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HMRC internal manual

Compliance Handbook

Penalties for Failure to File on Time: in what circumstances is a penalty payable: reasonable excuse: shortage of funds

A shortage of funds is not in itself a reasonable excuse for a failure to file a return or other document 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 file the return or document by the filing date when

  • the failure resulted from a shortage of funds, and 
  • the shortage occurred despite the person exercising reasonable care and due diligence, having given proper regard to their obligation to file the return or document by the due date.

When considering if 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 amounts to a reasonable excuse you must also consider if the person remedied the failure without unreasonable delay after the excuse has ended.

Each case must be considered taking into account all of the circumstances that gave rise to the failure to comply with the information notice, see CH61660.


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 didn’t 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 us and, if appropriate, agreed a time to pay arrangement.

Remember that there is no statutory definition of ‘reasonable’ or ‘unreasonable’. Each case must be judged on its own merits in view of the person’s abilities and circumstances. See CH61540 and CH61560.

FA09/SCH55/PARA23 (2)(a)