“Reasonable excuse” and “special circumstances” are two distinct and frequently confused, routes to cancelling or reducing an HMRC penalty. Used properly, they defeat or substantially mitigate late-filing, late-payment, failure-to-notify and inaccuracy penalties across self-assessment, VAT and the new points-based regime. This guide analyses the leading authorities, above all Perrin v HMRC [2018] UKUT 156 (TCC) and sets out how advisers should structure each argument.
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Two Distinct Routes
Practitioners must keep two mechanisms firmly separate:
- Reasonable excuse is a complete defence. If a taxpayer had a reasonable excuse for the failure (and remedied it without unreasonable delay once the excuse ended), the penalty does not arise at all. It applies primarily to “failure” penalties, late filing, late payment and failure to notify, rather than to inaccuracy penalties.
- Special circumstances (sometimes called special reduction) is a discretionary power to reduce a penalty that is otherwise due. It applies across the penalty regimes, including inaccuracy penalties and can reduce a penalty to nil. It is engaged where the case is uncommon or exceptional or where the statutory penalty would produce a result contrary to the clear intention of the legislation.
Where Reasonable Excuse Applies
Reasonable excuse appears across the penalty code, including: paragraph 23 of Schedule 24 FA 2007 (a defence to certain failure-based penalties), paragraph 20 of Schedule 41 FA 2008 (failure to notify), paragraph 23 of Schedule 55 FA 2009 (late filing) and paragraph 16 of Schedule 56 FA 2009 (late payment). The same concept governs the new points-based late submission and late payment regime rolling out for income tax under Making Tax Digital, analysed in our guide on the MTD penalty regime.
The statutes do not define “reasonable excuse.” They do, however, contain two recurring statutory restrictions: an insufficiency of funds is not a reasonable excuse unless attributable to events outside the person’s control; and where the taxpayer relies on another person to do something, that is not a reasonable excuse unless the taxpayer took reasonable care to avoid the failure. Both restrictions are heavily glossed by the case law.
The Perrin Four-Stage Test
The leading authority is the Upper Tribunal’s decision in Perrin v HMRC [2018] UKUT 156 (TCC). It is essential reading because it provides the structured analytical framework that the First-tier Tribunal is expected to apply. The Upper Tribunal directed that a tribunal considering a reasonable excuse should:
- Establish the facts that the taxpayer asserts give rise to a reasonable excuse;
- Decide which of those facts are proven on the evidence;
- Decide whether, viewed objectively, those proven facts amount to a reasonable excuse for the default, that is, was it objectively reasonable for this taxpayer, in those circumstances, to have failed to meet the obligation when they did; and
- Where the excuse has ceased, decide whether the taxpayer remedied the failure without unreasonable delay after the excuse ended.
Perrin emphasised that “reasonable excuse” is an ordinary English phrase to be given its ordinary meaning, not a term of art. The test is objective, but it is applied to the circumstances and attributes of the actual taxpayer, their experience, the information available to them and the situation they were in, rather than to a wholly abstract “reasonable taxpayer” divorced from the facts.
The Objective Standard: The Clean Car Co
The objective-but-contextual standard endorsed in Perrin derives from The Clean Car Co Ltd v Customs and Excise Commissioners [1991] VATTR 234, where Judge Medd QC framed the question as whether what the taxpayer did was a reasonable thing for a responsible trader, conscious of and intending to comply with their obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation the taxpayer found themselves in at the relevant time, to have done. This formulation, an objective standard applied to the actual taxpayer’s circumstances, remains the touchstone.
Ignorance of the Law
It is sometimes said that ignorance of the law is no excuse. Perrin rejected that as an absolute proposition in the penalty context. Whether ignorance of a particular obligation is a reasonable excuse depends on the circumstances, including whether it was objectively reasonable for the particular taxpayer not to have been aware of the requirement. A first-time taxpayer with no reason to know of an obscure filing obligation is in a different position from an experienced trader or one who has been specifically alerted by HMRC. Ignorance born of a failure to take obvious steps to find out will rarely be reasonable; genuine, understandable ignorance of a non-obvious obligation may be.
Insufficiency of Funds: Steptoe
The statutes provide that an insufficiency of funds is not a reasonable excuse “unless attributable to events outside the person’s control.” The leading gloss is Customs and Excise Commissioners v Steptoe [1992] STC 757. The Court of Appeal held that, although a shortage of money is not itself a reasonable excuse, the underlying cause of that shortage may be. If the insufficiency was itself the result of events outside the taxpayer’s control which a person exercising reasonable foresight and due diligence and having proper regard to their tax obligations, could not have avoided, then that underlying cause can constitute a reasonable excuse.
The classic example is the trader whose largest customer fails to pay or who is the victim of fraud or a sudden catastrophic event, leaving them unable to meet a tax liability despite prudent management. The argument turns on causation and foreseeability: the more the shortage flows from ordinary commercial risk that a prudent trader should have provided for, the weaker the excuse.
Reliance on Advisers and HMRC
Reliance on an Agent
Several regimes provide that reliance on a third party is not a reasonable excuse unless the taxpayer took reasonable care to avoid the failure. Whether reliance is reasonable is fact-sensitive: it depends on what the taxpayer did to select the adviser, to give them the information and instructions needed and to check that the task was done. A taxpayer who hands everything to a reputable agent in good time and reasonably believes the return has been filed stands in a very different position from one who simply assumed, without inquiry, that matters were in hand. Genuine reliance on professional advice is also powerful evidence against a finding of careless or deliberate behaviour, see our guide on the meaning of deliberate behaviour.
