Court of Appeal: ongoing judicial review can be ‘reasonable excuse’ for late tax payment

It is not uncommon in complex tax disputes for a taxpayer to be pursuing JR through the courts as well as an appeal in the tribunal, and it is often the case that one is stayed behind the other.

However, the decision is also a useful reminder of how difficult it can be to apply the law on reasonable excuse to any given fact pattern and therefore how uncertain such a defence can be for a taxpayer. The court also warned against applying case law that had arisen in the context of appeals against accelerated payment notice penalties to penalty appeals in other contexts because the statutory regime is so specific. The taxpayer in this case, William Archer, was ultimately unsuccessful in his claim that he had a reasonable excuse for not paying tax due to HM Revenue & Customs (HMRC).

Archer had entered into an avoidance scheme that was subsequently found not to work. He received closure notices which amended his self-assessment tax returns in order to recover the unpaid tax. Archer did not challenge the closure notices through an appeal to the Tribunal and did not pay the tax. This non-payment led HMRC to issue surcharges – penalties – for the late payment and to threaten to issue bankruptcy proceedings against him.

Archer then tried to pursue a JR claim against HMRC’s decision to threaten bankruptcy proceedings. His core argument was that there was no valid debt owed to HMRC because the closure notices were not valid, which in turn meant that HMRC was irrational to seek to pursue bankruptcy proceedings. The High Court ultimately dismissed Archer’s JR application, on the grounds that JR should only be used as a remedy of last resort. Archer had the option to appeal against the closure notices and therefore JR would not be appropriate. The Court of Appeal upheld the High Court’s decision, and Archer was unsuccessful in seeking permission to appeal to the Supreme Court.

Archer finally paid the tax within seven days of the Supreme Court refusal, but HMRC was still pursuing him for the surcharges. He appealed against the surcharge notices on the grounds that he had a reasonable excuse for non-payment of the tax while the JR proceedings were ongoing. The appeals were rejected by both the First-tier and Upper Tribunals.

The Court of Appeal decided that Archer did not have a reasonable excuse for non-payment of the tax. In its ruling, the court split the period that started when the payment became due and finished with the actual payment into three sections.

The first period covered the time from the issue of closure notices through to the JR claim. For this period, the court found that there was enough evidence to conclude that Archer had an objectively reasonable excuse for non-payment because during this period there was a real possibility of success in JR proceedings.

The second period covered the period from the decision of the High Court refusing permission to bring the JR until the Court of Appeal decision. Here, the court concluded that “the loss of the case at first instance meant that it was no longer permissible for the appellant simply to point to the existence of the judicial review, without more”. In other words, Archer was, at this point, expected to explain further why payment was not made; just the continued existence of the JR process was not justification enough. The court did not address what this evidence could be, only that Archer should “fill in the gaps and explain why payment was not made”.

The third period covered a six-month delay after the Court of Appeal rejected Archer’s appeal while he was waiting for a decision on whether the Supreme Court would allow a further appeal to proceed. The court decided that non-payment during this period could not be viewed as reasonable because the prospects of success in the JR were, by then, remote. In other words, it could not be believed that the actual reason that Archer was withholding payment of tax was his reasonable belief that it was not payable due to invalid closure notices.

The court also considered an evidential issue. It found that the Upper Tribunal had erred when it dismissed Archer’s arguments on reasonable excuse solely on the grounds that he had not provided any subjective evidence, in the form of a witness evidence, as to why he did not pay the tax. The Court of Appeal found that Archer was not obliged to provide a witness statement as to his views and was entitled to rely on the external evidence, being the existence of the ongoing JR proceedings. However, in this instance, the external evidence was insufficient to establish a reasonable excuse for the later periods.

While the decision confirmed that providing witness evidence of a taxpayer’s genuine belief is not essential for a reasonable excuse defence to be successful, there is no doubt that in the right circumstances, such evidence could boost the chance of success of a reasonable excuse defence.

Co-written by Shannon Mills of Pinsent Masons.