In February 2016 Jonathan Padley appealed to the First Tier Tax Tribunal against a series of late payment penalties levied against him for failing to pay income tax on time totalling £5,448.
The issue before the Tribunal was whether or not Mr Padley had a reasonable excuse for the late payments.
For each of the years in question, Mr Padley duly submitted his return on time (i.e. before 31 January the next year). However, he was not able to meet the tax liabilities arising from his returns.
Under the Finance Act 2009, the first penalty for failing to pay tax is imposed 30 days after the tax in question is due for payment (i.e. 2 March). If the tax remains unpaid, then a further 5 months can pass before another penalty is levied (2 August). If still the liability remains, there is another penalty added 11 months after the original due date (2 February the next year).
A series of penalties were handed to Mr Padley as he was unable to meet his tax liability. He appealed to HMRC in 2015. He said that his business as a horticultural label manufacturer had not brought in any income for that year. This was because there had been very poor weather and the supermarkets had offered a concession to the growers (who would usually buy labels from Mr Padley) allowing them to use the old labels they had in stock. No-one, therefore, bought any new labels.
Mr Padley also cited the fact that the business park that he owned and let out was more than half empty in that year. This meant that the income was less than his mortgage payments, and he still had to pay tax on the occupied units.
Mr Padley did all he could to subsidise the businesses, but was unable to and incurred a personal debt of £500,000.
HMRC refused to accept Mr Padley’s appeal as the deadline to appeal had passed. Mr Padley explained that he did not appreciate that there was a deadline and did not want to appeal the penalties until the underlying debt was paid. He asserted that the penalties and interest were overly harsh as they now amounted to 38% of the tax due.
HMRC rejected this and so Mr Padley appealed to the Tribunal.
Mr Padley, representing himself, argued before the Tribunal that there had been exceptional circumstances that had lead to severe cash flow problems. He referred to the fact that, amongst other factors, the wet summers of 2010 and 2012 (the wettest in 100 years) had seriously affected the horticultural labels business.
Mr Padley had tried everything to raise further finance, but was unable to. He was living on loans from his company’s creditors. HMRC had granted him time to pay outstanding VAT, PAYE and Corporation Tax. Under these arrangements, he was able to pay off approximately £200,000 of his tax arrears by 2015.
HMRC argued that not having the money to meet the tax liability was not a reasonable excuse, unless this was due to conditions outside of the taxpayer’s control. HMRC further argued that Mr Padley should be judged by the standard of a prudent person with reasonable foresight and due diligence. If the taxpayer could have foreseen the event that would have led to a lack of funds, then they were expected to take steps to meet their obligations. HMRC argued that a reasonable and prudent person would have expected there to be fluctuations in this particular market given the unpredictability of UK weather.
HMRC refused to apply a special reduction in the penalty because they felt there was no special circumstances (something exceptional, abnormal, or unusual) to warrant such a reduction.
Whilst the Tribunal did not accept that the penalties were disproportionate, they did feel that Mr Padley had done all he could to exercise reasonable foresight and due diligence. He had had proper regard for his tax liability, evidenced by the time to pay arrangements he had in place with HMRC.
The Tribunal decided that it would have been difficult to foresee severe cash flow problems in 2011 and 2012, and furthermore that HMRC relied too heavily on foreseeability as a criteria for determining whether there was a reasonable excuse.
If, even though, the taxpayer had exercised due diligence and reasonable foresight that would not have avoided the insufficiency of funds, then the taxpayer may well have a reasonable excuse for non-payment.
The Tribunal found that the bad luck that befell Mr Padley was beyond what he could have planned for to avoid a shortage of funds. He had a history of taking steps to ensure that tax was paid, and there would not have been an insufficiency of funds if events had not unfolded as they did.
The appeal was allowed and the penalties discharged.