Tribunal upholds penalty for non-payment of deferred VAT during COVID-19 despite lack of funds defense

Citation: [2024] UKFTT 83 (TC)
Judgment on

Introduction

In the case of Derek Shaw Racing Limited v The Commissioners for HMRC, the First-tier Tribunal (Tax Chamber) deliberated on the imposition of a penalty under Schedule 19 of Finance Act 2021 for non-payment of deferred VAT due to the COVID-19 pandemic. This analysis examines the key legal principles applied by the Tribunal in reaching its decision to uphold the penalty against Derek Shaw Racing Limited (DSRL).

Key Facts

DSRL, engaged in providing livery and transportation services for racehorses, faced a significant downturn due to the COVID-19 pandemic, with income notably decreasing while many fixed costs remained consistent. They declined to furlough staff, opting instead for a pay reduction agreement. DSRL took advantage of the VAT deferral provisions under the Finance Act 2021 during the pandemic but failed to make the deferred payments by the 30 June 2021 deadline. The company’s director, Mrs. Lyndsey Shaw, engaged with HMRC about a time-to-pay arrangement but could not agree on the terms, with Mrs. Shaw preferring to negotiate terms with external debt collectors after the company was eventually passed on to them.

The judgment elucidates several key legal principles relevant to the application of a penalty for non-payment of VAT:

  1. Schedule 19 of Finance Act 2021: This legal provision provides a framework for deferring VAT payments due to emergency reasons, such as the COVID-19 pandemic. It allows for HMRC to agree to further defer payments and to make arrangements for individuals or businesses to pay these sums.

  2. Penalty Imposition: Under para 4(1) of Schedule 19, a penalty may be imposed if a taxpayer fails to pay the relevant VAT sum by the due date and also fails to enter into a payment arrangement with HMRC.

  3. Reasonable Excuse Defense: According to para 4(3) of Schedule 19, the penalty does not apply if the taxpayer can prove a reasonable excuse for both the failure to pay and the failure to enter into payment arrangements.

  4. Objective Test for Reasonable Excuse: Following Christine Perrin v Revenue and Customs Commissioners [2018] UKUT 0156 (TCC) and The Clean Car Company v The Commissioners of Customs and Excise [1991] VATTR 234, the Tribunal applied an objective test that considered whether what the taxpayer did or failed to do could be regarded as reasonable for a responsible taxpayer, under the specific circumstances faced by DSRL.

The Tribunal evaluated the possibility that insufficiency of funds could be a “reasonable excuse,” which the statutory schedule might allow. The Tribunal decided that while lack of funds due to the pandemic could be a reasonable excuse for failure to pay the deferred VAT, it did not accept the same for failing to make payment arrangements.

Outcomes

The Tribunal’s examination of the evidence and the applicable legal principles led to the following conclusions:

  1. Failing to Pay: DSRL provided evidence that they lacked sufficient funds to make payment of the deferred amount. The Tribunal accepted this as a reasonable excuse for failing to pay the VAT by the due date, considering the economic impact of the COVID-19 pandemic.

  2. Failing to Enter Payment Arrangements: The Tribunal found DSRL did not establish a reasonable excuse for not entering into a payment arrangement. DSRL had failed to sufficiently demonstrate, through objective evidence, that they could not afford to agree to terms proposed by HMRC or that they could not have taken other steps to comply with payment obligations.

Conclusion

The First-tier Tribunal’s decision in Derek Shaw Racing Limited v The Commissioners for HMRC underscores the significance of engaging proactively with HMRC to establish payment arrangements and the rigorous application of an objective test to determine the existence of a “reasonable excuse.” Despite the Tribunal’s sympathetic view towards the business impacts of the pandemic, it remained firm on the standard for complying with VAT obligations, reinforcing that taxpayers must prioritize tax payments equally with other business liabilities. This decision serves as a cautionary reminder to businesses about the consequence of prioritizing other creditors over HMRC without adequately negotiating or demonstrating an inability to meet such tax obligations.