Reasonable Excuse for late payment of VAT
In the recent FTT case, McNamara Joinery Ltd (TC05278), the taxpayer was successful in their appeal against HMRC’s imposition of a default surcharge.
If a taxpayer is able to convince either HMRC or a Tribunal that they have a reasonable excuse for the late payment, they won’t be treated as in default.
Default Surcharge Regime
A taxpayer is in default if they are late in paying or submitting their VAT returns by the due date. A Surcharge Liability Notice is issued, advising that further defaults within the default period (one year from the end of the return in default) will result in an extension to the default period and a fine of 2% will be levied on any outstanding tax. Further defaults within that period escalate fines to 5%, 10% and 15% including an extension to the default period to another year from the end of the latest period in default.
If the return is submitted late but payment is made on time, no fine will be levied (as there is no outstanding tax) but the period will still be in default and the default period extended to another year from the end of the latest period in default.
It is HMRC policy not to collect fines less than £400 at either the 2% or 5% rate, although the defaults are recorded and a surcharge liability extension issued.
To illustrate this point, if a taxpayer submits their return on time, but they are within the default surcharge regime and liable to a 2% penalty and instead of paying the full amount of tax owed; say £25,000, and the taxpayer can only make a part-payment of £5,000. If they were to increase their payment by £1 to £5,001 a default surcharge would be avoided for the period if the part payment is made on time. Because the surcharge based on unpaid tax would be £399.98 which is less than the £400 de minims. Please note that the de minimis only applies for the 2% and 5% rates.
McNamara Joinery Ltd (TC05278)
The taxpayer’s appeal centered on the agent’s thwarted attempts to telephone HMRC to request an extension to pay the VAT for the return ending 31 December 2015 due to cash flow problems. Attempted calls were made on 5 February but the line kept disconnecting. The same occurred after the weekend with the agent finally getting through to HMRC on 12 February and arranging a two week extension.
HMRC acknowledged that the agent had tried to contact them but that they should have expected and preempted difficulties in making contact just a few days prior to the due date for return submissions.
HMRC contended that agreeing a time to pay request does not offset the issue of a surcharge if, as in the present case, the agreement had been made after the due date of the period in question.
The Tribunal considered whether there was a reasonable excuse; ‘an unexpected event, something unforeseeable, something out of the appellant’s control.’ An insufficiency of funds is not a reasonable excuse, but the reason for the insufficiency may provide one. The Tribunal did not consider that debtors failing to pay them provided a reasonable excuse for their late payment of VAT. But they did consider that the agent had done all he could in the circumstances to contact HMRC to arrange time to pay, starting on 5 February and finally making contact on 12 February, when a time to pay arrangement was made and adhered to.
The Tribunal viewed the taxpayer’s experience of trying to make contact and, the repeated failure they had in contacting HMRC as ‘unexpected and unforeseeable’.
The Tribunal did not agree with HMRC that the taxpayer should have anticipated the difficulty experienced in contacting HMRC due to the level of calls experienced prior to the due date for returns. Rather than expecting delays it was reasonable for taxpayer telephone calls to be answered without delay. Indeed HMRC should have been in a better position than the taxpayer to preempt a large volume of calls and therefore make arrangements to deal with them.
Although the Tribunal accepted that a time to pay arrangement should have been made by the due date, the unexpected problems encountered in contacting HMRC established for them a reasonable excuse for late payment.
Conclusions
It is advisable to keep a note of any attempts made to contact HMRC even if thwarted; in the current case the taxpayer was able to establish a reasonable excuse for late payment.
The amount of time that the taxpayer spent in trying to contact HMRC certainly flies in the face of their recently updated Charter under ‘your rights and what you can expect from HMRC’ specifically at ‘1.2. Provide a helpful, efficient and effective service; we’ll help you understand what you have to do and when you have to do it. We’ll deal with the information you give us quickly, efficiently, and keep any costs to you at a minimum. We’ll put any mistakes right as soon as we can.’
In this instance the Tribunal put right the woeful response of HMRC that would have left the taxpayer with a penalty if they hadn’t have appealed.
There are plenty of occasions when taxpayers have accepted that a penalty is due. Chartergates have a record of success in the Tribunal, establishing a reasonable excuse where one exists for the late payment and submission of VAT returns. If you think we could be of assistance to you in these matters, please get in touch.
See also VAT surcharge appeal