What Is A Reasonable Excuse For Late Payment Of VAT?
The case of Bicester Property Interiors Limited v Revenue & Customs [2023] UKFTT 13 highlighted what could be a reasonable excuse for late payment of VAT and therefore how to appeal a VAT default surcharge.
The taxpayer was late paying its VAT tax debts and defaulted. HMRC responded with a surcharge liability notice pursuant to Section 59 of the Value Added Tax Act 1994.
The taxpayer’s accountants asked HMRC for a review of some of the notices which did not change the position. This resulted in an appeal to the Tax Tribunal by the taxpayer.
Reasonable Excuse Defence For VAT
Under Section 59(7) of the Value Added Tax Act 1994 if a person has a reasonable excuse then it is possible that HMRC’s receipt of a VAT return late or late payment of VAT will result in the default surcharge being waived. The question is of course what is reasonable excuse?
What Is Not A Reasonable Excuse To Waive A VAT Default Surcharge?
Section 71 of the Value Added Tax Act 1994 says that neither a lack of funds to pay VAT nor reliance on another person are reasonable excuses for a failure to pay VAT, including a VAT default surcharge.
How Reasonable Excuse For Late Payment of VAT Is Determined
Reasonable excuse for late payment of VAT is determined the approach adopted in the case of Perrin v The Commissioners for HM Revenue and Customs (Tax) [2018] UKUT 156 as follows:
- Need to establish the facts asserted to be the reasonable excuse.
- Consider which facts are proven.
- Decide if the facts proven constitute an objectively reasonable excuse.
- Determine if a taxpayer’s failure was then corrected without unreasonable delay once the reasonable excuse ceased to be relevant.
Tax Tribunal’s Evaluation
Here the Tax Tribunal considered the reasonable excuse position as follows:
(1) a taxpayer who has collected funds representing VAT on behalf of HMRC in advance of the date for payment to HMRC will only rarely be able to establish that he has a reasonable excuse for using those funds for a purpose other than making payment to HMRC
(2) an event outside the normal course of the taxpayer’s business (but potentially falling short of an unforeseeable or inescapable event) may give rise to such a reasonable excuse
(3) such an event can only be considered to provide a reasonable excuse for so long as the exercise of reasonable foresight and due diligence and a proper regard for the fact that the tax would become due would not have avoided the insufficiency of funds
(4) where a taxpayer does not routinely collect funds representing VAT from customers prior to the date for payment to HMRC, the fact that the taxpayer has not adopted the cash accounting scheme is a factor to be given some weight in determining whether the taxpayer has exercised such reasonable foresight, due diligence and proper regard.
Interestingly in this case the taxpayer was only late in its payment of VAT by a maximum of 17 days and Covid-19 was a significant unforeseen disruption to the business.
The Tax Tribunal was persuaded that the Covid-19 was a significant unforeseen event and that it had disrupted the taxpayer and granted the appeal. However, this was not done without the following cautionary note:
97. We give some weight to HMRC’s submission that BPIL made positive choices to pay staff and suppliers in preference to HMRC. It is a distinctly unattractive argument for a taxpayer to assert that it is better for it to pay staff and customers first as this will keep the business going longer and provide an overall better result for the exchequer. The statutory regime does not permit a taxpayer to take matters into its own hands and speculate with funds otherwise due to the exchequer. Indeed, it may fairly be said that one of the underlying reasons for the surcharge regime is to provide a disincentive to choose to pay HMRC last.
98. In the normal course of events, if a business chooses not to pay its VAT liabilities then it must accept the consequences of that choice and pay the surcharge that results. However, that principle must be tempered by the circumstances in which that choice is made. The evidence in this case indicates that the cash flow pressures were considerable, and brought about by factors outside BPIL’s control. In the case of two of the defaults there were insufficient funds in the company bank account to pay the VAT liability in full and in the case of the third default the company bank balance only exceeded the VAT due by around £2,000.
But it also conspicuously noted that the test is not the most reasonable excuse but a reasonable excuse:
103. The test to be applied is whether or not BPIL has a reasonable excuse for the default. We do not consider that an otherwise reasonable course of action necessarily becomes unreasonable as a result of another, arguably more reasonable, course of action being available. The question is a matter of fact and degree to be judged in all the circumstances of the case. The test is not that no other option was available, or that the course of action was the best course in the circumstances.
…
107. Following on from our findings, we accept that VAT payments were made as soon as cashflow allowed. As such the failures were remedied without unreasonable delay.
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