd v Commissioners of Customs & Excise

Appropriate Technology Ltd v Commissioners of Customs & Excise [1991] VATTR

226

Clean Car Company v Commissioners of Customs & Excise [1991] VATTR 234