VAT tribunal: Lack of cash not a reasonable excuse for late payment

empty theatre

Neil Warren considers the case of KD Productions Ltd (TC6488), and the taxpayer’s claim that it had a reasonable excuse for a late VAT payment.


The company provided sets for theatre shows and also supplied technical crews for concerts and events. The cash flow challenges for this type of business are many: staff who expect to be paid straight after an event, suppliers that often want payment up front or offer limited credit terms and late-paying customers were all major problem for this particular company.

It paid VAT late for most returns between April 2016 and July 2017, incurring a series of default surcharges. It was the last period that was the subject of the appeal, a 10% surcharge issued by HMRC for £4,131.96 because the company paid its VAT one day late.

The law

The default surcharge regime has stood the test of time. A taxpayer always gets a ‘lifeline’, ie the first late return/payment is not the subject of a penalty, only a surcharge liability notice (the yellow card in football terms). A business with annual sales of less than £150,000 effectively gets two lifelines (VAT Notice 700/50, para 4.2). And then a business must submit returns and pay tax on time for the next 12 months, otherwise it will incur a rising surcharge of 2%, 5%, 10% and then 15%, based on the amount of unpaid tax by the due date.

Cash accounting scheme

The unusual aspect to this case was that the company used the cash accounting scheme but cited cash flow problems as the reason for its late payments.

A scheme user only accounts for output tax on a VAT return when customers pay their dues, and input tax is claimed when payment is made to suppliers. It can be adopted by a business that expects its sales in the next 12 months to be less than £1.35m (VAT Notice 731, section 2).

The reality was that the company did not have a cash flow problem but a profit problem. There was a reference to the business having a combination of “high turnover and low profits” and the profitability was not helped by a bad debt of £60,000 suffered with a customer going into liquidation. The old phrase that turnover is vanity and profit is sanity appeared to be relevant in this case.

Reasonable excuse

The director said that the company had a reasonable excuse for the late VAT payment, namely the £60,000 bad debt and also a late-paying customer that paid £48,000 on 8 September 2017, meaning the July 2017 return was paid one day late. A lack of cash is not acceptable as a reasonable excuse for a late VAT payment, although VAT enthusiasts might recall the 1992 case of Steptoe [1992] STC757, where the tribunal accepted that the reasons behind a lack of cash could be a reasonable excuse.

No backup plan

The reality was that KD had to use the 1/6 VAT element of its income to help pay other bills rather than HMRC. The director said that if he didn’t pay suppliers and employees on time, then he wouldn’t have a business.

This is a fair comment, but the tribunal noted that he was not prepared for the situation when customers paid late: “the company had no contingency plans such as an overdraft or other back up finance to manage its cash flow … the VAT received helped fund other subsequent obligations.”

Final thoughts 

Don’t forget the following opportunities that might help with VAT payment challenges:

  • Business Payment Support Service (BPSS) – a time to pay arrangement must be agreed with HMRC before the return is legally due for payment in order to avoid a potential surcharge (telephone number: 030 200 3835)
  • Direct debit option – this gives an extra three working days to pay HMRC compared with other electronic payment methods.
  • Part payments – a surcharge is only calculated on the VAT that is unpaid by the due date, so part payments made on time will reduce the amount of any surcharge. 

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.


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