Time To Pay Arrangement May Avoid HMRC Tax Penalty

The case of Wragg v Commissioners for His Majesty’s Revenue and Customs [2024] UKFTT 1012 (TC) (“Wragg”) highlights the need to apply for a time to pay arrangement when it might assist in avoiding an HMRC tax penalty.

An application for an HMRC time to pay arrangement is not guaranteed to be granted but as we shall see it is worth attempting to obtain one if a short term cash flow position makes it difficult for a taxpayer to pay the tax. If a time to pay arrangement is agreed upon with HMRC then under paragraph 10 of Schedule 56 of the Finance Act 2009 then no penalty becomes due provided the arrangement is adhered to.

Why The Taxpayer Could Not Pay HMRC

In Wragg the taxpayer, Mr Wragg, had a capital gains tax liability following the sale of shares in a limited company, Tiles Porcelain Limited (“the company”). However, unfortunately, the problem was Mr Wragg did not receive the proceeds of the sale immediately as the company needed to complete on the sale of a property.

The reason this case is unfortunate is that it is often possible to arrange one’s tax affairs so that a tax charge does not arise until funds are flowing from the relevant gain into the hands of the taxpayer. This avoids a cashflow dilemma or as the tribunal called it a dry tax charge:

It is a feature of any tax system that the due date for payment of tax may arise prior to the date upon which the relevant funds are received (a “dry tax charge“). A well-advised taxpayer will normally seek to structure transactions so as to avoid such charges.

How Does ‘Reasonable Excuse’ Operate To Stop An HMRC Tax Penalty?

See our guide how to appeal an hmrc tax penalty for further information generally outside of this case. In this case the basis of appeal was focused on a reasonable excuse as provided for under paragraph 16(1) of Schedule 56 of the Finance Act 2009.

The way a reasonable excuse operates to stop an HMRC tax penalty is if there is a reasonable excuse then the taxpayer needs to address the failure to pay on time without unreasonable delay as and when the excuse no longer exists.

The other point highlighted by paragraph 16(2)(a) of Schedule 56 of the Finance Act 2009 is that reasonable excuse does not arise (on its own) if a taxpayer has a shortage of funds to pay tax – there has to be something more:

…an insufficiency of funds is not a reasonable excuse unless attributable to events outside P’s control…

The case of Perrin v The Commissioners for HM Revenue and Customs (Tax) [2018] UKUT 156 (TCC) is commonly referred to on reasonable excuse cases and the tribunal mentioned the following from it here:

For present purposes, the key point to take from Perrin is that the excuse must be objectively reasonable, taking into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found themself in at the relevant time or times. The Upper Tribunal suggested in Perrin that it might assist the FTT, in this context, to ask itself the question “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”

Why Mr Wragg Lost His Tax Penalty Appeal

The taxpayer lost his appeal on the grounds of not having a reasonable excuse for non-payment of tax by the due date. 

HMRC does not have to hang around until a taxpayer has the means to pay over the tax as the tribunal said:

Mr Wragg’s position appears to be that HMRC should simply be expected to wait as long as necessary until he had been put in funds. If that were the case, HMRC would find it very difficult to collect tax as it fell due.

It seems Mr Wragg called HMRC to inform them of his lack of funds to pay the tax by the due date for payment.

Curiously in this case HMRC suggested to Mr Wragg that a time to pay arrangement application might be the way forward. However, it is understood that neither Mr Wragg nor his tax agent made such an application. This culminated in an HMRC tax penalty under Schedule 56 of the Finance Act 2009.

The problem for Mr Wragg was therefore the tribunal noted it had no evidence of the taxpayer seeking alternative sources of finance to pay the tax or seeking a time to pay arrangement with HMRC.