Penalties for late payment of tax may be appealed if the taxpayer can demonstrate a reasonable excuse for the failure to pay on time. The general rule in such situations is that an inability to pay does not constitute reasonable excuse. However, this is not a blanket rule, and there may be scope to argue reasonable excuse where the inability to pay arose from circumstances beyond the taxpayer’s control. 

We recently assisted a client who approached us after an appeal had already been submitted to the FirstTier Tribunal (FTT) against a late payment penalty. The client had been going through divorce proceedings, during which his accounts had been frozen following the withdrawal of substantial funds by his spouse. As a result, he was forced to negotiate access to funds through legal representatives in order to cover basic living expenses. This situation left him unable to meet his tax liabilities until the divorce settlement was finalised. 

Once appointed, we prepared submissions for HMRC’s representative, to the effect that the inability to pay stemmed from the taxpayer’s divorce proceedings, and the actions taken by his wife. We cited HMRC’s own guidance, which confirms a person may have a reasonable excuse if the insufficiency of funds was attributable to events outside of the taxpayer’s ability to control, and occurred despite the person exercising reasonable foresight and due diligence, having given proper regard to meeting their obligations. 

Our client had filed his returns on time, he could not have foreseen the actions of his wife, or the financial restrictions which would be placed upon him, and he paid the tax as soon as he became able to do so. Following our representations, HMRC withdrew the penalty and a costly FTT hearing was avoided. 

ESC Studios Ltd (‘ESC’) v HMRC [2025] UKFTT 747 (TC) 

This recent FTT case also provides a noteworthy example of the circumstances in which an inability to pay can amount to a reasonable excuse. Namely where that inability to pay arises from HMRC’s own failings and delays. 

ESC submitted a VAT return which included a large repayment claim of £478,893. ESC expected this to be processed promptly, but it was delayed by over six months due to an industry-wide inquiry by HMRC and a lack of resources. 

When ESC’s next VAT return was due, it reported a VAT liability of £225,640, but because the large repayment had not yet been credited, ESC encountered cashflow problems and as a result the liability was paid late. HMRC then imposed a penalty of £9,025 for late payment. 

The FTT acknowledged that an insufficiency of funds, on its own, does not constitute a reasonable excuse. However, where the underlying cause of that insufficiency stems from circumstances beyond the taxpayer’s control, it may be considered a valid basis for appeal. 

The FTT noted that ESC had acted diligently, filing its returns on time and promptly responding to HMRC’s queries, and that the delay in relation to the repayment claim was a result of factors outside of ESC’s control.  

Given the size of the repayment and the company's circumstances, it was unreasonable to expect ESC to borrow or otherwise cover the shortfall when it had reasonably expected the repayment to arrive in time. The FTT also confirmed that a responsible taxpayer in ESC’s position could reasonably rely on the repayment being made, and upheld ESC’s appeal. 

Key take-aways for taxpayers 

From both cases, we’ve listed several practical lessons for taxpayers who find themselves unable to pay on time: 

• An inability to pay may be a reasonable excuse, but only if caused by circumstances outside your control, and only if it was reasonable to expect the funds to be available. 

• You must demonstrate that you took all reasonable steps to avoid the late payment.  

• Consider contacting HMRC proactively to discuss a payment plan if a shortfall is anticipated. Whilst the Tribunal did not fault ESC for not taking such steps, HMRC will not impose penalties if a payment plan has been agreed ahead of the payment deadline. 

If you’re unsure whether your circumstances could amount to a reasonable excuse, our specialists can review your case and advise on the best approach.