Penalties for late payment: Mark McLaughlin discusses time to pay
There are certain ‘let-outs’ from penalties for late payments of tax (under FA 2009, Sch 56), which are potentially helpful for taxpayers.
One of these exceptions relates to 'time to pay' arrangements with HMRC. Its effect is broadly that if HMRC accepts a taxpayer request for time to pay, there is no penalty for late payment in respect of the period covered by the agreement, provided that the taxpayer does not break the terms of the time to pay arrangements. In other words, any penalty is suspended while the agreement is in place. However, if the taxpayer breaks the time to pay arrangements, HMRC can issue a penalty notice to impose the suspended penalty (FA 2009, Sch 56, para 10).
HMRC's debt management and banking manual includes a whole chapter on time to pay (DMBM800000). It sets out three conditions for late payment penalties to be suspended where the taxpayer requests time to pay (DMBM803600):
1. Taxpayers must approach HMRC before they become liable to a penalty;
2. HMRC must agree the time to pay arrangement; and
3. Taxpayers must adhere to the arrangement and comply with any conditions of the
Penalties are not due if the terms of a time to pay arrangement are varied, provided that the taxpayer and HMRC both agree the terms. However, if the agreement is otherwise broken, the taxpayer becomes liable for penalties in respect of the time to pay period, in addition to any penalties incurred before or after that period (CH156600).
Individual taxpayers within self-assessment are liable to a penalty if the tax in question is not paid within 30 days from the due date (FA 2009, Sch 56, para 1(4)). The penalties broadly apply to late balancing payments of income tax and late payments of capital gains tax. Taxpayers in financial difficulty should therefore have up to 30 days from 31st January following the tax year to agree a time to pay arrangement with HMRC.
However, HMRC guidance warns (CH156600): "If a person is unable to make payment on time they can ask us to agree that they may defer payment of that amount of tax. They must make their request to defer payment before the due date for payment".
In Brand v Revenue & Customs  UKFTT 783 (TC), the taxpayer’s self-assessment return for 2010/11 showed a substantial capital gain on the sale of a property. The capital gains tax liability was approximately £40,000. However, the proceeds from the property sale had not been received. The tax return for 2010/11 was filed on 24th January 2012. On 9th February 2012, the taxpayer wrote to HMRC requesting time to pay, and explaining the situation. On the same day, he sent paperwork to HMRC about the property transaction. On 22nd March, HMRC wrote to the taxpayer refusing his time to pay application. The taxpayer subsequently approached a friend for a loan to pay the tax. HMRC charged a penalty for late payment of the capital gains tax. The taxpayer appealed.
The tribunal accepted that if the taxpayer had known about HMRC's refusal of his time to pay request within two weeks of applying on 9th February 2012, he would have paid the capital gains tax by 2 March 2012 (i.e. within 30 days from the tax return filing date), and no penalty would have been incurred. The taxpayer's appeal was allowed.
Penalties for late payment may be reduced by HMRC in 'special circumstances', although the inability to pay is specifically excluded (FA 2009, Sch 56, para 9). In addition, a defence of 'reasonable excuse' may be available. However, an insufficiency of funds is not a reasonable excuse, unless it is attributable to events outside the taxpayer's control. If the taxpayer had a reasonable excuse which has ended, it is treated as having continued if the tax is paid without 'unreasonable delay' after the excuse ended (Sch 56, para 16).
As mentioned, in the Brand case, the tribunal considered that if the taxpayer had known about HMRC's refusal of the time to pay proposal by 9 February 2012, he would have been able to raise the funds to pay the CGT before the penalty trigger date of 2 March 2012. The taxpayer had a "reasonable expectation" that HMRC would respond to his request within a two week timeframe. On that basis, the tribunal held that the taxpayer had a reasonable excuse.
As mentioned, insufficiency of funds is generally not a reasonable excuse. However, in the Brand case it would seem that this insufficiency was considered to be attributable to events outside the taxpayer's control. The tribunal's sympathetic approach offers somehope to taxpayers in a similar position.
Mark McLaughlin CTA (Fellow) ATT TEP