What Is a "Reasonable Excuse" When Defending VAT Return Penalty Points?

January 2023 saw the introduction of a new penalty regime for VAT return non-compliance, including a restructured approach to penalties for late submission of VAT returns and new late payment penalties. The main aspect of the scheme is penalty points that accrue each time you submit a VAT return late, in a similar way to penalty points on a driving licence. When a business accrues enough points that it meets a specific penalty point threshold (as determined by an organisation's VAT accounting period), it will receive a fine for each following late submission.

As with penalty points on a driving licence, a business may avoid a late submission penalty point in some cases by providing a 'reasonable excuse'. Government guidance provides several examples of what may constitute a reasonable excuse, but the system has only recently been put to the test after an appeal by Five Star (Development) Homes Limited to the VAT Tribunal.

What 'reasonable excuse' was provided at the tribunal?

Five Star (Development) Homes Limited appealed against a penalty issued by HMRC following the late payment and submission of its VAT returns in a recent VAT Tribunal case. This case is interesting, as it is an early example of the new penalty regime in operation, where points are accumulated before a financial penalty is imposed. While the facts are unique in every case, this example could be instructive in determining how VAT return penalty points may be applied.

In this case, the company submitted monthly VAT returns, so it accumulated penalty points quickly. The penalty points threshold for monthly VAT accounting period is five points, the highest threshold available in the new VAT penalty system, but these points can be accrued in much less time than those for businesses filing VAT returns annually or quarterly.

Five Star (Development) Homes Limited appealed as it considered that it had a “reasonable excuse” for the omissions. The company believed that it had a reasonable excuse because a trainee who was responsible for submitting the VAT returns to HMRC had failed to complete the process. The trainee blamed their issues with the software that the company used.

The company’s managing director was only subsequently made aware that the online software used had failed to correctly submit its VAT returns. The error was attributable to the trainee, who had also not told the managing director about the penalty letters that the company had received from HMRC as she was trying to resolve the issue herself.

Did the tribunal accept the reasonable excuse?

Unsurprisingly, the tribunal did not accept that the company had a reasonable excuse for its failure to make returns and confirmed the penalties issued by HMRC were correct. Guidance provided online specifies that errors of this nature are not a reasonable excuse, and states that you cannot rely on problems with the HMRC online system, mistakes made on tax returns or missed notifications and reminders from HMRC as reasonable excuses.

With that said, certain types of computer or network problems may be accepted. In the case of Five Star (Development) Homes Limited, the late submissions were deemed to have been the fault of the trainee rather than the computer system.

A reasonable excuse must be what HMRC considers a valid reason for failing to meet a tax obligation. For the most part, examples pertain to unexpected events and health problems such as a serious or life-threatening illness, or a stay in hospital that prevented you from meeting the tax return or payment deadline. Other excuses include delays that were outside your control, such as postal problems or relying on someone else to send a return who failed in their obligation, or situations such as theft, a fire or a flood.

These problems can be avoided by working with a third-party to manage your VAT obligations on your behalf. The VAT People can advise you on avoiding late payment penalties and preventing disputes with HMRC, or take care of your obligations on your behalf to enable your organisation to avoid accruing penalty points and fines.