Embittered separation is no excuse for a late return

14 June 2016

Andrew Hinsley

HMRC tried but failed to charge a wife a penalty for submitting late returns even though she was prevented from completing them by her estranged husband and business partner, who denied her access to the necessary information due to an embittered separation.

Where a husband and wife are involved in a business partnership, a messy break-up can create problems if one partner refuses to allow the other access to company information. In a recent case HMRC was decidedly unsympathetic of this situation, demanding penalties for late returns and tax payments despite clear mitigating circumstances.

The taxpayer had been denied access to business records and bank accounts by her ex-husband and business partner. Access was needed to complete her return and make annual tax payments. Despite the blocked access, HMRC considered ‘a more determined reaction to her husband’s conduct might reasonably have been expected of her’. Also she should have submitted her returns using estimated figures even though one of the partnerships was a building business that was subject to particular volatility in the severe recession which affected the reliability of estimates. This is a somewhat rigid stance given HMRC’s guidance on penalties which says a penalty canould be charged if HMRC find 'the amount was not estimated reasonably'.

What reaction HMRC expected to her husband’s denial of access is anyone’s guess. Fortunately for the taxpayer the Tribunal was more sympathetic, ruling that this denial and concerns over the reliability of estimates constituted a ‘reasonable excuse’ meaning a penalty should not be charged for the late returns. 

Although the Tribunal thought the taxpayer was not entirely faultless regarding elements of the late payment issue, it still found factors outside her control seriously affected her ability to realise the bulk of her assets in order to make her tax payments. It therefore instructed HMRC to re-calculate the penalty, taking account of these reservations over the taxpayer’s modest means whilst in this situation.

The case heralds a common sense victory for a spouse locked out of her business by her former partner. Perhaps if HMRC had been notified of the taxpayer’s issues sooner they may have been more sympathetic but given its current attitude to penalties that is doubtful.

If you would like any more information on this issue please contact Andrew Hinsley or your usual RSM contact.