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HMRC internal manual

Compliance Handbook

Penalties for Failure to Pay on Time: reasonable excuse: Shortage of funds

A shortage of funds is not in itself a reasonable excuse for a failure to make payments on time. You must consider why the person did not have the funds.

Most businesses experience cash flow problems as part of their normal cycle of business. They manage those difficulties as part of their day-to-day operations. So a normal expected shortage of funds is something we expect a person to be able to manage, perhaps by arranging short-term finance.

However, a person may have a reasonable excuse for failing to pay on time when

  • the failure resulted from a shortage of funds and 
  • the shortage of funds occurred despite the person exercising reasonable care and due diligence, having given proper regard to their tax due date obligations

When considering whether there is a reasonable excuse you must look at the circumstances that gave rise to the shortage of funds. If you accept that the shortage of funds amounted to a reasonable excuse you must also consider whether the person remedied the failure without unreasonable delay after the excuse ended, see CH155900.

Each case must be considered on its own facts, taking into account all of the circumstances that gave rise to the failure to pay on time. See CH155600 and CH155650.


Over 90 per cent of the monthly income of Luke’s small engineering business comes from one client. The client had always paid their account promptly on the 15th of each month and Luke used this income to pay his PAYE due on the 19th. On 15 June the company contacted Luke to say it was going into receivership and was unable to pay their account. Luke had been given no prior indication this major client was in financial difficulties and as a consequence of the loss of this account was unable to pay his PAYE by the due date. Luke was unable to arrange any other finances before his next month’s PAYE was die but quickly arranged to sell some assets in order to release finances. He paid his PAYE in full on 30 July.

As Luke did not pay two months PAYE liability by the due dates and failed to contact HMRC to seek a Time to Pay agreement he received a late payment penalty. He appealed against the penalty on the grounds that he had a reasonable excuse.

Luke’s shortage of funds could not have been reasonably expected and left him little time to arrange additional funding at such short notice. Once he was able to raise the additional funds he remedied his PAYE payment failure without unreasonable delay. As a result HMRC would accept that Luke had a reasonable excuse for his failure to pay on time.

FA09/SCH56/PARA16 (2)(a)