Reasonable excuse letter

HMRC has a wide range of penalties available to it. Many of these can be reduced while others can be removed completely where you have a reasonable excuse for the action which gave rise to the penalty.

Having a reasonable excuse

Most of the penalties imposed by HMRC will be cancelled in full if the taxpayer can establish a “reasonable excuse” defence. Unhelpfully though, there is no definition of “reasonable excuse”. This argument now applies to:

• failure to notify liability; and
• default surcharge.

In relation to failure to notify liability to registration, some situations where a reasonable excuse can be established are:

• bereavement and serious illness
• unforseen events
• employment status - a person thought they were employed but were in fact self-employed

Note. The law does specify that shortage of funds and reliance on another person are not reasonable excuses for failing to notify.

With the default surcharge, there is a different list including:

• computer breakdown
• illness of key personnel
• unexpected cash crisis (but not insufficiency of funds itself); or
• loss of records.

Excuses that won’t work are, for example, cheque signatories being on holiday, staff responsible for preparing VAT returns being absent due to pregnancy and the fact that there has been no significant loss of VAT.

Ignorance of the law

Ignorance of the law is not mentioned in HMRC’s lists although it is relevant to both failure to notify and the misdeclaration penalty. For example, in one case a distinction was made between basic ignorance in relation to registering for VAT and the taxpayer’s ignorance of the fact that expenses incurred abroad and charged to his customers would be regarded as part of his turnover for VAT. The issue has been raised in relation to:

• liability of particular supplies

• whether supplies are made in the course of business

• place of supply

• time of supply

• supplies involving agents or sub-contractors

• the existence of a partnership

• imports

• bad debts; and

• credit notes.

Use our Reasonable Excuse Letter as the base on which to build your argument that you had a reasonable excuse and so should be let off a penalty or have it reduced.