A “reasonable excuse” is one of the most important statutory defences available to taxpayers in the UK facing VAT-related penalties. If established, it can remove liability entirely, but tax tribunals apply this test rigorously. The defence is objective and fact-specific: the excuse must exist at the moment the failure occurred, and once the underlying cause has ended, the taxpayer must remedy the failure without unreasonable delay. Certain grounds, such as a mere lack of funds or reliance on another person, are expressly excluded unless the events that caused them were beyond the trader’s control.

This comprehensive guide outlines the statutory framework for “reasonable excuse,” how the courts and tribunals interpret the defence, and the practical steps involved in raising it effectively. It also examines common scenarios where the argument succeeds or fails, drawing on decades of case law, HMRC guidance, and recent tribunal trends.

LEXLAW’s experienced Tax Disputes team regularly defends clients against VAT surcharges, late filing penalties, and other HMRC enforcement actions, providing urgent strategic advice and robust tribunal representation.

What Legal Framework Governs VAT Reasonable Excuse Defences?

The reasonable excuse defence appears across multiple VAT provisions. The default surcharge regime in section 59 and section 59A of the Value Added Tax Act 1994 (“VATA 1994”) expressly allows a taxpayer to avoid a penalty if they can demonstrate a reasonable excuse. Similar provisions apply to failures to notify acquisitions or register for VAT under section 67(8), breaches of walking-possession agreements under section 68(4), and failures to submit EC sales statements under section 66(7)(b).

Which VAT Provisions Include Reasonable Excuse Defences?

Section 71(1) VATA 1994 sets out statutory exclusions, confirming that lack of funds and reliance on another person will not amount to a reasonable excuse unless the underlying cause was outside the trader’s control. The same test is found in a range of Finance Act penalty regimes. HMRC’s Compliance Handbook (CH160000 onwards) contains operational guidance and illustrative examples.

Provision	What it covers	Key points
s 59 & s 59A VATA 1994	Default-surcharge regime	Allows defence if “reasonable excuse” proved.
s 66(7)(b) VATA 1994	EC sales statements	Defence preserved.
s 67(8) VATA 1994	Failure to notify acquisitions / registration	Reasonable-excuse defence preserved.
s 68(4) VATA 1994	Breaches of walking-possession agreements	Same defence available.
s 71(1) VATA 1994	Statutory exclusions	Lack of funds and reliance on others not excuses unless beyond trader’s control.
Sch 23 ¶30-31 Finance Act 2009	Data-gathering default penalties	Identical defence.
Sch 36 ¶45 Finance Act 2009	Daily default penalties (information powers)	Identical defence.
Sch 41 ¶20 Finance Act 2009	Failure to notify certain wrongdoing	Identical defence.
Sch 55 & Sch 56 Finance Act 2009	Late filing / late payment	Cross-heading “Reasonable excuse”,  identical wording across taxes.

How Do Tribunals Assess “Reasonable Excuse” Defences?

The Tax Tribunal have developed a consistent approach to interpreting “reasonable excuse.” In Clean Car Co (1991), the tribunal adopted an objective standard, asking whether a prudent trader, conscious of their VAT duties, would have acted differently in the same circumstances. The Court of Appeal in Customs and Excise v Steptoe [1992] confirmed that insufficiency of funds will only succeed if the cause of the shortage was itself reasonable.

The Upper Tribunal in Perrin (2018) set out a four-stage checklist that is now widely used by tribunals. Recent decisions emphasise that mental health evidence must directly link the condition to the compliance failure, that HMRC-caused delays can justify late payment (as in ESC Studios Ltd [2025]), and that ignorance of the law can sometimes be reasonable where the legislation or guidance is unclear (Belloul [2020]).

Reliance on advisers remains a high-risk argument, it will only succeed if the taxpayer took reasonable steps to select and supervise them (Krywald [2024]; Purever UK [2025]). Attendance at hearings is strongly recommended; tribunals place far greater weight on oral evidence than on written statements.

LEXLAW’s tax litigation solicitors have successfully argued “reasonable excuse” in complex cases across a wide range of industries, often securing penalty cancellations where HMRC initially refused to accept the defence.

How Do You Successfully Make a Reasonable Excuse Defence?

