Insufficiency of Funds - Deals Mean Loss of Control

Failing to pay taxes due because of insufficiency of funds with which to do so has repeatedly been challenged by HM Revenue and Customs (HMRC) when a defaulting taxpayer has sought to claim it is a 'reasonable excuse' for non-payment.

Where such an excuse has been made, the test applied has long been whether a 'reasonably competent businessman' would have anticipated the circumstance which led to the insufficiency of funds. If so, the excuse fails. However, the legislation says nothing about that: it says that insufficiency of funds can only be relied on if the circumstances are 'outside the taxpayer's control'.

A recent court case involving the sale of company shares has led to a rethink about what may or may not be a reasonable excuse by focusing more strongly on what it means for something to be outside the taxpayer's control.

It involved an individual's sale of a majority holding of a company's shares. The sale agreement required the sale consideration to be held in an escrow account to ensure potential liabilities were met. Unfortunately, the value of the shares fell sharply, making it impossible for him to properly fund the escrow account or to pay his Capital Gains Tax liability on the due date.

The First-tier Tribunal considered that the escrow account issue was outside the man's control, since it had arisen not by his own choice but as a result of negotiations, and that his subsequent failure to negotiate a 'time to pay' agreement with HMRC was also outside his control because he could not reasonably know when he might be able to make payment.

Ultimately, the structure of the deal was the root cause of the man's problems. There are many ways to negotiate sale agreements and we can help you control the risk of any contractual arrangement you enter into. Also, if you are in a difficult position with HMRC, we can help you negotiate a reasonable outcome – hopefully without having to make recourse to the courts.
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Ray Goodman
Managing Director
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The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.