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Penalties from the taxman, and how to avoid them

As HMRC’s limited resources (i.e. people) become increasingly overstretched, they rely increasingly on the deterrent effect of penalties to help keep taxpayers in line and on time. With the planned cuts, this is likely to get worse.

HMRC’s version of Hal churns out penalty notices without any apparent human intervention, so this is extremely efficient, compared with most of what HMRC does. The level of penalties and areas of tax that they apply to is growing, with monthly PAYE bills being the latest addition to their fine farming.

Reasonable excuse – what HMRC says

One of the few ways of avoiding having to pay these penalties is by making a ‘reasonable excuse’ claim. HMRC says that this is only available when there is “some unforeseen and exceptional event beyond your control” and they give three examples:

  • When HMRC or its computer Hal goes wrong or gives out bad advice
  • When your computer fails while submitting a return online
  • Serious illness

They say that not having enough money to pay or relying on someone else who lets you down does NOT count.

Reasonable excuse – the reality

However, the outcome of tribunal and court cases suggest that, in fact, the following situations can be accepted as an excuse to avoid penalties:

  • Lack of funds caused by non-payment by a customer who was a local council
  • An accountant failing to advise on special rules relating to a film investment
  • Fire or major theft

Some more unexpected tribunal successes were:

  • Where the introduction of the national minimum wage left a charity short of cash
  • When a cheque bounced because the bank manager fell ill before agreeing a new overdraft
  • Where a tobacconist had no cash to pay because of smugglers
  • When the taxpayer’s car crashed on the way to the bank to pay the tax, and the forms got lost under the seat of the damaged car!

Remember that, whatever your excuse, you will need to prove it (e.g. keep screen shots of error messages from failed online submissions etc.) and there are time limits for appeals.

The lesson from this is that it is usually worth appealing against any fines, just in case.

If you have any questions about this, please let Andy Scott or me know, or if you have your own story about a reasonable excuse claim, please post a comment.

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