"Honest belief" test for reasonable excuse is subjective (First-tier Tribunal)

The First-tier Tribunal has held that if a taxpayer's honest belief is, viewed objectively, irrational or unreasonable, this may be taken into account when deciding whether the taxpayer did in fact hold the claimed belief. However, it is not a separate test to be applied in deciding whether an honest belief amounts to a reasonable excuse. (Chichester v HMRC [2012] UKFTT 397 (TC).

PLC Tax

The First-tier Tribunal has held that if a taxpayer's "honest" belief is, when viewed objectively, irrational or unreasonable, this may be taken into account when deciding whether the taxpayer did, in fact, hold that belief. However, it is not a separate, objective test applied in deciding whether an honest belief constitutes a reasonable excuse. Instead, it goes solely to the issue of credibility. The taxpayer honestly and genuinely believed that her cheque to pay her income tax would be honoured. This constituted a reasonable excuse for late payment so the tribunal cancelled the surcharge.

The tribunal cited the earlier First-tier Tribunal decisions in HMD Response International v HMRC [2011] UKFTT 472 (TC) (see Legal update, Tribunal criticises HMRC's approach to penalties (www.practicallaw.com/2-507-1642)) and Purveur v HMRC [2011] UKFTT 850 (TC) as authority that an honest belief will usually amount to a reasonable excuse for a failure, at least until the person holding that belief becomes aware that it is wrong. However, the tribunal disagreed with the (differently constituted) First-tier Tribunal's decision that an irrational or unreasonable belief, even if honest and genuine, does not suffice (Intelligent Management UK Ltd v HMRC [2011] UKFTT 704 (TC)). The tribunal applied R v Unah [2011] EWCA Crim 1837, in which the Court of Appeal decided that whether a person holds an honest and genuine belief is a question of fact, it is an enquiry into the subjective state of that person's mind and there is no objective element to the test (it is entirely subjective).

Although taxpayers will welcome the tribunal's conclusion in this case, the inconsistency between First-tier Tribunal reasonable excuse decisions continues and makes an Upper Tribunal decision more urgent.

Case: Chichester v HMRC [2012] UKFTT 397 (TC) (www.practicallaw.com/7-520-2527) (Judge Geraint Jones QC and Derek Speller Esq.).

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