VAT Late Payment - Reasonable Excuse

The late payment of VAT is subject to a statutory regime of interest and penalties called default surcharges. Default surcharges are fixed by statute and the VAT Tribunal has power neither to mitigate nor reduce them. The only thing that affects the imposition of a default surcharge is whether the appellant against a default surcharge has a ‘reasonable excuse’ for not paying the VAT on time.

The VAT Guide ‘Penalties and Interest’ (HMRC: Notice CCL1/5 [June 2004]) states, ‘for the purposes of any liability to a penalty, an insufficiency of funds to pay any amount due, or reliance on another person to perform any task, is not a reasonable excuse’.

Over the years there have been many cases on what is and what is not a reasonable excuse, but insufficiency of funds in the absence of some sort of disaster or unforeseen problem has not been a fruitful ground for those appealing against VAT surcharges. However, taxpayers have been successful in cases in which the real cause of the default has been the wrongful or dishonest action of an employee. A recent case confirms this. It involved a company whose finance director had carried out a number of fraudulent transactions, depriving the company of the cash necessary to make the VAT payment on the due date. The Tribunal agreed that the cash-flow shortfall was an unforeseen and inescapable misfortune and quashed the default surcharge.

It is perhaps surprising that HM Revenue and Customs (HMRC) chose to impose a default surcharge in this case, since the facts are similar to an established precedent in which the taxpayer was successful. HMRC are well-known for their stringent approach to collection and penalties.