Not having the money to pay is, by statute, not a reasonable excuse unless the shortage was caused by events outside your control. The courts read that as a question about the underlying cause: could you have avoided the cash shortfall by reasonable foresight and due diligence, given that you knew the tax would fall due on a particular date? If you could, there is no excuse. Lack of money never explains a late return, because a return can always be filed without paying.

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What does the legislation say?

The same rule appears in each of HMRC’s modern penalty codes:

  • paragraph 23(2)(a) of Schedule 55 to the Finance Act 2009 (late returns);
  • paragraph 16(2)(a) of Schedule 56 to the Finance Act 2009 (late payment of income tax, PAYE and other taxes);
  • paragraph 19(2)(a) of Schedule 24 to the Finance Act 2021 (VAT late submission points);
  • paragraph 12(2)(a) of Schedule 26 to the Finance Act 2021 (VAT late payment penalties).

Each says an insufficiency of funds is not a reasonable excuse unless attributable to events outside the person’s control. The older VAT default surcharge, which still applies to accounting periods starting on or before 31 December 2022, uses blunter wording. Section 71(1)(a) of the VAT Act 1994 simply says an insufficiency of funds to pay VAT is not a reasonable excuse.

Lack of money is also excluded elsewhere. Special reduction under paragraph 16(2)(a) of Schedule 55 cannot take ability to pay into account. gov.uk lists a cheque that bounced or a payment that failed because you did not have enough money among the reasons that will not be accepted.

How have the courts interpreted the rule?

The leading case is the Court of Appeal’s decision in Customs and Excise v Steptoe [1992] STC 757, decided under the wording that became section 71(1)(a). The Upper Tribunal summarised it in ETB (2014) Ltd v HMRC [2016] UKUT 0424 (TCC). The Court of Appeal held unanimously that insufficiency of funds can never in itself be a reasonable excuse, but the cause of that insufficiency, meaning the underlying cause of the default, might be.

The judges then differed on the test. Scott LJ thought the underlying cause had to be an unforeseeable or inescapable event. The majority preferred Nolan LJ’s approach, which Lord Donaldson MR expressed this way: if reasonable foresight, due diligence and a proper regard for the fact that the tax would fall due on a particular date would not have avoided the shortage, the taxpayer may well have a reasonable excuse. That excuse ends, though, on the date when such foresight and diligence would have overcome the shortage.

In ETB the Upper Tribunal reduced this to one question: was the insufficiency of funds reasonably avoidable? If not, the taxpayer will usually have an excuse until it would be reasonable to expect them to have found other funding or taken other steps. In Raggatt, below, the Upper Tribunal applied the same test to a late payment penalty under the Finance Act 2009 wording. HMRC’s own guidance at CH160100 tells officers to avoid describing a reasonable excuse as an unforeseeable or inescapable event, because the law does not require one.

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What happened in ETB (2014) Ltd?

ETB sold its business on 31 December 2014. Invoicing all work in progress at that date produced VAT of £19,442.26 for the quarter, due on 7 February 2015. The director, who had been unwell with several viruses, only started raising money on 4 February by selling shares and closing a notice account. The VAT arrived 18 days late and a default surcharge of £972.11 followed.

The Upper Tribunal said it was “blindingly obvious” that invoicing all work in progress would create a VAT bill. Earlier action would have produced the funds in time, and there was no medical evidence that illness prevented the director arranging finance or contacting HMRC. The shortage was reasonably avoidable, so there was no excuse and the surcharge stood.

What happened in Raggatt?

In Timothy Raggatt v HMRC [2018] UKUT 0412 (TCC), a barrister was charged late payment penalties of £9,795 for 2012 to 2013 and £3,640 for 2013 to 2014 under Schedule 56. He blamed cuts to criminal legal aid, which he said amounted to a 40% real terms fall over several years, and his bank’s refusal to extend his overdraft. The Upper Tribunal accepted that the scale of the cuts was exceptional. But he had averaged about £190,788 a year of income over six years, made no reserves for tax, and bought a house in 2011 knowing significant tax bills were coming. His overdraft letter had made clear the limit would not be extended.

The Upper Tribunal held that the First tier Tribunal’s conclusion was within the range open to it: he had not shown reasonable foresight and due diligence. It added two practical points. Someone with an irregular income would be well advised to set money aside or arrange suitable bank facilities if they want to rely on this defence later. And a taxpayer should not organise their affairs on the basis that HMRC will agree time to pay, because that is HMRC’s discretion.

When does HMRC itself accept a cash shortage?

CH160800 says the underlying cause may be an excuse where the shortage caused the failure, and it arose despite reasonable foresight and due diligence with proper regard to the obligation. HMRC also looks favourably on a taxpayer who has been proactive, for example by asking for payment to be deferred. It gives two contrasting examples:

  • Excuse accepted. Luke’s engineering business earned over 90% of its monthly income from one client, which had always paid on the 15th. On 15 June the client said it was going into receivership and could not pay. With no warning and no time to arrange finance, Luke missed two months’ PAYE. He sold assets and paid in full on 30 July. HMRC accepts he had a reasonable excuse.
  • No excuse. Simon had a cash flow problem after training new staff, and did not file his tax return because he knew it would show a large capital gains liability. HMRC says the circumstances were not beyond his control. He should have filed on time and contacted HMRC about time to pay.

CH160800 also reminds officers that many people have cash flow problems and usually manage them as part of daily life, for example by arranging short term finance. So an ordinary squeeze on cash is expected to be dealt with, and only a severe shortage that could not reasonably be managed is likely to succeed.

What should you do if you cannot pay?

File every return on time regardless. Then contact HMRC before the payment deadline. Under paragraph 10 of Schedule 56, if you ask for payment to be deferred and HMRC agrees, you are not liable to late payment penalties that would otherwise arise between your request and the end of the agreed deferral period. Break the agreement and HMRC can charge them. gov.uk explains that HMRC will check whether a payment plan is affordable before agreeing one. See HMRC time to pay arrangements and, for VAT, VAT time to pay arrangements.

Keep a record of what caused the shortage and every step you took to fix it, such as approaches to your bank, chasing debtors and selling assets. That is the evidence a tribunal looks for under the Steptoe test. Interest is still charged on tax paid late. See HMRC late payment interest.

What mistakes undermine a cash flow appeal?

  • Not filing because the tax cannot be paid. HMRC’s guidance at CH62220 even treats that choice as deliberately withholding information. See the 12 month penalty for withheld information.
  • Calling HMRC only after the due date, as happened in ETB.
  • Pointing to a foreseeable event, such as the sale of the business or a known large bill, as if it were unexpected.
  • Producing no bank statements or correspondence to show when the shortage arose and how quickly it was dealt with.
  • Applying the old “unforeseeable or inescapable” test to yourself and giving up. The real question is whether the shortage was reasonably avoidable.

For how these arguments fit into a wider appeal, see reasonable excuse for a late tax return and appealing a VAT penalty point.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.