Neil Warren considers the judgments in favour of the taxpayers in three hearings (two were linked) about reasonable excuse and default surcharges.
Illness was a factor
Both of the cases related to situations where the key person in the small business suffered illness and HMRC failed to show sympathy about the problem. Does this mean that HMRC’s thinking needs to be revised?
This concerned two associated companies: Hardy Access Services Ltd and Michael F Hardy Ltd (TC06075), whose directors were father Michael Hardy and son Paul Hardy. They both submitted and paid late VAT returns for the period ended 30 November 2016, which incurred respective 10% surcharges of £1,580 and £7,425.
The tribunal heard that Paul Hardy was the managing director of both companies, but he had suffered serious illness problems in mid-2015, which was eventually diagnosed as a brain tumour. His illness meant he could not properly focus on work issues, so the tribunal decided there was a reasonable excuse for late returns and payments for the earlier periods of November 2015 and February 2016. At this point, the company’s management was restructured when it was clear the director was very ill.
The surcharges for the periods to November 2015 and February 2016 were withdrawn for each company, meaning that the 10% surcharges in November 2016 were reduced to a 2% penalty. The amounts due therefore became £316 and £1,581 respectively. The tribunal reported: “We accept that had the companies’ management known of Mr Hardy’s illness they would have put measures in place to ensure payment of VAT was made on time.”
In the case of Sky Thorne Ltd (TC06073) the company accountant, Mr Raza, was hospitalised on 5 December 2016. Although he was able to complete the October 2016 VAT return from his hospital bed on 7 December 2016 (ie meeting the filing deadline) he could not make the payment until the following day because there was no facility for making a faster payment. A 10% default surcharge of £1,636 was incurred because it was one day late.
HMRC was not sympathetic because the accountant had been aware of his hospital appointment on 21 November, giving time for alternative arrangements to be made to ensure the VAT was paid on time. The situation was complicated by the fact that the accountant’s assistant was absent on a week’s examination leave.
The tribunal supported the taxpayer and withdrew the surcharge. The judge commented: “Mr Raza clearly tried his best, but for reasons which are not entirely clear, was unable to arrange an online transfer of funds on 7 December 2016. We have to conclude that Mr Raza experienced a difficulty which he was not expecting. That is an unforeseeable event beyond his control, otherwise he would have made the VAT payment when filing the return.”
Before I read the full judgment given in the Sky Thorne case, I assumed that the main issue had been the illness of Mr Raza. But this was not correct: the case hinged on the problems he had experienced with the company's online banking arrangements. His illness, which confined him to hospital, was a red herring.
In reality, the issue of illness and reasonable excuse can vary according to the level of sympathy given to the taxpayer by the tribunal. In the case of M Barnard v Commissioners of Customs & Excise (LON/89/252Y), the tribunal accepted that a taxpayer’s mother being ill with cancer was a reasonable excuse for a late VAT payment, but in the case of George Gordon Wright v Commissioners of Customs & Excise (LON/90/1380X), the tribunal concluded that the taxpayer suffering from depression was not a reasonable excuse and that: “He should have engaged someone to take on the task of keeping his records.”
Direct debit solution
The irony is that if the Hardy and Sky Thorne companies had set up direct debit arrangements to pay their VAT, then neither of these appeals would have reached the tribunal. This is because the payments in all three cases were less than three working days late, ie the extra time given by a direct debit arrangement would have meant the payments would have been on time. This is definitely food for thought!
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.