August 13, 2026
Receiving property rather than cash may create a genuine liquidity problem, but the taxpayer must prove why the resulting late payment was outside their control and what was done to resolve it.
A liquidity problem may be real, but “reasonable excuse” depends on evidence of its cause, the alternatives considered and the speed of the taxpayer’s response.
Mr Kothari received properties valued at approximately £1.727 million as a distribution in specie on the liquidation of a company. The distribution generated a capital gains tax liability of approximately £240,964.
Unlike a cash distribution, the transaction did not provide liquid funds with which to discharge the tax. Mr Kothari’s case was that he needed to borrow against the properties, and that the ownership structure first had to be reorganised before suitable lending could be secured.
The tax was eventually paid after the financing was completed. HMRC nevertheless imposed a late-payment penalty of £12,047, which Mr Kothari appealed on the basis that he had a reasonable excuse.
Schedule 56 to the Finance Act 2009 provides for penalties where tax is paid late. A penalty is not due where the taxpayer satisfies HMRC or the Tribunal that there was a reasonable excuse for the failure.
The legislation addresses lack of funds directly. An insufficiency of funds is not, by itself, a reasonable excuse unless it is attributable to events outside the taxpayer’s control. That prevents the reasonable-excuse defence from becoming an automatic consequence of poor cash management.
The rule does not mean that financial difficulty can never qualify. Unexpected external events, the sudden withdrawal of agreed finance or circumstances genuinely beyond the taxpayer’s control may be relevant. The taxpayer must nevertheless prove both the cause of the shortage and a reasonable response to it.
The Tribunal was not satisfied that the distributed properties were Mr Kothari’s only assets or that no faster source of funds was available. The evidence did not establish that borrowing against other property, including his home, or alternative short-term finance had been fully investigated and was unavailable.
Timing was also important. The first documented approach to the eventual mortgage broker occurred around five and a half months after legal title to the properties had passed. The Tribunal received limited contemporaneous material explaining that delay or demonstrating a continuous and urgent financing process.
Mr Kothari paid promptly once the borrowed funds became available, but that did not answer whether reasonable steps had been taken from the outset. Nor had a Time to Pay arrangement been agreed with HMRC before the penalty arose.
The Tribunal therefore upheld the penalty. The problem was not disbelief that the transaction created a liquidity challenge; it was the absence of sufficient evidence that the challenge arose from matters outside the taxpayer’s control and had been addressed with appropriate speed.
Taxpayers often present a coherent explanation at the hearing but lack documents created at the relevant time. In penalty appeals, the chronology may be as important as the explanation itself.
Useful evidence can include lender applications, broker correspondence, valuation reports, legal advice on ownership changes, evidence of rejected or unsuitable facilities, cash-flow schedules, records of other assets and liabilities, and correspondence with HMRC seeking additional time.
A detailed timeline should show what occurred before the due date, when the problem became apparent, which alternatives were considered, why each failed or was rejected, and what the taxpayer did after the immediate obstacle was removed.
A non-cash distribution, reorganisation, trust appointment or property transfer may create tax without generating funds. That is not an incidental administrative issue; it is part of the transaction’s commercial feasibility.
Before completing, advisers should calculate the likely tax, identify the payment deadline and confirm the source of funds. Where borrowing is required, they should test lender requirements, ownership conditions, valuations, security, personal guarantees and completion timescales in advance.
A plan that assumes property can simply be refinanced after completion may be unrealistic. Lending can be delayed by title issues, leases, company or trust ownership, planning status, valuation disputes, affordability tests and legal due diligence. The tax deadline does not automatically move with the financing timetable.
· Prepare a transaction-specific tax and liquidity schedule before completion.
· Obtain written indications from lenders or brokers rather than relying on an assumed ability to refinance.
· Consider whether part of the transaction can generate or retain cash for the tax.
· Document alternative assets and funding routes, including why they are unavailable or unreasonable.
· Contact HMRC before the payment deadline if a shortfall is foreseeable and seek a Time to Pay arrangement.
· Keep a complete chronology. A later witness statement is stronger when supported by contemporaneous records.
Time to Pay is not guaranteed and does not erase the underlying liability, but early engagement is materially better than silence. A taxpayer who knows payment will be late should not wait until enforcement or penalty correspondence begins.
Advisers should state clearly when their engagement covers the tax analysis but not financing or cash-flow planning. Even where the legal scope is limited, a foreseeable liquidity risk should be highlighted in writing and referred to the client’s finance team or lender.
The transaction file should record the estimated liability, due date, assumptions and the client’s proposed funding route. That protects the client by prompting action and protects the adviser by showing that the non-cash nature of the transaction was not overlooked.
Where delays arise, advisers can help assemble evidence, maintain the chronology and frame correspondence with HMRC. However, evidence created after the event cannot fully substitute for records made while the funding problem was unfolding.
Kothari does not say that a taxpayer must sell a home or obtain finance at any cost to avoid a penalty. It says that a taxpayer relying on lack of funds must prove why the shortfall was outside their control and why their response was reasonable.
The receipt of valuable property explained why cash was not immediately available. It did not establish that no other funds could be raised, that the restructuring and refinancing could not have started earlier or that HMRC had been approached promptly.
The most effective defence to a late-payment penalty is usually created before the payment date: a credible liquidity plan, prompt action and a documented record of what happened when that plan encountered genuine external obstacles.
