Penalties for non-payment of APN can be avoided where it is reasonable to consider an APN unlawful

In Chapman v HMRC, the First-tier Tribunal (FTT) has confirmed that a reasonable belief that an accelerated payment notice (APN) is unlawful can constitute a reasonable excuse for non-payment of the APN.

Background

In Chapman v HMRC [2017] UKFTT 800, Francis Chapman (the Appellant) claimed a loss in his self-assessment return which arose from a tax planning arrangement which had been notified to HMRC under the DOTAS regime. HMRC opened an enquiry and issued an APN to the Appellant. The Appellant subsequently challenged the lawfulness of the APN in judicial review proceedings and did not pay the APN by the required date. HMRC  imposed a penalty on the Appellant for non-payment of the APN. 

A time to pay arrangement was agreed with HMRC.

The Appellant appealed the penalty on various grounds, including: (1) that HMRC had been 'difficult' to deal with; (2) that 'Time to Pay' arrangements were in place which meant he did not have to pay on the due date; and (3) he had a reasonable excuse for non-payment, namely, that he had been advised that the APN was unlawful (and that his judicial review challenge against the APN would succeed).

FTT decision

The appeal was dismissed.

With regard to ground (1), the FTT said that matters relating to HMRC's internal management were not relevant to the appeal. The FTT also dismissed ground (2) and found that the correct statutory mechanisms had not been used to instigate time to pay in time. Paragraph 10, Schedule 56, Finance Act 2004, provides that if a taxpayer makes a request for time to pay before he is liable to pay the APN and HMRC agrees, then a penalty cannot be issued as a result of non-payment of the full amount by the due date. The FTT found that the Appellant had not made the relevant request by the payment date. 

With regard to ground (3), the FTT observed that a taxpayer should not assume lightly that HMRC has acted unlawfully in issuing an APN, but rejected HMRC's argument that an APN must be taken to be lawful until the contrary is established. The FTT confirmed that a belief that an APN was unlawful could constitute a 'reasonable excuse', which it defined as follows: 

"It seems to me that for something to be an excuse it must be such that absent that thing, payment would have been made; and that an excuse is a reasonable excuse if, taking into account all the circumstances including those of the taxpayer, it was reasonable for him to have acted or failed to act as he did."

HMRC argued that any belief that an APN has been unlawfully issued cannot be a reasonable excuse for non-payment of the APN and that the APN must be taken to be lawful until the contrary is established. The FTT rejected this argument. 

HMRC also argued that taxpayers should pay the amount demanded in an APN, even if they believe the APN is unlawful as, should the substantive challenge to its lawfulness be successful, the penalty would be quashed ipso facto. The FTT also rejected this argument, stating:

"… it seems to me that this argument is in effect that if something is lawful it can never be a reasonable excuse to act on a belief that it is unlawful. To my mind that affords “reasonable” too little scope. No doubt all decisions of the High Court are reasonable, although some are shown to be wrong: it would not be unreasonable I think to act on a High Court decision nevertheless. There must I think be circumstances in which it is reasonable to consider an APN unlawful and on that basis reasonably decline to pay it." 

The FTT considered that there must be circumstances in which it is reasonable to consider an APN unlawful and on that basis reasonably decline to pay it. However, the FTT did go on to say that a belief in the illegality of an APN could be a reasonable excuse only in exceptional circumstances, such as where there is an obvious or gross error in the notice. In this case, the Appellant had failed to produce the advice he relied on to found his belief and there was no evidence of error in the APN. Accordingly, his reasonable excuse defence failed.

Comment

It is fair to say that taxpayers appealing a penalty for non-payment of an APN have had an uphill struggle in trying to convince the FTT that they have a reasonable excuse for non-payment on the basis that they believe the APN is invalid. There has been a number of cases over the past 18 months that have indicated that the FTT is of the view that it does not have jurisdiction to consider the validity of an APN (see: Beadle v HMRC [2017] UKFTT 544 (TC); Goldenstate Ltd v HMRC [2017] UKFTT 0568 (TC); Paranby v HMRC [2017] UKFTT 0213 (TC); O'Donnell v HMRC [2016] UKFTT 743 (TC); and Nijjar v HMRC [2017] UKFTT 0175 (TC)). 

In this case, however, the FTT has confirmed that a taxpayer's belief in the illegality of an APN may constitute a reasonable excuse for non-payment, provided that belief is reasonable.

A copy of the decision can be viewed here.