The process begins with an appeal to HMRC within 30 days of the penalty or surcharge notice. This must set out the facts in detail, explain when and how the reasonable excuse arose, and include supporting documents. If HMRC rejects the appeal, an internal review can be requested. This is an opportunity to refine arguments and add evidence.

If the review is unsuccessful, the taxpayer can appeal to the First-tier Tribunal, where oral testimony is often critical. The burden of proof lies on the taxpayer. Appeals to the Upper Tribunal and higher courts are restricted to points of law.

Our tax disputes experts are experienced in navigating each stage of this process, from drafting persuasive initial appeals to delivering robust advocacy at tribunal, ensuring that every possible argument and piece of evidence is presented to maximise the chance of success.

What do Recent Appeals Tell Us About Tax Tribunal Trends?

This section explains common themes that appear in tribunal decisions on reasonable excuse claims. By understanding these patterns, businesses can better assess whether their circumstances are likely to succeed and how to present their case effectively.

Acquisitions – Failure to Notify

Relevant law: Section 67(8) Value Added Tax Act 1994
If your business makes acquisitions from other EU countries and crosses the VAT registration threshold, you must notify HMRC. Tribunals have occasionally accepted ignorance of threshold changes as a reasonable excuse, but only if the trader acted promptly to seek professional advice once aware of the possibility. Simply not knowing about the threshold, without making any enquiries, is unlikely to succeed.

Appearance at Hearing Essential

If you appeal to a tribunal, your presence is critical. Many reasonable excuse claims fail because the taxpayer did not attend the hearing to give evidence in person. Attendance allows the tribunal to assess your credibility directly, and oral testimony under cross-examination often carries more weight than written statements alone.

Assessment of Penalty

Relevant law: Schedule 55 Finance Act 2009

When a tribunal accepts that you had a reasonable excuse, it removes the entire penalty, not just part of it. This means all penalty stages linked to the same failure are cancelled, providing significant relief for the taxpayer.

Breaches of Walking-Possession Agreements

Relevant law: Section 68(4) VATA 1994
A walking-possession agreement (now known as a Controlled Goods Agreement) allows you to keep goods on your premises while owing HMRC money, on the condition you do not sell or dispose of them. If you breach this agreement, the reasonable excuse defence mirrors the rules for default surcharges, you must show that the breach was genuinely beyond your control.

Changes in the Law or HMRC Policy

When the law changes mid-accounting period, or HMRC policy shifts unexpectedly, tribunals have shown some flexibility. For example, during the Covid-19 pandemic, VAT payment easements were introduced and then withdrawn. Businesses that reasonably misunderstood the changes and acted promptly to correct matters were sometimes able to rely on this as a reasonable excuse.

Multiple Factors Combining

Tribunals recognise that several small, individually weak reasons can combine into a strong reasonable excuse. This principle was confirmed in the Matthew Harrison Upper Tribunal case, where the combined effect of multiple challenges made compliance impossible.

Penalties for Failing to Provide Information

Relevant law: Schedule 23, paragraphs 30–31 Finance Act 2011
HMRC has the power to issue daily penalties if you fail to provide information or documents when requested. However, if the failure was caused by adviser error or serious illness, and you remedy the default quickly once aware, the tribunal may cancel these penalties entirely.

What Common Business Scenarios Qualify as Reasonable Excuses?

Do Accounting Difficulties Qualify as Reasonable Excuses?

In Castlelaw (No. 628) Ltd v HMRC, the tribunal made it clear that general accounting problems rarely qualify as a reasonable excuse. To succeed, the taxpayer must prove the breakdown was sudden, unforeseeable, and outside their control, not the result of poor record-keeping, inadequate systems, or lack of resources.

Ambiguous Surcharge-Liability Notices

The decision in Mohammed v HMRC shows that if an HMRC notice is genuinely unclear or misleading, the tribunal may cancel the penalty. However, the taxpayer must demonstrate that a reasonable person in the same position would have been confused by the wording.

Do IT Computer Problems Qualify as Reasonable Excuses?

The case of Krywald (2024) confirm that IT failures, such as system outages or software malfunctions, can be accepted as a reasonable excuse. Success depends on credible evidence of the problem and proof that the taxpayer made an immediate attempt to file by alternative means.

Can Customer Late Payments Excuse VAT Default Surcharges?

