Default Surcharges - Inability to pay is not always a reason for HMRC to impose the penalty.

Where a business submits more than one late VAT return (or pays one VAT return late) it will incur a financial penalty on a sliding scale rising from 2% of the VAT for the second late return to 15% for the fourth late return and any subsequent ones in the following four quarters. Unfortunately as many businesses find HMRC are unsympathetic to arguments that lack of ability to pay should be taken into account, and in fact the VAT law states that inability to pay is not an excuse.

Tax payers may therefore be heartened by the fact that a VAT tribunal chairman has agreed that in the case of one business, Scrimsign Micro-Electronics Ltd, the dire impact of the recession on it was a "reasonable excuse" for failing to pay a VAT bill on time.

The business had incurred three default surcharges between July and December2012 and contacted HMRC to explain that the economic climate meant it was experiencing "severe financial difficulties" .

As might sadly be expected HMRC refused to accept this as a reasonable excuse as the business was unable to show that its financial problems were caused by factors "outside its influence or control" and not just the "normal hazards of trade". This was despite the fact that during 2010 the company's turnover had been reduced by 50%.


The tribunal chairman was however sympathetic to the plight of the business especially given that it had evidence of working a reduced week to keep trading and employing its staff, the director had forgone his company car and the VAT was always paid in full and in some cases only a few days late. He therefore allowed the appeal resulting in £3,000 default surcharges being waved.

Whilst we would always advise that clients pay their VAT on or before the due date to HMRC to avoid simply throwing money away in default surcharges, it is often worth looking critically at the reason why a default has been incurred. In some circumstances businesses miss the opportunity to recover these charges where there is clear evidence that the default was unavoidable for reasons HMRC may be unaware of. If your client has incurred default surcharges it would be worth giving our helpline a call to see if there is any scope for these to be withdrawn.

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