VAT – default surcharge – reasonable excuse – Covid-related cash flow – appeal allowed

“We consider that the business was carried on with the level of foresight, diligence and proper regard that might be expected in the circumstances. We consider that the insufficiency of funds was unavoidable in the circumstances.

We give some weight to HMRC’s submission that BPIL made positive choices to pay staff and suppliers in preference to HMRC. It is a distinctly unattractive argument for a taxpayer to assert that it is better for it to pay staff and customers first as this will keep the business going longer and provide an overall better result for the exchequer. The statutory regime does not permit a taxpayer to take matters into its own hands and speculate with funds otherwise due to the exchequer. Indeed, it may fairly be said that one of the underlying reasons for the surcharge regime is to provide a disincentive to choose to pay HMRC last.

In the normal course of events, if a business chooses not to pay its VAT liabilities then it must accept the consequences of that choice and pay the surcharge that results. However, that principle must be tempered by the circumstances in which that choice is made. The evidence in this case indicates that the cash flow pressures were considerable, and brought about by factors outside BPIL’s control. In the case of two of the defaults there were insufficient funds in the company bank account to pay the VAT liability in full and in the case of the third default the company bank balance only exceeded the VAT due by around £2,000.

Overall, we consider that the course of action pursued by BPIL was a reasonable one for it to take in the circumstances in which it found itself.”