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Recession a ‘Reasonable Excuse’ for Late Payment of Tax

Electrical wasteIn an unprecedented case of significance to any hard-pressed business, a tribunal has ruled that the recession was an event that went beyond the normal hazards of trade and amounted to a ‘reasonable excuse’ for a company’s late payment of VAT.

The small family electronics company had been hit with over £3,000 in late payment penalties after three VAT payments were delayed. At the relevant time, the company had suffered a 50% reduction in its turnover; its clients were taking substantially longer to pay their bills and bank credit was extremely hard to come by.

The payments had been made a few days after the due dates and the company’s managing director testified that, had they been made on time, the company would have run out of cash and gone out of business, with the loss of a number of jobs.

HM Revenue and Customs contended that a prudent taxpayer would have sought to agree suitable time-to-pay arrangements. However, in overturning the penalties, the First-Tier Tribunal (FTT) acknowledged that the company had been ‘badly hit’ by the recession, had been loss making at the relevant time and was operating day-to-day with its cash-flow on a knife’s edge.

Ruling that the company had a reasonable excuse for the late payments, the FTT concluded: “The effects of the recession have travelled far afield and have affected many businesses in many different ways at different times. In the present appeal, these effects seem to me to be somewhat different from the normal hazards of trade. The company was placed in difficult financial circumstances which arose because of a combination of factors flowing from the general effects of the recession”.