Perrin v HMRC [2018] UKUT 156 (TCC)

The definitive statement of the reasonable excuse test. Perrin holds that an excuse must be both genuinely held and objectively reasonable, judged by reference to the particular taxpayer’s knowledge, experience and situation, and it sets out the four-stage structure that every penalty appeal should now follow. Mrs Perrin won that argument and still lost her appeal, for reasons every adviser should understand.

Why Perrin Is the Starting Point

“Reasonable excuse” appears throughout the penalty legislation (Schedule 55 FA 2009 (late filing), Schedule 56 FA 2009 (late payment), Schedule 36 FA 2008 (information notices), Schedule 41 FA 2008 (failure to notify), s71 VATA 1994), and is nowhere defined. Before Perrin, First-tier Tribunal decisions were inconsistent in a way that made advising clients almost impossible: some panels demanded “exceptional circumstances”, some applied a purely subjective test, and some treated any mistake of law as automatically fatal.

Perrin settled the approach. It is now cited in virtually every penalty appeal, and HMRC’s own Compliance Handbook at CH160900 and CH160950 is written around it.

The Facts

Mrs Christine Perrin attempted to file her 2010–11 self-assessment return online. She completed the return but did not complete the final submission step, so the return was never actually filed. She believed she had filed it: she had seen and relied on what she understood to be a submission receipt.

A second and compounding error followed. When she came to address the position, she mistakenly completed the return for 2011–12 rather than the outstanding 2010–11 return.

Critically for the outcome, HMRC told her on several occasions that the 2010–11 return remained outstanding. She did not act on those communications for a considerable period.

HMRC imposed daily penalties of £900 under paragraph 4 of Schedule 55 FA 2009 for the late filing of the 2010–11 return, in addition to fixed late filing and late payment penalties which had been dealt with in earlier proceedings.

Procedural History

• FTT (2014): Perrin v HMRC [2014] UKFTT 488 (TC). Her appeals against the fixed late filing and late payment penalties were largely dismissed. The daily penalties were deferred, because points of principle about their validity were then before the courts in the lead case of Donaldson v HMRC.
• FTT (2017): [2017] UKFTT 315 (TC) (Judge Anne Redston and Mrs Lesley Stalker). Following the resolution of Donaldson, the FTT dismissed her appeal against the £900 of daily penalties.
• Upper Tribunal: [2018] UKUT 156 (TCC). The UT found that the FTT had erred in its approach, but remade the decision and dismissed the appeal on a different basis.

The Statutory Framework

Paragraph 23 of Schedule 55 FA 2009 provides that liability to a penalty does not arise in relation to a failure if the person satisfies HMRC or the tribunal that there is a reasonable excuse for the failure. Sub-paragraph (2) then imposes three qualifications:

• (a) an insufficiency of funds is not a reasonable excuse unless attributable to events outside the person’s control;
• (b) reliance on another person to do anything is not a reasonable excuse unless the person took reasonable care to avoid the failure;
• (c) where the person had a reasonable excuse for the failure but the excuse has ceased, the person is to be treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased.

Sub-paragraph (c) is the trap. A reasonable excuse is not a permanent immunity. It covers the period during which it operates, and the taxpayer must then act promptly once it ends.

Separately, paragraph 16 of Schedule 55 permits HMRC to reduce a penalty because of “special circumstances”. The tribunal can interfere with HMRC’s decision on special circumstances only if that decision was flawed in the judicial review sense. Reasonable excuse and special circumstances are distinct routes and should be pleaded separately.

The Ratio Decidendi

1. Genuine and objectively reasonable

The Upper Tribunal rejected both extremes. A purely subjective test would excuse any sincerely held but foolish belief. A purely objective test, judged against some notional standard taxpayer, would ignore the reality that the statute asks whether this person had a reasonable excuse. The correct approach is objective assessment with subjective inputs: the tribunal takes the taxpayer as it finds them (their experience, knowledge, attributes and circumstances), and then asks whether, so situated, the excuse was objectively reasonable.

This has a real consequence in practice. An excuse that would be unreasonable for a large corporate with an in-house tax function may be entirely reasonable for an elderly first-time filer with no adviser and limited digital literacy.

2. The four-stage approach

The UT set out a structured process for the FTT to follow:

1. Establish what facts the taxpayer asserts give rise to a reasonable excuse. These may include the taxpayer’s beliefs, their own experiences and relevant attributes, their situation at the relevant time, acts carried out by them or by someone else, and acts that should have been carried out but were not.
2. Decide which of those facts are proven on the evidence available.
3. Decide whether, viewed objectively, the proven facts amount to a reasonable excuse for the failure, and, if so, when that excuse ceased. In doing so the tribunal must have regard to all relevant circumstances, including the experience, knowledge and attributes of the particular taxpayer.
4. Having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time (unless, exceptionally, the failure was remedied before the excuse ceased).

