CH160800 - Reasonable excuse: what is not a reasonable excuse

What is or is not a reasonable excuse is personal to the individual’s abilities and circumstances. Those abilities and circumstances may mean that what is a reasonable excuse for one person may not be a reasonable excuse for another.

For example, there are some situations which we will not normally accept, on their own, as a reasonable excuse, such as:

  • pressure of work
  • lack of information
  • lack of a reminder from HMRC

Statute identifies two specific situations that are not a reasonable excuse, unless certain conditions are met. These are:

  • insufficiency of funds, and
  • reliance on a third person, but follow the guidance in CH160700.

Insufficiency of funds

The law says that insufficiency of funds is not a reasonable excuse unless the insufficiency is attributable to events outside the persons control.

Therefore, consideration must be given to establish why the person did not have the funds to meet the obligation. Many people may experience cash flow problems for varying reasons and they usually manage these as part of their normal daily life. So, in general, an insufficiency of funds is something we would expect a person to be able to manage, perhaps by arranging short-term finance.

This is not to say there will never be events outside a person`s control that create a severe cash shortage that cannot be managed.

A person may have a reasonable excuse if

  • the insufficiency of funds is the cause of the failure, and
  • the insufficiency of funds occurred despite the person exercising reasonable foresight and due diligence, having given proper regard to meet their obligation.

Insufficiency of funds is not a ‘reasonable excuse’, but the underlying causes may be. If this shortage of funds is the cause of the failure and the person has been pro-active in trying to remedy this, then they may have a reasonable excuse. For example, the person requests HMRC that the payment of the amount be deferred and HMRC agrees to the deferment for a period, therefore you must look at the circumstances that gave rise to the shortage of funds.

Each case must be considered on its merit, taking into account all the circumstances that gave rise to the failure to comply with the obligation.

Examples

Reasonable excuse exists

Over 90% 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 due 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.

No reasonable excuse exists

Simon recently took on additional employees and invested time and money training them before they could produce income. This meant that his business had a severe cash flow problem. Simon did not file his tax return because he knew that he had a large capital gains liability.

Simon does not have a reasonable excuse for not filing his tax return. The circumstances were not beyond his control. Simon should have filed the return on time even if he was unable to pay the tax by the filing date. He should have contacted HMRC and, if appropriate, agreed a time to pay arrangement.