TC09554 - [2025] UKFTT 00747 (TC)

We agree with Mr Chaudhary that the Appellant did not have a “right” to the £478,893.36 repayment until November 2024, once HMRC’s investigation into it had come to a conclusion (UK Tradecorp). However, we disagree with him inasmuch as he suggested that that is a full answer to this case. We say so because of the Court of Appeal’s decision in Steptoe.

In a part of his judgment in Steptoe, Lord Justice Nolan (who was in the majority) cited from an earlier judgment of his:

“… the cases in which a trader with insufficient funds to pay the tax can successfully invoke the defence of “reasonable excuse” must be rare. That is because the scheme of collection which I have outlined involves at the outset the trader receiving (or at least being entitled to receive) from his customers the amount of tax which he must subsequently pay over to the commissioners. There is nothing in law to prevent him from mixing this money with the rest of the funds of his business and using it for normal business expenses (including the payment of input tax), and no doubt he has every commercial incentive to do so. The tax which he has collected represents, in substance, an interest-free loan from the commissioners. But by using it in his business he puts it at risk. If by doing so he loses it, and so cannot hand it over to the commissioners when the date of payment arrives, he will normally be hard put to invoke [para. 12(1)]. In other words, he will be hard put to it to persuade the commissioners or the tribunal that he had a reasonable excuse for venturing and thus losing money destined for the exchequer of which he was the temporary custodian.”

The learned judge was therefore recognising that, in general, the net VAT that a trader is required to pay to HMRC in respect of a period will come out of funds that the trader has received from its customers over and above the actual selling price payable for the trader’s goods or services. (The learned judge in the subsequent paragraph then acknowledged that, strictly, VAT does not operate on a cash basis, although cash accounting is an option for many traders.) However, as the Court concluded, that is not to say that a lack of funds can never be the basis of a reasonable excuse defence: as the majority held, it depends on whether the taxpayer has exercised reasonable foresight and due diligence and with a proper regard for the fact that the tax would become due on a particular date.

The general position, however, is that a trader’s net VAT liability should come out of funds that should not be carelessly mixed with the trader’s working capital. In the present case, however, the general position described by Lord Justice Nolan can be said to operate in reverse, so far as the March 2024 quarter is concerned. In relation to that quarter, the Appellant has had to find an additional £478,893.36 from its working capital and, in effect, lend it to HMRC until such time as HMRC are able to approve the repayment.

It is our finding that £478,893.36 represents a significant sum for the Appellant (we note, for example, that it represents more than twice the net VAT payable by the Appellant in relation to the next VAT quarter) and we do not consider it reasonable for a new and growing company such as the Appellant to be expected to absorb the cash flow costs of this amount, for example by taking a short-term bank loan to assist its working capital until such time as the repayment would eventually be made (the period of which would inevitably be uncertain at the time that any such advance would be made). In particular, whilst the Appellant (reasonably) did not expect the repayment to be made immediately after the March 2024 quarter’s VAT return was submitted, its evidence which we have accepted was that it expected the repayment to be agreed by 7 August 2024 and it took every reasonable step to facilitate that outcome by assisting HMRC in their investigations.

Thus, rather than viewing the £225,639.93 (the net VAT payable in relation to the June 2024 quarter) as surplus to the Appellant’s working capital, we view that sum as an amelioration to the £478,893.36 hit to the working capital that was being experienced by the Appellant pending the repayment expected from the March 2024 VAT quarter. The difference which still exceeds £250,000 is not a trivial amount.

For these reasons, the facts of this case are very different from those in NSF Utilities. In particular, there is evidence of the Appellant taking active steps to guard against the possibility that the VAT fell due before the repayment was received. In our view, there is nothing more that the Appellant could realistically have done to expedite the repayment from HMRC. The Appellant has been more than prudent. And, for the reasons summarised in paragraph ‎35 above, we do not think it would have been reasonable to expect the Appellant to seek a loan to cover the temporary shortfall (assuming that such would have been available on reasonable terms).

We do recognise that the Appellant could have sought a formal deferral of the due date of 7 August 2024 which, if agreed by HMRC, would have then allowed this penalty to be avoided. On future occasions, that might prove to be a sensible precaution for the Appellant to take. However, for the following two reasons, we consider that it was reasonable for the Appellant (having not been in this situation before) not to have taken this formal step:

Taking a step back, we consider that, overall, the Appellant has acted in a way that one can reasonably expect of a responsible trader conscious of and intending to comply with its obligations regarding tax, given its experience and placed in the situation that it found itself. We say that by applying the approach to reasonable excuse defences as laid down by the Court of Appeal in Steptoe.

In any event, and in case we are wrong in that regard, we consider that the conduct of HMRC’s investigation (in circumstances where the Appellant had been so diligent and prompt in responding to HMRC’s questions), which led to the repayment being paid more than six months after the March 2024 VAT return was submitted, meant that the Appellant’s insufficiency of funds was attributable to events outside the Appellant’s control. Even ignoring the Steptoe approach to the reasonable excuse test, we consider that the facts of this case point squarely to the conclusion that the Appellant had an objectively reasonable excuse for not paying the June 2024 VAT by 7 August 2024.

As a result, whichever of these two approaches we might take, we find that the Appellant had a reasonable excuse for not paying the VAT due by 7 August 2024. Given the amount of the repayment that the Appellant was expecting (and eventually received), we similarly consider that the Appellant had a reasonable excuse for not making any partial payment of the June 2024 quarter’s VAT. We agree with Mr Chaudhary that any reasonable excuse that the Appellant had continued until the repayment was made in November 2024. As the outstanding payment was deducted from that repayment, it follows that the Appellant’s reasonable excuse subsisted throughout the period of default.