Lee Sharpe worries that tribunals seem to have become increasingly indifferent to taxpayers who are struggling to pay HMRC while waiting for repayments, etc. – often from HMRC itself.
Fewer things in life are more annoying than someone, who actually owes you more money, demanding payment. But this is quite common with HMRC, across the various heads of tax: waiting for a refund to set against a liability elsewhere. To add insult to injury, HMRC will typically issue a penalty for late payment without regard to those repayments subject to its tender mercies.
Is it ‘reasonable’?
It is a common and enduring principle that a taxpayer who wants to challenge a penalty for late payment (amongst other things) may have a ‘reasonable excuse’ for failing to pay on time. However, it is also a common feature that the law does not permit a mere ‘insufficiency of funds’ to amount to a reasonable excuse.
That is not the end of the story, because the courts have a long history of looking beyond that prohibition to ascertain the root cause of that lack of funds – that might yet amount to a reasonable excuse. To put it another way, while it is not enough to say: “I didn’t have the money”, it may yet suffice to explain: “I didn’t have the money because of this unavoidable reason”.
This article considers a few tax cases to see how this argument has developed over the years.
Tax Cases
Customs & Excise Commissioners v Steptoe [1992] BVC 142 – This is a well-known case, which reached the Court of Appeal – a senior court, and with precedential value. The taxpayer was an electrical contractor, most of whose work was for a particular London council. He got into arrears with his VAT returns (and payments) because the council regularly delayed payment by up to two months.
The Court of Appeal confirmed that the taxpayer did have a reasonable excuse for defaulting on his VAT obligations; while the immediate reason was an insufficiency of funds, the underlying excuse was that the taxpayer’s main customer (not HMRC, in this case) consistently paid late.
One reason why this case has been so influential is that, since then, HMRC has relied on a minority dissenting opinion as its key enduring argument that “…a reasonable excuse is normally an unexpected or unusual event that could not be reasonably foreseen or is beyond the person’s control”, as per HMRC’s guidance in its Compliance Handbook at CH61540, up to January 2018. The new guidance at CH160300 and CH160800 still mentions unexpected events and “reasonable foresight”.
Paul Raymond Marsh v HMRC LON [2006] 1099 V20091 – Another building contractor was unable to pay their VAT by the due dates, but this time because HMRC itself had taken several weeks to repay a much larger amount of construction industry scheme (CIS) retentions owed back to the trader. HMRC argued that Mr Marsh had previous experience of the considerable time that it took HMRC to make payments, and he should therefore have appreciated that he should not have relied on his CIS repayments to fund his VAT liabilities in time. The tribunal, however, was scathing:
“When HMRC has relatively draconian powers to see that tax payments are paid on time, with there being very serious penalties if payments are even one day late, we consider that it is unacceptable for HMRC to announce that taxpayers should expect very significant delays when they hope to obtain repayments.
For a hard-pressed trader to be told that HMRC is habitually slow in making payments…even when it is the taxpayer’s money, and when the taxpayer will have a surcharge bill of over £1,000 if his VAT payment is late is just unacceptable… For the appellant to be penalised in these circumstances would be remarkable and unacceptable.”
Electrical Installation Solutions Ltd v HMRC [2013] UKFTT 419 (TC) – Another case concerning an electrical contractor; but this time, the argument was that they were unable to keep up with their VAT payments following the recession of the late ‘noughties. Notably, they had asked HMRC for time to pay but this had eventually been withdrawn. The tribunal found for the taxpayer, noting that HMRC’s argument that the taxpayer could not claim a reasonable excuse where the lack of funds was foreseeable (based on the dissenting opinion in Steptoe, as noted above) was wrong; the correct test was whether the late payments were ‘reasonably avoidable’; HMRC guidance was incorrect and misleading on this point.
In fact, HMRC’s old published criteria to meet ‘reasonable excuse’ had been criticised quite frequently. In Perrin v Revenue and Customs [2014] UKFTT 488 (TC), for example, the tribunal judge roundly castigated HMRC, even suggesting that “In an appropriate case where HMRC base their argument on this unsustainable position, the FTT may well consider it appropriate to exercise their jurisdiction to award costs against HMRC for unreasonable conduct of the appeal”. The reader might guess why HMRC’s guidance was updated following this case, although, as above, I wonder if HMRC’s underlying attitude has really changed. Of the cases discussed so far, Perrin is the only one the taxpayer lost – and even then, more because they were slow to remedy their delay after the excuse.
NSF Utilities Ltd v HMRC [2018] UKFTT 9 (TC) - The taxpayer again blamed HMRC delays in repaying CIS retentions for being unable to meet their VAT obligations on time. The taxpayer lost this case. The tribunal again criticised HMRC for its “...standard formulation that to constitute a reasonable excuse the cause of the insufficiency of funds must be due to ‘an unexpected or unusual event that is either unforeseeable or beyond the taxpayer’s control’”, preferring the majority opinion in Steptoe that something may be foreseeable but, tested objectively, may not be reasonably avoidable. The tribunal also commented:
“No doubt, a taxpayer who believes that it is due a repayment of tax from [HMRC] on one account, may think it galling that they can insist on payment of tax on another account by a particular date, and impose a penalty for the taxpayer’s failure to do so when they face no equivalent sanction for an apparent delay in making repayment.”
Unfortunately for the taxpayer, the tribunal noted that the evidence before it suggested that:
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the company had sufficient bank funds to meet the VAT payment without the CIS refund (but had scant information to determine if the company otherwise needed those positive funds);
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the company had not requested that the CIS repayment be set off against the VAT liability (although there was some concern that a formal set-off would cause further delay); and
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the company had not taken further steps to deal with possible further delays in CIS repayment.
In the quite recent case ABG Fibre Services Ltd v HMRC [2024] UKFTT 907 (TC), along very similar lines, the tribunal referred to Perrin, which is reassuring, then quoted from NSF Utilities with approval; also, in dismissing the taxpayer’s appeal:
“…a prudent taxpayer… should not have relied on a repayment claim that was subject to verification. The taxpayer could not reasonably rely on getting the full amount claimed or when that would be paid” (in turn from Quality Asbestos Services Ltd v HMRC [2015] UKFTT 595 (TC)).
Conclusion
There are numerous tax cases involving appeals against penalties under ‘reasonable excuse’ because of cashflow, and the above selection may be considered somewhat eclectic. And I think that the taxpayer in ABG Fibre Services was always going to struggle, given that the company ‘knew’ the CIS repayment would not be made until after the VAT liabilities were due.
Even so, it seems to me that the courts have become less sympathetic to the taxpayer and may, over time, have been beguiled by HMRC endlessly arguing that the taxpayer should, really, have actively “exercised reasonable foresight” to prevent late payment. What really matters is whether the problem was reasonably avoidable. Readers involved with the construction industry in particular, will be painfully aware of the strictures of CIS retentions; it is almost as if the courts are rewarding HMRC for getting progressively worse at processing and repaying what is, after all, the taxpayer’s money.
I suggest advisers should monitor this issue and carefully and comprehensively counter HMRC’s more specious arguments, as and when made at tribunal or otherwise, particularly when VAT compliance failures are now considered when assessing a subcontractor’s eligibility to achieve (or to retain) gross payment status under CIS (following FA 2024, s 35). This will cause a lot of problems, soon enough – just not for HMRC.
