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Case Studies

Appeal against VAT default surcharge

We represented Electrical Installation Solutions Limited in its successful appeal against a VAT default surcharge.

The Company had failed to pay VAT to HM Revenue & Customs ("HMRC") on time because of insufficiency of funds. The insufficiency of funds was itself caused by a downturn in orders and by cash flow problems caused by customers extending their period of payment of the Company's invoices. The Company had acted in a proactive manner to keep its business afloat, maintain its cash flow and settle its liabilities as best it could. It had exercised reasonable foresight and due diligence and had had proper regard for the fact that the tax would become due on a particular date. It had not, however, managed to avoid the insufficiency of funds.

Insufficiency of funds is not in itself an acceptable excuse for failing to pay VAT on time. The Tribunal noted that the test to be applied was laid down by the Court of Appeal in Customs and Excise Commissioners v Steptoe. There Lord Donaldson said:

 "... [I]f the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, then the taxpayer may well have a reasonable excuse for non-payment, but that excuse will be exhausted by the date on which such foresight, diligence and regard would have overcome the insufficiency of funds."

The Tribunal made critical comments about HMRC's view of the law, which was set out in paragraph 10534 of the VAT Civil Penalties Manual. HMRC had relied on the dissenting judgment of Lord Justice Scott in the Steptoe case as authority that a reasonable excuse required a series of unforeseeable circumstances which directly led to the shortage of funds. Lord Justice Scott's reasoning could not be regarded as a precedent, or indeed as correct. The Tribunal considered the paragraph of HMRC's VAT Civil Penalties Manual in this respect to be incorrect and misleading.


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