A Tax Tribunal has recently ruled that the breakdown of the marriage of Timothy Cooke, a businessman from Telford, was sufficient excuse to discharge him from paying tax penalties of £10,000.
In April 2011, Mr Cooke sold shares in a company that he worked for, realising £380,000 and which gave rise to a Capital Gains Tax (CGT) liability of just over £100,000. This was duly reported on his 2012 tax return. The tax was due for payment on 31st January 2013 but remained unpaid until 24th October 2013. In the intervening months HMRC imposed two penalties of 5% of the tax paid late which totalled £10,004.
Although Mr Cooke paid all of the first penalty and part of the second penalty whilst paying off the CGT, he appealed against the penalties on the basis that he had a reasonable excuse. His appeal was rejected by HMRC and was referred to the First Tier Tax Tribunal in January of this year.
There is no legal definition of ‘reasonable excuse’ but legislation lays down certain conditions, one of them being that an insufficiency of funds is not a reasonable excuse unless attributable to events outside a person’s control.
The share sale proceeds were used to pay off an Individual Voluntary Arrangement of £70,000 and another £30,000 to discharge a loan. The vast majority of the remainder of £280,000 was used to purchase a new property for Mr Cooke and his wife in May 2011. The taxpayer maintained however that it had always been his intention to take out a £100,000 mortgage against the property to pay the CGT.
Prior to acquiring the new property Mr & Mrs Cooke lived in a house that was in negative equity.
In March 2012 the couple separated and divorce proceedings ensued. Mr Cooke wanted to sell the marital home but was prevented from doing so by Mrs Cooke although she eventually relented and gave her consent. It was finally sold in October 2013 and Mr Cooke used the sale proceeds to pay off his outstanding tax bill on the very same day that the sale went through.
In his defence, Mr Cooke said that he had had several conversations with HMRC during January 2013 and was never told that penalties would be charged, only interest on the tax arrears. This was flatly denied by the Revenue.
HMRC argued that Mr Cooke could have continued living in his previous property and used £100,000 of the share sale proceeds to pay off his CGT liability, as the taxpayer had told them that he could have continued to meet his mortgage repayments. This was rejected by the tribunal as the judge said that Mr Cooke “could not have reasonably expected events to conspire to prevent him discharging his tax liability on time.”
The Tribunal found that the taxpayer could not have known at the time he acquired the new property that his 13 year marriage was about to fail. At that time Mr Cooke was entitled to manage his financial affairs as he saw fit. That he intended to raise a mortgage on the new property after he moved should not have been a problem and is what would have happened had the marriage not collapsed. That was an unforeseen event which was completely beyond the control of the taxpayer.
Mr Cooke’s appeal was therefore upheld and all the penalties discharged.