The landmark Court of Appeal case Steptoe (1992) held that customer late payments could only be a reasonable excuse if the taxpayer could show robust credit control measures and that the delay was entirely beyond their control.

Do HMRC’s Own Delays Create Reasonable Excuses?

In Cohen v HMRC, the tribunal accepted that an appeal was allowed as the appellant had a reasonable excuse for late payment arising from his mistaken belief as to the applicable time period following his online webchat with HMRC advisers. A penalty could be cancelled if the delay was caused by HMRC itself, for example, in processing paperwork or issuing forms, provided the taxpayer acted promptly once the delay was identified.

Can Serious Illness Excuse VAT Compliance Failures?

The decision in Marc Catchpole v HMRC confirms that a serious or acute illness affecting the person responsible for compliance can excuse a default. The illness must be directly linked to the failure and supported by strong medical evidence.

Non-Receipt of Notices

In A&P Trading Solutions Ltd v Pensions Regulator, the tribunal accepted non-receipt of a notice as a valid excuse where the taxpayer could show this was not their fault, for instance due to postal errors. This defence is most often successful at earlier penalty stages.

When Can You Rely on Adviser Errors as Reasonable Excuses?

The case of Chohan v HMRC demonstrates that relying on an employee, accountant, or adviser may be a valid defence, but only where the oversight was genuinely unexpected and the taxpayer had taken reasonable care in selecting and supervising that person.

Does Reasonable Excuse Apply to Other HMRC Penalties?

The same reasonable excuse test applies to other penalty regimes. This includes daily penalties for information notices under Sch 36 FA 2008, penalties for failing to submit EU sales lists or Intrastat returns (with Covid-19 border disruption sometimes providing a defence), late filing or payment under FA 2009 Schedule 55 and Schedule 56, and Senior Accounting Officer penalties under FA 2009 Schedule 46 (where a robust tax control framework must be demonstrated).

It also applies to misdeclaration penalties, where clerical error, complexity, or defective professional work may be excusable. Ignorance of a notifiable avoidance scheme obligation under VATA 1994 Sch 11A can also be a reasonable excuse if professional advice was sought promptly.

Which Recent Legal Developments Affect Reasonable Excuse Appeals?

Covid-19 Impact Recognised

HMRC guidance (CH160300) and tribunal decisions now show greater flexibility where the pandemic directly caused compliance failures. This could include staff shortages, enforced business closures, or severe operational disruption. To rely on this defence, taxpayers must provide clear evidence linking Covid-19 to the missed deadline, for example, correspondence showing operational shutdowns or records of affected staff availability.

Expanded Mental Health Guidance

Under updated guidance (CH160400), HMRC acknowledges that mental health conditions may amount to a reasonable excuse. However, the condition must be directly connected to the compliance failure and supported by credible evidence. Medical records or professional assessments are strongly recommended to substantiate the claim.

Online Filing Exclusions

Certain taxpayers are excluded from mandatory online filing, such as those with recognised digital accessibility barriers. According to HMRC, paper filers in these situations must include a completed Reasonable Excuse form with their return to avoid penalties.

Proportionality in Decision-Making

Tribunals are increasingly assessing whether HMRC’s actions are proportionate. In cases involving HMRC delays or disputes over CIS (Construction Industry Scheme) offsets, penalties have been overturned where enforcement was found to be excessive or unfair. This growing emphasis on proportionality means that even when a default is proven, the fairness of HMRC’s response is open to challenge.

Instruct our specialist Tax Disputes team today to secure expert representation in challenging HMRC penalties and surcharges. We provide immediate strategic assessment of your case, combining in-depth knowledge of VAT, PAYE, and self-assessment compliance with a proven track record in overturning penalties at all stages, from initial HMRC review to First-tier and Upper Tribunal appeals. Whether you require urgent action to stop enforcement, robust advocacy in complex tribunal proceedings, or strategic advice on building a strong reasonable excuse defence, we deliver the decisive legal intervention your case demands. Fill in our enquiry form or call 020 7183 0529, to ensure your matter receives the expert attention it requires.

HMRC SECURITY NOTICES – ACT PROMPTLY
There is a limited time to respond to a HMRC Security Notice once it has been served which may be as short as 30 days from the date on the Notice letter. The options for defending against the criminal sanctions for non-compliance become more limited thereafter. You should take therefore obtain specific legal advice on your circumstances quickly.