Taxpayer loses £1.4m tax case over late payment
The Court of Appeal has ruled that a taxpayer did not have a reasonable excuse for not paying a £14m tax bill on time and upheld a £1.4m HMRC penalty
Max Austin, Reporter, Accountancy Daily
The appellant, William Archer, appealed against notices of penalties issued by HMRC totalling £1,403,181.78 for his failure to pay tax.
Archer argued that he had a ‘reasonable excuse’ for not paying the tax due as a result of closure notices issued by HMRC, and that he later paid the tax without ‘unreasonable delay’ once that excuse came to an end.
HMRC opened enquiries into Archer’s tax returns for the tax years 2001-02 and 2002-03 due to concerns that he had used two marketed tax avoidance schemes designed to produce tax losses.
The first scheme related to relevant discounted securities (RDS) and the second to hand life assurance policies (known as SHIPs). In 2009, the Court of Appeal held that both schemes were ineffective.
Following this, HMRC issued accelerated payment notices (APNs) to Archer on 30 October 2015 and 15 January 2016 for the tax years under enquiry.
It later issued closure notices of £14m in 2016 for the 2001-02 and 2002-03 tax years due to Archer’s involvement with the marketed tax avoidance schemes.
However, Archer failed to pay the tax he owed, and did not appeal against the notices as he believed that no tax was due.
Responding, HMRC warned that it would begin bankruptcy proceedings to recover the debt, sparking judicial review proceedings by Archer against what he considered were ‘invalid closure notices’.
The judicial review application was dismissed by the High Court in February 2017, the Court of Appeal in November 2017, and again in the Supreme Court in June 2018.
On 22 June 2018, shortly after the Supreme Court refused permission, Archer paid the £22.5m owed in tax and interest.
HMRC then issued multiple surcharge notices to Archer under Taxes Management Act (TMA) 1970 totalling £1.4m in respect of his failure to pay the tax by the due date.
Under section 59C TMA 1970, the taxpayer is liable to surcharge equal to 5% of the unpaid tax if it remains unpaid 28 days from the due date. If the tax remains unpaid after six months, they are liable to a further surcharge equal to 5% of the unpaid tax.
Archer appealed against the notices on the basis that he had a ‘reasonable excuse’ for his late payment.
On 8 July 2020, the First Tier Tribunal (FTT) dismissed the appeal, as it was not satisfied on the evidence that Archer had a reasonable excuse for not paying the tax until 22 June 2018.
Archer was allowed to appeal the decision on the basis that the tribunal’s decision was affected ‘by a fundamental error of reasoning’ and that it had wrongly considered that he could and should have appealed the notices.
He then appealed to the Upper Tribunal, which set aside and remade the FTT’s decision. However, the Upper Tribunal still dismissed his appeal, due to a lack of evidence.
At the Court of Appeal, Archer argued that the Upper Tribunal had ‘erred in law’ in requiring him to give evidence about his subjective view of the strength of his judicial review and this meant he had failed to make the payment.
He asserted that the reasonable excuse was ‘not based on his subjective belief’ but on the fact of the judicial review and that it was ‘blindingly obvious’ that this was the reason he did not pay the tax.
HMRC’s case ranged wider than it had done before the UT or the FTT, arguing that the payment of tax would not have rendered the judicial review useless, contrary to the FTT’s findings.
They also maintained that Archer had not shown a reasonable excuse for his failure to pay the tax, and that the existence of the judicial review, the appeal to the FTT and the second attempted appeal, did not amount to a reasonable excuse.
The Tribunal held that Archer should have paid the tax by mid-December 2017, instead of paying the tax on 22 June 2018, over six months later. This was fatal to the appeal, because that period of delay could not be viewed as reasonable.
It also held that it was no longer permissible for the appellant to simply rely on the existence of the judicial review, and that Archer had to add further evidence for the period, to fill in the gaps and explain they the payment was not made – which he did not do.
Lady Justice Whipple said: ‘By mid-December 2017, a responsible taxpayer, especially one who benefited from expert legal advice as this taxpayer did, would have paid the tax.
‘The appellant did not have a reasonable excuse throughout the period of default, and his delay in paying the tax was unreasonable once the reasonable excuse had come to an end.
‘The outcome of this appeal is no different from that arrived at by both tribunals below, although the approach I have adopted and my reasons for getting there are in some respects different. I would dismiss this appeal.’
Meg Wilson, lead direct tax writer, Croner-i commented: ‘The Court of Appeal decided that while the taxpayer’s initial judicial review challenge against closure notices had provided him with a reasonable excuse for not paying the tax at issue, as he had not paid the tax without unreasonable delay once this excuse had ended his appeal had to fail.’