When living off-grid could be a ‘reasonable excuse’ against VAT penalties
By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)
11 February 2020
Philip McNeill discusses a recent tax case Eglas Ltd (Eglas Ltd TC07506 [2019] UKFTT 0749 (TC)) about VAT late penalties and what might constitute a reasonable excuse.
In a case that will resonate with anyone used to the more remote areas of the UK, the First-tier Tribunal recently cancelled a VAT penalty that had arisen in relation to late payment of VAT because a member of staff was off sick due to a cycling accident.
Due to the remote location, it was difficult to find suitably qualified replacement staff.
The demands of digital business
The most striking feature of the case is the Tribunal’s acceptance that the difficulty of obtaining qualified staff amounted to a reasonable excuse.
The business relied on an employee who was qualified to use Sage. When the employee was unable to perform their duties after an accident, the employer was unable to recruit a replacement.
How did this situation arise and what are the key features to watch for?
Default surcharge
The business was mandated to file VAT returns electronically. Returns were on time, but payment was late. The VAT liability due by 7 December 2017 was not fully paid until 22 December – 15 days late. As a result, the business entered a default surcharge period.
Payment penalties
As is frequently the case with smaller businesses, further late payments within the default surcharge period did not attract an immediate financial penalty because they were below the £400 de minimis charging level adopted by HMRC.
It was not until the March 2019 payment was a day late that penalties kicked in – with a £572.46 bill based on 10% of the tax due.
After the original 15 day payment delay, subsequent late payments were all only one day late. Ironically, the 15-day delay brought no late payment penalty, but a one-day delay was charged at over £500.
Segregation of duties
In common with many small business owners, Mr Evans focussed on the work, not the book-keeping.
He provided grounds maintenance and associated services, and his time was committed to meeting prospective customers, preparing quotations and tenders, determining work schedules, standing in for absent staff and overall supervision of the business.
With contractual deadlines, equipment to purchase and maintain, training courses to attend … Mr Evans found the work “increasingly exhausting”.
He therefore employed a Sage-qualified accounts manager. The accounts manager entered sales and purchase invoices into Sage, issued sales invoices, chased payment, supervised cashflow, reconciled the bank, prepared VAT returns and ensured payments were made on time.
Mr Evans relied entirely on the accounts manager for business administration.
The accident
In September 2017 the accounts manager had a cycling accident and broke her arm in two places. She was were off work for almost 7 months!
As a result, ‘the accounting process …. [was] … paralysed’. But couldn’t a replacement be found?
No one wants to work here
Mr Evans business is based in Ynys Mon (Anglesey). The area is fairly remote and the economic outlook there has been poor. Even after extensive search, no one could be found who was qualified and willing to undertake the role.
Mr Evans tried to make VAT payments himself, but his ‘knowledge of Sage was so very poor as to be non existent’. In desperation, Mr Evans managed to secure ‘the services for one day only of a Sage operative who took holiday entitlement from permanent employment to help’.
The HMRC view
Not surprisingly, HMRC didn’t think much of this. Mr Evans must have been aware of the VAT default surcharge period. HMRC has no discretion – it was only charging what the law ordains.
It was Mr Evan’s choice to rely on the accounts manager alone. And it was a choice with inherent risk. While the accident was unforeseen, it happened almost ten weeks before the VAT payment was due.
The taxpayer had failed to exercise ‘reasonable foresight and due diligence’ not ‘having proper regard for [his] … responsibilities under the tax acts’. What is more, reliance on a third party, like an employee, is not a reasonable excuse. The business owner may have made a genuine mistake in paying a day late, but the law does not provide shelter for mistakes, only for ‘reasonable excuse’ (per Garnmoss Ltd t/a Parham Builders [2012] UKFTT 315 (TC)).
Finding the facts
The Tribunal had little difficulty in finding that HMRC had issued the surcharges correctly and that they were properly calculated, but then went on to find that there was a reasonable excuse. How?
Following Perrin
The Tribunal followed the approach set out by the Upper Tribunal in Perrin (Upper Tribunal decision in Perrin v HMRC [ 2018[ UKFTT 156 (TCC)):
- Establish what facts the taxpayer asserts give rise to a reasonable excuse
- Decide which of those facts are proven
- Decide whether, viewed objectively, those proven facts do indeed amount to a reasonable excuse
- Decide when the reasonable excuse ceased.
Applying these to the case in hand, the appeal was based on an unforeseen accident by a key member of staff whom it had proved impossible to replace. All the facts were proven. Was the excuse reasonable? In the Tribunal’s opinion it was. The business owner had diligently tried to find replacement staff, but owing to the specialist nature of the role, and the remote location, this had proved unsuccessful. Initially only temporary staff had been sought as the original employee was expected to return to work. Only when it later become clear that the employee would not return, was a permanent replacement sought.
The Tribunal concluded that the reasonable excuse had continued until April 2018. As a result, penalties for previous periods were cancelled and later ones reduced by attracting a lower percentage. As the lower percentage rate meant that all penalties were now below the £400 de minimis level, the business had nothing to pay.
Conclusion
While not a sinecure, the verdict does help redefine the boundaries of what is reasonable. With increasing digitalisation, many business owners are dependent on others to perform specialised niche roles, which they themselves may not be qualified to do.
It is refreshing to see the Tribunal go below the surface to establish what is reasonable for a specific business owner in their own specific circumstances.