3. Application to Mrs Perrin

The UT accepted that her belief that she had filed the return, founded on what she understood to be a submission receipt, was genuine and objectively reasonable. She therefore had a reasonable excuse. But that excuse ceased when HMRC informed her that the return remained outstanding. She was told this on several occasions and did not remedy the failure until much later. Paragraph 23(2)(c) was accordingly not satisfied, and the penalties stood.

Obiter Dicta and Guidance

Several passages in Perrin are guidance to the FTT rather than propositions necessary to the decision. They are nonetheless among the most frequently cited parts of the judgment.

Ignorance of the law

The UT addressed the widespread assumption that ignorance of the law can never be a reasonable excuse. It rejected that as too absolute. There is no general rule excluding ignorance of the law; the question is whether, given the taxpayer’s attributes and circumstances, it was objectively reasonable for that taxpayer not to have known of the obligation. A person who has been in self-assessment for twenty years is in a different position from a person receiving their first notice to file. HMRC’s Compliance Handbook at CH160600 now reflects this.

Against glosses on the statutory words

The UT warned the FTT against elaborating the ordinary English phrase “reasonable excuse” with judicial glosses. In particular it disapproved of the practice of requiring “exceptional circumstances”: the statute does not use that language, and importing it raises the bar above what Parliament set. Similarly, formulations drawn from other statutory contexts should be handled with care.

The place of Clean Car Co Ltd v Customs and Excise Commissioners [1991] VATTR 234

Judge Medd QC’s formulation (what would a reasonable taxpayer, in the position of this taxpayer and intending to comply with their obligations, have done?) is not a statutory test and should not be treated as one, but it remains a useful practical touchstone and is consistent with the approach the UT adopted.

How the FTT should write its decisions

The UT gave guidance on the structure of reasonable excuse decisions: the tribunal should make clear findings of fact, identify precisely when any excuse began and ended, and explain its reasoning on each of the four stages. Decisions that collapse the stages into a single conclusion are vulnerable on appeal, which is, in itself, a useful lever for a practitioner considering an appeal to the Upper Tribunal.

The Donaldson Backdrop

The daily penalties in Perrin had been held over pending Donaldson v HMRC [2016] EWCA Civ 761, the lead case on the validity of daily penalties under paragraph 4 of Schedule 55. Donaldson concerned whether HMRC had given the required notice specifying the date from which daily penalties would run, and whether any defect was cured by s114 TMA 1970. The Court of Appeal largely upheld HMRC’s position. The practical lesson is that a reasonable excuse argument is only one line of attack on a penalty: the validity of the underlying notices is another, and should always be checked first.

Practitioner Application

Building a reasonable excuse case

• Plead the four stages explicitly. Set out the facts relied on, the evidence for each, why the excuse was objectively reasonable given this client’s attributes, when it ceased, and what the client did next. A submission structured in this way is far harder for the FTT to dismiss in a paragraph.
• Front-load the client’s attributes. Age, health, first-time filer status, language, digital exclusion, bereavement, business scale, whether an adviser was engaged. These are not mitigation, they are part of the legal test.
• Identify the cessation date and defend it. This is where most appeals are lost. If the client acted within days of the excuse ending, say so and evidence it. If there was a gap, explain it, a second, distinct excuse may cover it.
• Do not concede ignorance of the law. After Perrin it is a permissible excuse in the right circumstances. The question is whether it was reasonable for this taxpayer not to know.
• Check the notices first. Was a valid notice to file given under s8 TMA 1970? Was the daily penalty notice properly given? An invalid notice defeats the penalty without any need for an excuse.
• Plead special circumstances in the alternative. Paragraph 16 of Schedule 55 is a separate route and a separate ground of appeal. HMRC frequently fails to consider it at all, which makes its decision flawed and opens the tribunal’s jurisdiction.

Where Perrin tends not to help

• Insufficiency of funds, unless attributable to events outside the taxpayer’s control (paragraph 23(2)(a)).
• Reliance on an adviser, unless the taxpayer took reasonable care to avoid the failure (paragraph 23(2)(b)), a materially different and more forgiving test than the attribution rule that applies to late appeals under HMRC v Katib.
• Cases where the client received clear warnings and did nothing. That is precisely what defeated Mrs Perrin.

Frequently Asked Questions