I THOUGHT THAT I UNDERSTOOD REASONABLENESS

BLOG 179

I THOUGHT THAT I UNDERSTOOD REASONABLENESS

Some years ago, I was on the Consultative Committee for the reform of the tax tribunal system.  I was the lone representative of the accountancy profession.  I remember sitting around a table with about 14 lawyers and a couple of other non-lawyers and bemoaning the impending demise of the General Commissioners.  For younger readers I should explain that these were volunteers who gave up their time to settle tax appeals locally.  When asked by Stephen Olive (later Sir Stephen) who chaired the Committee what was good about the Commissioners, I said that they applied commonsense.  He retorted, was I suggesting that lawyers could not apply commonsense!

The recent decision of Judge Christoper McNall, a barrister, whose website tells me that he aims “to bring a robust and practical approach to all my clients’ cases”, in the First-tier Tribunal case of Coomber v HMRC, seems to me to prove my point.

Mr Coomber owed income tax for 2015/16.  He sent a cheque to HMRC on 2 February 2016, which was received by them on 4 February 2016.  They banked the cheque and it bounced.  No one knows why it bounced.  Mr Coomber had sufficient funds in the account to meet it.

Mr Coomber’s accountant spoke to HMRC on 1 March 2016 and were told that his tax payments were up to date; he owed nothing.  In early March Mr Coomber received his bank statements and noticed that the cheque had not gone through.  It is not clear what happened next.  I assume the accountants spoke to HMRC again and this time were told that they had not received payment.  Apparently when they spoke to HMRC on 1 March, HMRC had not got around to updating their records.  Mr Coomber eventually sent HMRC a replacement cheque on which HMRC banked on 17 March.

Where tax due on 31 January is not paid before the end of February a 5% surcharge applies unless the taxpayer has a reasonable excuse for the late payment.  The issue for Judge McNall to determine was whether Mr Coomber had a reasonable excuse for not having paid his tax by the end of February in circumstances where he had sent HMRC a cheque at the beginning of February, knew that he had sufficient funds in the account to meet it, had not been told by HMRC that the cheque had not been honoured, indeed, had in fact been told by HMRC that he had duly paid what he owed, and had no knowledge that what HMRC had told him (through his accountants) was incorrect until it was too late to avoid a surcharge by sending a fresh cheque.

Do you think that in that combination of circumstances Mr Coomber had a reasonable excuse for paying his tax late?  I certainly do.  But reasonableness is a subjective concept and what matters is what Judge McNall thinks and he thinks that Mr Coomber acted unreasonably.

So what would a reasonable person have done in Mr Coomber’s circumstances?  Should he have called his bank every day to check that it had cleared?  Personally I think that would be an odd thing to do.  If everyone did it, I would expect the banking system to collapse.  But that is precisely what Mr McNall believes that a reasonable person would have done.  “Santander offers telephone banking, and his bank statement gives a Freephone (0800) number at which the bank could be contacted.  No reason is put forward why Mr Coomber, having made this payment by cheque, could not have checked with his bank to see if it had been cleared.  I do not see any reason why he should not have done so”. 

Personally I think it would have been a very odd thing to do.  If I send someone a cheque and it bounces, I would expect the recipient to contact me very quickly to demand an explanation.  Isn’t that what normally happens?  Well, apparently not in Mr McNall’s commonsense world.  “Mr Coomber advanced the proposition that it is “normal practice” if a cheque is dishonoured for some reason for the creditor (here HMRC) to contact the payer to inform them of the same.  But there is no evidence or other material before me as to this alleged practice and, if it exists, whether it is indeed “normal” as alleged and, if, even if it is normal in other contexts, whether it applies to HMRC”.

I find that incredible.  It needs evidence to indicate that if a cheque bounces it is normal for a creditor to contact the debtor and demand his money?  What sort of a world does Mr McNall live in?  I must admit though, that I like the suggestion that even if that were to be normal, it is not reasonable to assume that HMRC will act like any normal person; one can rely on what normally happens only if you can show that HMRC is staffed by normal people!

But probably Mr McNall had to except HMRC from normality because it had told him that when a bank bounces a taxpayer’s cheque, it simply throws it away!  Nowadays I do not have any day to day dealings on behalf of clients with HMRC, but back in the days when I did my recollection is that if a client’s cheque bounced, HMRC were on the phone demanding an explanation straight away.  Has the ability to impose penalties for late payment resulted in HMRC no longer bothering to seek to collect unpaid tax, except tardily?  I talk to a lot of accountants and while many believe that HMRC use penalties to increase the headline amount of what they collect, none has ever told me that they don’t try to collect at all.

Mr McNall clearly thought Mr Coomber should not have paid by cheque.  “Whilst he was entitled to do so, he was nonetheless, in doing so, taking a risk that, if anything went wrong with the cheque, or (for example) if it went astray in the post, payment would not be made in time”.  He said that Mr Coomber should have used “some other means (for instance BACS, Faster Payment or Direct Debit) which would have given him the immediate knowledge and assurance that the payment had been safely received”.  Would it?  I pay my tax electronically.  I get immediate knowledge that it has left my account, but I have no knowledge that it has reached HMRC’s account or even that it has left my bank.  I still take the risk that the bank might make an error.

Mr McNall was also clearly upset that no-one could tell him the full facts.  In particular he was annoyed that he did not have a copy of the cheque itself.  Not annoyed with HMRC for destroying it, of course.  Annoyed that Mr Coomber had not said whether or not he had asked his bank whether, as part of its ordinary cheque-clearing processes, it scanned and kept a copy of the cheque which it was dishonouring.

This appeal was dealt with as a default paper case, i.e. Mr McNall decided the case without a hearing but by simply reading the taxpayer’s notice of appeal, HMRC’s statement of case and the taxpayer’s comments on it.  That meant Mr Coomber and his accountants had to guess what Mr McNall would expect to be evidenced and what he would be likely to himself know from his own knowledge of life.  It also meant that Mr McNall had to make guesses to fill in gaps in what he had been told in order to write his decision. 

The idea of default paper cases was not simply to save Tribunal time.  It was felt that some taxpayers would forgo their appeal rights rather than have to appear before a Tribunal but would pursue an appeal if all they needed to do was write a letter setting out their case.  This case perhaps demonstrates the downside of the default paper procedure!

ROBERT MAAS