Many taxpayers pay their tax liabilities close to the statutory deadline for making such payments. For example, an individual who faced a large tax bill on 31 January might have needed time to find the necessary funds.

Pay on time…or else?

If the individual was unable to pay by 31 January, it would not necessarily have been the end of the world. Interest is added to any late payment, but no late payment penalty would arise if the liability was paid in the next 30 days (FA 2009, Sch 56, para 1(4), item 1). In the above example, the penalty date would therefore be 3 March (nb it would be 2 March in a leap year).

If the tax was paid late, the initial penalty would be 5% of the amount unpaid at the penalty date (for a summary of late payment penalties for income tax and capital gains tax purposes, see the HM Revenue and Customs (HMRC) Compliance Handbook manual at CH155100).

However, a penalty may be reduced or possibly eliminated, broadly where:

• HMRC (or the tax tribunal) is satisfied that the taxpayer had a reasonable excuse for the failure to make the payment, and that failure is put right without unreasonable delay after the reasonable excuse has ceased (Sch 56, para 16);
• HMRC considers that it is right to reduce the penalty because of ‘special circumstances’ (which do not include the ability to pay) (Sch 56, para 9); or
• The taxpayer has made a ‘time to pay’ deferral proposal before the tax falls due, which HMRC accepts, and the taxpayer satisfies the payment terms (Sch 56, para 10).

These days, tax liabilities can be paid in a number of different ways (e.g. online banking), but many taxpayers have continued to pay HMRC by cheque. However, care is needed when doing so, particularly if the cheque payment is sent close to the deadline.

Dishonoured cheque

For example, in Coomber v Revenue and Customs [2016] UKFTT 809 (TC), the taxpayer was due to pay income tax for 2014/15 by 31 January 2016. He tried to pay by cheque, which was sent to HMRC on 2 February 2016. However, the cheque was dishonoured by the taxpayer’s bank for an unknown reason, even though he had sufficient funds available for the cheque to be honoured. Unfortunately, the taxpayer only became aware that the cheque had not been cashed when he saw his bank statement on or around 1 March 2016. His payment by replacement cheque was not received by HMRC until 17 March 2016.

HMRC imposed a late payment penalty (under Sch 56, para 1(1)). The taxpayer appealed, contending that he “cannot be expected to contact the bank by telephone, on a regular basis, to see if cheques have cleared”. However, the First-tier Tribunal disagreed, stating that it was the taxpayer’s responsibility to make sure that his tax was paid on time. In addition, the tribunal noted that the taxpayer chose to pay his tax at a very late stage, and was therefore taking a risk that, if anything went wrong with the cheque, or if (for example) it went astray in the post, payment would not be made in time.

The tribunal also pointed out that the taxpayer’s payment was “important and large” (i.e. approximately £18,850). His bank offered telephone banking, and the tribunal saw no reason why the taxpayer could not have contacted his bank. The tribunal considered that a reasonable taxpayer would have telephoned the bank to find out whether his large tax cheque had cleared. The failure to do so was held to be unreasonable. The tribunal concluded that the taxpayer had not given any reasonable excuse for his failure to pay the tax on time. Furthermore, there were no special circumstances to justify reduction of the penalty. The taxpayer’s appeal was dismissed.

Practical point

Few people would have sympathy for a taxpayer who suffered a late payment penalty after attempting to pay a tax liability by cheque whilst knowing that insufficient funds were available in their bank account. However, that was not the case in Coomber. The tribunal’s decision might therefore seem rather harsh. Having said that, the tribunal noted the taxpayer had chosen to pay his tax liability by cheque, rather than by some other means which would have given him the immediate knowledge and assurance that the payment had been safely received (e.g. online or telephone banking, CHAPS, or by commercial debit or credit card). Thus the moral is that if paying by cheque, taxpayers should allow plenty of time for unexpected mishaps.

The above article was first published in Tax Insider in April 2017 (www.taxinsider.co.uk).