Navigating HMRC Penalties: The Wragg Case and the Crucial Role of Time to Pay Arrangements

The recent case of Wragg v Commissioners for His Majesty’s Revenue and Customs [2024] UKFTT 1012 (TC) underscores a vital lesson for taxpayers facing liquidity issues: proactive engagement with HMRC through a Time to Pay (TTP) arrangement can be instrumental in avoiding penalties.

The decision, delivered by Tribunal Judge Malcolm Frost, highlights the significance of TTP arrangements under Paragraph 10 of Schedule 56 of the Finance Act 2009. When such an arrangement is agreed upon and adhered to, penalties for late payment are generally not imposed. Yet, as this case illustrates, failing to take this route can prove costly.

A Dry Tax Charge and a Missed Opportunity

Mr. Wragg’s predicament arose from a capital gains tax (CGT) liability of £54,528.27, predominantly linked to the sale of shares in Tiles Porcelain Limited. While the transaction occurred during the 2021-2022 tax year, the payment of the proceeds was contingent upon the company’s sale of a commercial property. This delay created a “dry tax charge,” where tax was due before funds were available to cover it.

Dry tax charges are a known feature of tax systems globally, but well-advised taxpayers typically structure transactions to avoid such situations. For Mr. Wragg, no such foresight was evident. Despite informing HMRC of his cash flow constraints, neither he nor his tax advisors took the crucial step of applying for a TTP arrangement.

The Tribunal’s Take on Reasonable Excuse

Central to the case was whether Mr. Wragg had a reasonable excuse for his late payment. Paragraph 16(1) of Schedule 56 of the Finance Act 2009 provides relief from penalties if a reasonable excuse exists, and the failure is rectified without undue delay. However, Paragraph 16(2)(a) clarifies that insufficient funds alone do not constitute a reasonable excuse unless the shortfall arises from events beyond the taxpayer’s control.

In this instance, the tribunal determined that the terms of the share sale, including the deferred payment, were within Mr. Wragg’s control. Moreover, the tribunal found no evidence that Mr. Wragg sought alternative financing to cover the tax liability or attempted to negotiate a payment plan with HMRC. Merely notifying HMRC of his inability to pay was insufficient, as the tribunal noted, “HMRC does not have to hang around until a taxpayer has the means to pay over the tax.”

Time to Pay: A Path Not Taken

A particularly striking aspect of this case was HMRC’s repeated suggestion to Mr. Wragg and his advisors to consider a TTP arrangement. Despite these prompts, no application was made. As the tribunal highlighted, a successful TTP application would have likely averted the £2,656 penalty issued under Paragraph 3(2) of Schedule 56.

TTP arrangements offer flexibility, allowing taxpayers to spread payments over time based on their financial circumstances. These agreements are not guaranteed, but they provide a lifeline for those facing short-term cash flow issues. The tribunal emphasized that even an unsuccessful TTP application could have bolstered Mr. Wragg’s case for reasonable excuse.

Lessons from Wragg

The Wragg decision serves as a stark reminder of the importance of addressing tax liabilities proactively. Taxpayers facing liquidity challenges should seek professional advice early, ensuring that their financial affairs are structured to avoid unnecessary penalties. When payment difficulties arise, engaging with HMRC to explore options, including TTP arrangements, is critical.

For advisors, the case underscores the need for diligence in assisting clients with tax planning and compliance. Overlooking potential solutions, such as TTP applications, can have significant repercussions, as seen here.

Conclusion

While Mr. Wragg’s case is a cautionary tale, it also highlights the mechanisms available to taxpayers to manage financial difficulties. By taking timely action and leveraging tools like TTP arrangements, taxpayers can avoid the pitfalls of penalties and maintain compliance with HMRC requirements. The lesson is clear: when in doubt, engage early and comprehensively with HMRC to navigate the complexities of tax obligations.