Judgment summary
This appeal concerned a first late payment penalty of £4,848.54 assessed under Schedule 26 to the Finance Act 2021 in respect of the VAT accounting period ending 30 September 2025 (1). The Tribunal determined the appeal on the papers without a hearing, both parties having consented (2).
The issue was whether the Appellant had a reasonable excuse for the late payment, and, if so, whether the failure was remedied without unreasonable delay (3). The underlying facts were not in dispute (5).
The Tribunal found that the Appellant had established a reasonable excuse within paragraph 12 of Schedule 26 and that the failure had been remedied without unreasonable delay once the excuse ceased. The appeal was allowed and the penalty cancelled (94, 95).
Background
The Appellant is a company registered for VAT (6). The relevant VAT accounting period ran from 1 July 2025 to 30 September 2025, with net VAT payable of £161,618.14 and a due date for payment of 7 November 2025 (7, 8, 9).
On 6 November 2025 at 09.30 the Appellant submitted its VAT return electronically and, on the same date, set up a Direct Debit instruction with HMRC (10, 11). On doing so, it received an on-screen automated confirmation message stating: "Direct Debit instruction received ... What happens next We will collect your payments automatically by Direct Debit" (12). Around the same time, the Appellant transferred substantial funds, including £50,000 and £100,000, into its current account to pay the VAT liability (13).
No payment was collected by HMRC by the due date, and none was made within 15 days of the due date (14, 16). Between 25 and 27 November 2025 the Appellant made four faster payments totalling £161,618.14, discharging the liability in full (17).
HMRC created the penalty on 29 November 2025 and issued a first late payment penalty on 2 December 2025, calculated at 3 per cent of the amount outstanding at day 15 (18). The Appellant requested a review on 1 December 2025, and on 13 January 2026 HMRC issued a review conclusion upholding the penalty, stating that the Direct Debit was ineffective because it had been set up on the same day as submission of the return, contrary to guidance requiring at least three working days' notice (19, 20). The Appellant appealed to the Tribunal on 6 February 2026 (21). Service of the penalty correspondence was not disputed (22).
Core dispute
The issue for determination was whether the Appellant had a reasonable excuse for the late payment of VAT under paragraph 12 of Schedule 26 to the Finance Act 2021, and, if so, whether the failure was remedied without unreasonable delay once that excuse ceased (3, 4, 55).
The Appellant contended that it reasonably relied on HMRC's automated confirmation message, which stated unconditionally that HMRC would collect payment automatically by Direct Debit, and that it had taken positive steps, including transferring funds, to ensure compliance (26 to 37).
HMRC contended that the Direct Debit was ineffective because it had been set up on the same day as submission of the return, contrary to published guidance requiring at least three working days' notice, and that the confirmation message was a general acknowledgement rather than a specific representation regarding the relevant liability (41 to 52). HMRC also argued that, in the alternative, there were no special circumstances justifying a reduction of the penalty under paragraph 13 of Schedule 26 (53).
Court findings
The Tribunal accepted that the statutory preconditions for liability to a first late payment penalty under paragraph 5 of Schedule 26 were satisfied, as the VAT was not paid by the due date and remained unpaid at the end of day 15 (54).
The Tribunal applied the test from The Clean Car Co Ltd v Commissioners of Customs and Excise [1991] VATTR 234 and Perrin v HMRC [2018] UKUT 156 (TCC), noting that a reasonable excuse may arise where a taxpayer acts on a reasonable but mistaken understanding induced by HMRC's own conduct or communication, provided reliance on it is reasonable (57 to 60).
The Tribunal did not accept HMRC's characterisation of the confirmation message as a neutral acknowledgement, finding instead that it was a clear and unqualified representation as to how payment would be taken, containing no reference to any minimum notice requirement (68 to 71). It held that a reasonable and prudent taxpayer was entitled to rely on that specific, unqualified communication rather than infer an undisclosed condition from generic published guidance (72 to 76).
The Tribunal noted that the Appellant's conduct, viewed in the round, including transferring substantial funds and re-establishing the Direct Debit following a Time to Pay arrangement, was directed towards compliance rather than avoidance (77, 78). The Tribunal accepted evidence regarding the personal circumstances of the Appellant's director, who is autistic and relies on clear written communication, but found that its conclusion did not depend on this factor, as the conduct was reasonable even on a wholly objective standard (82).
On the question of remedying the failure, the Tribunal found that the 15-day period determines when a penalty arises but does not determine whether a reasonable excuse exists, and that HMRC had not identified any earlier point at which the Appellant ought reasonably to have become aware of the failure to collect payment (86 to 89). Once aware, the Appellant paid the liability in full within a short period, completing payment by 27 November 2025, and there was no unreasonable delay (89, 90).
Having found a reasonable excuse, the Tribunal did not need to determine the question of special circumstances under paragraph 13, but indicated that, in any event, it would not have found HMRC's decision not to reduce the penalty flawed in the public law sense (93).
Outcome
The Tribunal found that the Appellant had established a reasonable excuse for the late payment within paragraph 12 of Schedule 26 to the Finance Act 2021 (94).
The appeal was allowed and the penalty of £4,848.54 was cancelled (95).
Major issues / areas of contention
- Whether the Appellant had a reasonable excuse for late payment of VAT under paragraph 12 of Schedule 26 to the Finance Act 2021.
- Whether the Direct Debit instruction, set up on the same day as submission of the VAT return, was ineffective for the relevant accounting period.
- Whether HMRC's automated confirmation message constituted a specific representation that payment would be collected, and whether reliance on it was reasonable.
- Whether the general published guidance requiring three working days' notice for Direct Debit set-up displaced the effect of the specific confirmation message.
- Whether the failure was remedied without unreasonable delay once the reasonable excuse ceased, in light of paragraph 12(3) of Schedule 26.
- Whether there were special circumstances under paragraph 13 of Schedule 26 justifying a reduction of the penalty.