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Cash Flow Problems Excused Late Tax Payments

In a decision which will come as some comfort to many hard-pressed businesses, a tax tribunal has ruled that a small company’s unexpected cash flow problems provided a ‘reasonable excuse’ for its late payment of its PAYE liabilities.

The commercial photography business was already suffering in the recession when a client cancelled a major contract and its bank withdrew its £125,000 overdraft facility. It managed to weather the financial storm but was late in paying its PAYE for a string of quarters and was hit with a substantial penalty as a result.

HM Revenue and Customs argued that general cash flow problems could never be a reasonable excuse for failing to pay tax on time. However, in allowing the company’s appeal and overturning the penalties, the First-tier Tribunal found that it had made the payments in full as soon as it was able to do so.

Although its business had already been weakened by the economic downturn, the immediate cause of the company’s cash flow problems was two ‘wholly unexpected’ events which caused it significant loss. The company had eventually brought itself back from the brink by selling its premises.