Rewarding Failure? HMRC Penalties and the Pain of Repayment Delays
Introduction: When HMRC Owes You — But Still Issues a Penalty
It’s one of the most frustrating scenarios for any taxpayer or business owner: you’re waiting on money owed to you by HMRC, yet they’re demanding payment elsewhere — and even adding penalties when you can’t pay on time.
For many small businesses, particularly in the construction industry where CIS (Construction Industry Scheme) deductions are common, this isn’t rare — it’s routine.
In this post, we explore:
- What HMRC considers a “reasonable excuse” for late payment
- Case law where taxpayers have challenged HMRC’s penalties
- How the courts have responded to cash flow-based defences
- What steps businesses can take to protect themselves
The Problem: Late Repayments, Immediate Penalties
Businesses may face late payment penalties from HMRC if:
- VAT is paid late
- PAYE is underpaid
- Corporation tax deadlines are missed
But what happens if the cause of delay is HMRC itself — for example, when they’re slow to release a CIS refund, VAT reclaim, or other overpaid tax?
Unfortunately, HMRC often refuses to accept their own repayment delays as a valid defence. Instead, they argue that insufficiency of funds is not a “reasonable excuse” for late payment — even if they caused it.
What Is a “Reasonable Excuse”?
In tax law, a reasonable excuse is a defence against penalties for late filing or payment. However, HMRC frequently argues that a simple lack of money is not enough.
Their position:
“A reasonable excuse is normally an unexpected or unusual event that could not be reasonably foreseen or is beyond the person’s control.”
However, the courts have often taken a more nuanced view.
Key Tribunal Cases: When the Taxpayer Fought Back
Let’s look at some landmark and recent cases that explore when “insufficiency of funds” becomes a valid reasonable excuse.
Customs & Excise Commissioners v Steptoe [1992]
One of the most influential cases. The taxpayer, an electrical contractor, was routinely paid late by a local council — causing delays in paying VAT.
The Court of Appeal ruled in favour of the taxpayer:
The immediate cause was lack of funds, but the underlying reason — delayed payments by a key customer — was a valid reasonable excuse.
Why it matters: HMRC often quotes the dissenting opinion from this case, but the majority decision supports the taxpayer where cashflow failure was caused by unavoidable external issues.
Paul Raymond Marsh v HMRC (2006)
Mr Marsh couldn’t pay VAT on time because HMRC had delayed repaying a large CIS refund.
HMRC argued he should have known they’d be slow — but the tribunal was scathing:
“To be penalised in these circumstances would be remarkable and unacceptable.”
Why it matters: The tribunal slammed HMRC’s double standards — slow to repay, fast to penalise.
Electrical Installation Solutions Ltd v HMRC (2013)
Another contractor caught in a post-recession cashflow crunch. HMRC withdrew a Time to Pay arrangement and then issued penalties.
The tribunal ruled:
HMRC’s guidance was wrong. The test is not whether the issue was foreseeable, but whether the failure was reasonably avoidable.
Key insight: HMRC’s internal policy was ruled misleading, and the taxpayer won.
NSF Utilities Ltd v HMRC (2018)
Another CIS-related case. HMRC delayed refunds again, but the tribunal sided with them this time — because:
- The taxpayer had sufficient cash
- They hadn’t requested set-off
- They didn’t take further steps to plan around the delay
Lesson: Tribunals want evidence that you tried to mitigate the impact of delays.
ABG Fibre Services Ltd v HMRC (2024)
A very recent case, where the taxpayer again argued that delayed CIS repayments left them short on VAT.
The tribunal upheld the penalty:
“A prudent taxpayer should not have relied on a repayment claim that was subject to verification.”
Takeaway: Even when HMRC is slow, courts are less forgiving if you should have known repayment would take time.
What’s the Trend? Less Sympathetic Courts
While earlier tribunals were more understanding, recent cases show a harder stance. Tribunals are asking:
- Did the taxpayer take all reasonable steps?
- Could the late payment have been avoided?
- Did they plan around HMRC’s known delays?
The question is no longer just was it out of your control? but also did you do enough to prevent it?
Construction Sector: CIS Refunds & Gross Payment Status
This issue is especially severe for construction firms:
- CIS deductions reduce monthly cashflow
- HMRC delays in repayments can take weeks or months
- Delays can cause knock-on effects with VAT and payroll
From 2024, VAT compliance issues (including penalties) may affect a subcontractor’s ability to keep or apply for Gross Payment Status (GPS).
Gross Payment Status is vital for many subcontractors — delays or penalties can now jeopardise your cashflow even more.
How to Protect Your Business
1. Request Time to Pay
If you know payment will be delayed due to cashflow or HMRC delays, request a Time to Pay arrangement. If agreed, penalties may be suspended.
2. Document Everything
Keep records of:
- Refund claims submitted
- Delays acknowledged by HMRC
- Any efforts to request set-off or chase repayment
3. Request Set-Off
Ask HMRC to offset one tax liability against a refund from another head of tax (e.g. CIS refund against VAT due). It’s not automatic — you must request it.
4. Challenge Penalties — With Confidence
If penalised unfairly, appeal. Tribunals often sympathise with well-evidenced cases and can overturn penalties.
5. Get Advice Early
An experienced accountant can:
- Push for repayment faster
- Liaise with HMRC on your behalf
- Handle appeals or set-off requests
Final Thoughts: Don’t Let HMRC Delay Penalise Your Business
It’s deeply unfair for HMRC to delay repaying your money, then issue penalties when you fall behind elsewhere. And while the courts have sometimes sided with taxpayers, they expect you to show clear steps to avoid the default.
This is especially important now that VAT penalties can impact your subcontractor status under CIS.
Facing Penalties While Waiting on a Refund? Merranti Can Help
At Merranti Accounting, we regularly help businesses:
- Navigate HMRC repayment delays
- Dispute unfair penalties
- Request set-off between tax accounts
- Protect their Gross Payment Status
- Submit appeals to tribunals or request Time to Pay
Whether you’re a contractor, self-employed trader, or small business owner — if HMRC is penalising you while holding your funds, you don’t have to accept it.
