The Tribunal held that a provision allowing taxpayers to do something outside the usual time limits where they have a “reasonable excuse” applies to voluntary matters, such as reclaiming overpaid tax, as well as those things that taxpayers are obliged to do, such as filing a tax return. It will be up to the tribunal to decide whether a taxpayer has a reasonable excuse. This means it may be possible to appeal HMRC’s refusal to allow a claim simply because it is out of time.
The Upper Tribunal also held that:
- for HMRC to open an enquiry into a claim it just needs to scrutinise it. It does not necessarily need to ask for extra information; and
- an HMRC notice of enquiry and the notice closing that enquiry can be in same letter.
These point are significant because usually a taxpayer can only appeal an HMRC decision where HMRC has opened an enquiry and closed it.
So if you think you are out of time to make a claim you might not be if you have a good excuse. However, you must still act promptly once you realise you have missed the deadline.
And if HMRC simply refuses your claim on the grounds that you are out of time you may be able to appeal that refusal. Potentially any HMRC decision is open to appeal on the grounds of having a “reasonable excuse”. Of course you do need to have a “reasonable excuse” for the claim to be valid, but that will be up to the tribunal to decide, not HMRC.
There essentially two types of time limit in tax legislation:
- compulsory: i.e. those things that a taxpayer is obliged to do within a specified time limit, with the threat of a penalty of they fail to comply. The most straightforward example is filing a tax return.
- voluntary: things that are not required but there can be beneficial tax consequences if you do them e.g. making a claim.
Section 118(2) of the Taxes Management Act 1970 (TMA) provides that “where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it”, provided that he acts without unreasonable delay once he is able to.
The taxpayer had overpaid income tax for a particular tax year. She was out of time to amend her tax return for that year (such amendments can only be made within 12 months of the filing date).
Schedule 1AB TMA allows a taxpayer to make a claim for overpaid income tax. Such a claim must be made within 4 years of the end of the relevant tax year. The taxpayer in this case filed her claim after this time limit had expired. However, she claimed to have a reasonable excuse because she had been out of the the UK in the intervening period.
HMRC refused her claim on the grounds that it was out of time. The taxpayer sought to appeal but the First-tier tribunal (FTT) struck out her case on the grounds that it did not have jurisdiction to hear an appeal against HMRC’s decision.
The taxpayer appealed against this striking out to the Upper Tribunal solely on the grounds that the FTT had not considered the possible effect of section 118(2) TMA.
Right to appeal an HMRC decision
Not every HMRC decision can be appealed. The relevant provisions in the TMA only allow a taxpayer to appeal HMRC’s refusal to accept a claim for overpaid tax if:
- the taxpayer made their claim within the required time limit (the Upper Tribunal decided that an attempted claim filed out of time would not technically be a “claim” for these purposes);
- HMRC opened an enquiry into that claim and notified the taxpayer of that enquiry; and
- HMRC issued a closure notice.
Had the taxpayer made a claim?
The taxpayer had not in fact filed their claim within the 4-year time limit. She would, therefore, have no right to appeal HMRC’s decision unless:
- section 118(2) applied; and
- it had the effect that her claim was treated as made within the 4-year time limit.
This presented something of a “chicken and the egg” situation, because the tribunal would technically only have jurisdiction to hear an appeal if that appeal would be successful. However, the Upper Tribunal was clear that the FTT would have jurisdiction to hear an appeal in these circumstances.
The scope of section 118(2) turned on the meaning of the words “required to be done”.
HMRC argued that section 118(2) only applies to acts that are compulsory (e.g. filing a tax return) and not to things the taxpayer could choose not to do (e.g. making a claim for overpaid tax).
The Upper Tribunal rejected this and held that the section should apply to voluntary acts that, if done, are required to be done within a time limit to have the intended consequence. Thus the requirement to make claim for overpaid tax within 4 years was something “required to be done” and section 118(2) could in principle apply.
And if it did apply the effect would be to deem the claim to be filed within the relevant time.
The result would be that if the taxpayer did have a reasonable excuse for not filing her claim within the 4-year time limit (and she acted promptly once that excuse was no longer valid) then her claim would be deemed to have been submitted in time.
However, there was a further hurdle to overcome before she could appeal. HMRC must have opened and closed an enquiry into her claim. The Upper Tribunal, therefore, needed to consider whether HMRC had opened an enquiry.
Did HMRC open enquiry and issue closure notice?
HMRC had only written to the taxpayer once and that was to refuse her claim because it was out of time.
In an earlier case (Portland Gas Storage) the Upper Tribunal had expressed the view (obiter) that if all the relevant information has been sent to HMRC then the conclusion drawn by HMRC from that information was not enough to constitute an enquiry.
The taxpayer in this case argued that it was unnecessary for HMRC to ask questions or seek further information from taxpayer. She argued that where all information had been provided and HMRC had reached a conclusion based on that (essentially an open and shut case) HMRC must still have addressed their minds to the issue at hand before reaching conclusion. That was sufficient to constitute an enquiry.
The Upper Tribunal accepted this (and explicitly rejected the view expressed in Portland Gas Storage). Enquire simply meant to scrutinise. Otherwise the more information a taxpayer gave HMRC the less likely they would be able to appeal (leaving them to rely instead upon judicial review).
Finally, the Upper Tribunal held that a single letter can be both notice of enquiry and closure notice if the taxpayer would understand the document to have that effect.
Applying this to the facts of this case, the Upper Tribunal held that HMRC had scrutinised what the taxpayer had sent in and so had opened an enquiry. And the taxpayer would have understood the letter refusing her claim to both notice that HMRC had enquired into her claim and an amended to that claim. Thus there was an enquiry and a closure notice and the FTT, therefore, had jurisdiction to decide whether she had a reasonable excuse.
The Upper Tribunal remarked that not every HMRC conclusion will give rise to an appealable decision. However, the cases where there was been an amendment to a claim without scrutiny or enquiry by HMRC are likely to be exceptional.
The case was remitted back to the FTT decide whether the taxpayer did have a reasonable excuse for filing her claim out of time.