Reasonable Excuse for the Late Payment of Tax

Mark Pearson (“MP”) v The Commissioner for HMRC is a fascinating case in reasonable excuse for the late payment of tax.

Essentially MP sold his company to another company, Monitise plc, in exchange for shares in Monitise plc.  Under the terms of the share purchase agreement, MP had to sell sufficient number of shares in Monitise plc in the open market in order to place funds into an escrow account to cover certain sale warranties and indemnities.  The escrow should have been funded to the tune of £13m, but in the event MP only sold shares to the value of £6m, (not least because of a catastrophic fall in the price of Monitise plc shares) and all the proceeds were placed in the escrow account.

Post acquisition, MP was engaged in the business of Monitise plc and regulatory rules prevented MP from selling further shares whilst at the low share price.  Owing to separate negotiations and discussions with Monitise plc (MP tried to buy his company back from Monitise plc), MP had been forced to sell his family home to cover legal and professional fees and he was then living in rented accommodation.  Financial institutions were reluctant to lend to MP as his assets largely comprised illiquid positions in tech companies and so, when the liability fell due, MP was unable to pay.

The case then turned to whether MP had acted as a reasonable businessman might throughout.  Although potentially being aware of the possibility of the market value of Monitise plc shares falling, MP did not anticipate the size of the fall in their value.  It was argued that a reasonable businessman would also not have anticipated this.  Had the share price not fallen so sharply, MP should have been able to sell further shares in the market in order to cover the tax liability.  The Tribunal also held that it was not the actions of an unreasonable businessman to sell a company solely for shares in another company together with the escrow requirement.

The Tribunal considered that this was an arms length transaction and the conditions of sale were negotiated as opposed to being under MP’s exclusive control.  Finally, the Tribunal also found that there was little realistic prospect of MP being able to reach a time to pay arrangement with HMRC as he lacked the means to be certain as to future cashflows. 

Therefore as MP had paid the tax the day after the escrow funds were released, the Tribunal found that he had a reasonable excuse for the late payment of tax and the appeal against the penalty was allowed.

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