Reliance on HMRC’s Own Statements
Where a taxpayer acts on incorrect information given by HMRC itself, a reasonable excuse argument may arise, as in the factual background to Gore v HMRC [2014] UKFTT 904 (TC), where a trader ceased accounting for VAT after being told by an HMRC helpline that the supplies were not taxable. Reliance on HMRC’s published guidance or specific advice can found a reasonable excuse, although taxpayers should note the separate (and narrower) public-law doctrine of legitimate expectation, which the First-tier Tribunal generally has no jurisdiction to enforce and which must be pursued by judicial review.
Special Circumstances / Special Reduction
Distinct from reasonable excuse, HMRC has a discretionary power to reduce a penalty because of “special circumstances”, for example, paragraph 11 of Schedule 24 FA 2007 (inaccuracy penalties), paragraph 14 of Schedule 41 FA 2008 and paragraph 16 of Schedule 55 / paragraph 9 of Schedule 56 FA 2009. The power can reduce a penalty, stay it or agree a compromise and can take a penalty down to nil.
The statutes say only that special circumstances do not include the taxpayer’s ability to pay or the fact that a potential loss of revenue from one taxpayer is balanced by an over-payment by another. The courts have held that “special” means something uncommon or exceptional, out of the ordinary run of cases or circumstances in which the statutory penalty would produce a result contrary to the clear compliance intention of the legislation (see the discussion in Barry Edwards v HMRC [2019] UKUT 131 (TCC) and the earlier authorities it reviews).
Practitioner Strategy
Plead Both, Separately
Always advance reasonable excuse and special circumstances as separate, clearly labelled arguments. They have different tests and different review standards, and a tribunal that rejects one may accept the other. Inaccuracy penalties, in particular, are not generally susceptible to reasonable excuse, so special circumstances is often the only mitigation route.
Build the Evidence to the Perrin Structure
Frame the witness evidence and documents around the four Perrin stages: the facts relied on, proof of those facts (medical evidence, correspondence, system logs), why those facts made the default objectively reasonable for this taxpayer and what happened after the excuse ended. The fourth stage is the most commonly fatal, evidence the remedial steps.
For Insufficiency of Funds, Prove the Cause
Do not argue “we had no money.” Argue, with evidence, the cause of the shortage and that it was outside the taxpayer’s control and unavoidable by a prudent trader (Steptoe). Bank records, the failed-customer correspondence and cash-flow evidence are key.
Target HMRC’s Special-Circumstances Reasoning
Obtain HMRC’s stated reasons for refusing a special reduction and test them against the flawed-decision standard. A bare or formulaic refusal that does not engage with the specific features of the case is vulnerable.
Practitioner Checklist
- Identify the penalty type and confirm whether reasonable excuse is available (failure penalties) or whether special circumstances is the only route (inaccuracy penalties).
- Work through the four Perrin stages , facts asserted, facts proven, objective reasonableness for this taxpayer and prompt remedy after the excuse ended.
- Apply the Clean Car standard , objective, but judged on the actual taxpayer’s attributes and situation.
- Consider ignorance of the law where the obligation was non-obvious and it was reasonable for the taxpayer not to know of it.
- For late payment, prove the cause of any shortage of funds under Steptoe , events outside control, unavoidable by a prudent person.
- Assess reliance on agents or on HMRC’s own advice against the statutory “reasonable care” restriction.
- Plead special circumstances separately, showing the case is uncommon/exceptional or that the penalty defeats the statute’s purpose.
- Obtain and attack HMRC’s special-circumstances reasoning against the flawed-decision (judicial review) standard.
- Mind the appeal deadlines , 30 days to appeal a penalty, with statutory review and FTT options.
Frequently Asked Questions
What is the legal test for a reasonable excuse in a tax penalty appeal?
The leading authority is Perrin v HMRC [2018] UKUT 156 (TCC), which sets out a four-stage approach: establish the facts the taxpayer says give rise to a reasonable excuse; decide which of those facts are proven; decide whether, viewed objectively, those facts amount to a reasonable excuse for the default, judged by reference to the situation and attributes of the actual taxpayer; and, where the excuse has ended, decide whether the failure was then remedied without unreasonable delay.
Is a lack of funds a reasonable excuse for late payment of tax?
Insufficiency of funds is generally not a reasonable excuse, but following Customs and Excise Commissioners v Steptoe [1992] STC 757 the underlying cause of the shortage may be. If the lack of funds was itself attributable to events outside the taxpayer’s control which a person exercising reasonable foresight and due diligence could not have avoided, that underlying cause can amount to a reasonable excuse. The argument turns on causation and foreseeability.
What is a special reduction or special circumstances reduction?
Separately from reasonable excuse, HMRC may reduce a penalty where there are special circumstances (for example, paragraph 11 of Schedule 24 FA 2007 and paragraph 16 of Schedule 55 FA 2009). Special circumstances are uncommon or exceptional or arise where the statutory penalty would produce a result contrary to the clear intention of the legislation. The Tribunal can only substitute its own view if HMRC’s decision was flawed in the judicial review sense.
Can reliance on an accountant or adviser be a reasonable excuse?
It can, but reliance on a third party is expressly limited as an excuse in several penalty regimes unless the taxpayer took reasonable care to avoid the failure. Whether reliance is reasonable depends on the facts, including what the taxpayer did to give the adviser the information needed and to check the task was done. Genuine reliance on professional advice is also strong evidence against a finding of careless or deliberate behaviour.