Default Surcharges and Reasonable Excuse

Ripon Farm Services appealed against a default surcharge of approximately £15,000 which occurred as a result of the late payment of VAT due for the period 10/14. The Appellant had defaulted on VAT payments twice in the previous 12 month period, the first of which prompted a Surcharge Period with the second default incurring a surcharge equal to 2% of the unpaid VAT however this was withdrawn when a time to pay arrangement was put in place. Due to this, the default that occurred for the period ending 10/14 meant that 2% of the unpaid VAT was due to HMRC as a penalty.

The balance due for the VAT period ending 10/14 was paid to HMRC in 22 part payments, the last of which was received by HMRC 10 weeks after the payment was initially due. However, the Appellant sought the removal of this surcharge on the grounds that the business had a “reasonable excuse” for the late payment of the return.  It made this argument given that the business had suffered an insufficiency of funds due to the highly seasonal nature of the supplies.

The business previously had a verbal agreement with HMRC in respect of previous VAT periods that VAT due would be paid in instalments of £30,000 per day in advance of the due date. The Appellant had applied this agreement to the period ending 10/14 however HMRC informed them on the effective due date of the VAT that there was no formal agreement in place for such a payment schedule

In instances such as this, a taxable person who is liable to a default surcharge can escape liability if they have a “reasonable excuse” for late payment. Ripon Farm Services based their arguments on their understanding that a time to pay arrangement was in place and that the business had insufficient funds due to the seasonal trading.

The First-Tier tribunal concluded that as a tentative agreement had been agreed, there is little that the business could have done once informed that its proposals had actually been rejected, particularly when the late nature of HMRC’s rejection of the time to pay agreement is considered. The Appellant therefore had a“reasonable excuse” and the default surcharge was rescinded.

If you or your business are liable to a default surcharge or require the arrangement of a time to pay agreement, discuss your options with one of our experienced VAT consultants today.

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