Two recent tribunal cases indicate that the tribunals are adopting  a sympathetic approach to taxpayers in these difficult times.  Each involved a penalty charge for the late payment of tax  and whether an insufficiency of funds could be a reasonable  excuse. This is not a promising prospect. The penalty regime  in FA 2009 includes the following phrase in all relevant places:  ‘an insufficiency of funds is not a reasonable excuse unless  attributable to events outside the person’s control’.

HMRC takes the view that cashflow problems are part of the normal  cycle of business and need to be managed as part of the day to  day operations. However, it does acknowledge that there can be  unforeseeable events outside the taxpayer’s control which will create  a severe cash shortage which cannot be managed.

This issue arose last month in the case of Anaconda Equipment  International Ltd v HMRC (TC03521). The company’s business was  the manufacture of conveyor systems and engineering equipment  for the construction trade. The company seemed to be managing  its cashflow position satisfactorily, but when the bank reduced its  overdraft facility from £1m to £355,000 and it lost two big clients  which accounted for two thirds of its turnover, it had a serious  problem. It had no alternative but to refinance the business and that  obviously took some time. Although the taxpayer had a history of  poor compliance, the tribunal looked at this appeal on its merits. It  concluded that the reduction in turnover from the loss of two major  clients and the substantial reduction in the overdraft facility were  events entirely outside the taxpayer’s control and constituted a  reasonable excuse for the late payment.

A few days later, the case of Paragon Precision Engineering Ltd v  HMRC (TC03542) was published. This involved an appeal on the  same grounds: an insufficiency of funds. However, this was even  more difficult because it was a VAT case and the rule for VAT in VATA  1994 s 71(1)(a) is: ‘an insufficiency of funds to pay any VAT due is not  a reasonable excuse’.

There is nothing here about events outside the taxpayer’s control and  so the appeal looked completely hopeless. However, the taxpayer  had an argument based on proportionality. It claimed that the tribunal  could strike down the penalty if it was clearly out of proportion to  the default. This approach has previously been supported by the  Upper Tribunal, although it said that this power should rarely be used  because ‘the tribunal should show the greatest deference to the will  of Parliament when considering a penalty regime’.

In the case of Paragon, the tribunal did not think that the penalty was  disproportionate – but suspended its decision for 21 days to give the  taxpayer the opportunity to provide further evidence regarding its  financial affairs to demonstrate a lack of proportionality.

Whether Paragon succeeds or not, the mere possibility opens up an  interesting further defence to the taxpayer. Although most appeals  on penalties fail before the tribunal, there are clearly circumstances  which can represent a reasonable excuse if a sympathetic case can  be put forward.

Article first published in Tax Journal on 6 June 2014.