Overdue PAYE refund trumps VAT penalty

HMRC tardiness provides escape from surcharge

HMRC’s delay in repaying overpaid PAYE to a business, handed the taxpayer a reasonable excuse for a slight late payment of VAT, the First Tier Tax Tribunal ruled.

PR Powersaving Solutions Ltd submitted its VAT return for the quarter ended 30th September 2015 on time but a delay in receiving £95,000 due from their client, meant the VAT of £27K reached HMRC shortly after the due date of 7th November 2015.

In May of 2015, HMRC had issued PR Powersaving Solutions with a surcharge liability notice for filing their VAT return for the quarter ended 31st March 2015 one day late. At this point there was no financial penalty as this had the effect of notifying the company that it was now within the default surcharge regime. However, the subsequent late payment of VAT in November meant that HMRC could levy a default surcharge penalty of £540.

The company’s preferred method of paying its VAT was by direct debit but when HMRC attempted to collect the VAT of £27K on 11th November 2015, it was returned unpaid because the amount exceeded the balance of cleared funds available in the account by nearly £1,785. Furthermore, the company had no overdraft facility. Payment was finally received by HMRC on 18th November via Billpay.  

Powersaving Solutions took swift action and requested a review, stating:

“It was unfortunate that we did not meet the deadline of the 7th November. We believed that we had been paid by our financiers at the time, unfortunately the money arrived in our account the day after you attempted to apply the Direct Debit.

We are a growing business who have only just begun to turn a profit. We have laboured for two years to get into the position we are now and cash is still incredibly tight for our business. This additional surcharge will only serve to make business more difficult for us. We have already significantly overpaid PAYE and have been awaiting repayment from yourselves for this amount for a number of months.”

A review was carried out by HMRC but it was considered that there was no reasonable excuse for the late payment. They considered that the difficulties experienced by the company were no more than the normal hazards of trade. Subsequently, Powersaving Solutions asked for a further review which was denied as HMRC do not normally conduct more than one review. So, the company appealed to the Tribunal on 4th February 2016 stating one of the grounds of appeal as being:

“Sadly we had been waiting for approximately 12 months for HMRC to repay us for overpaid PAYE almost £3,500, which they have finally done this week. This, combined with our main client paying us a week later than scheduled, meant that payment could not be made until 20th November (only nine days later).

It seems grossly unfair that we are being made to pay a surcharge by HMRC on a payment we couldn’t make because HMRC were late paying us themselves.”

Whilst HMRC accepted there had been a delay in repaying the overpaid PAYE they gave no reason for this, preferring instead to blame the company for overpaying PAYE in the first place.

Furthermore, they pointed out that the PAYE refund represented only 13% of the VAT due and that had the repayment been made earlier it was quite possible that the company may have spent it anyhow.

HMRC said that the company should have checked that sufficient funds were available and on discovering the shortfall should have contacted the Business Support service to request time to pay.

Not being able to pay the required VAT does not constitute a reasonable excuse in dislodging a surcharge penalty but the reason for a lack of funds might.

The Tribunal noted that at the time HMRC tried to take the VAT of £27K from Powersaving Solutions bank account, the company’s balance was only £1,785 shy of the full amount. Had HMRC not dragged their feet in repaying the overpaid PAYE of £3,500 then the full amount of VAT would have been paid on time. HMRC’s argument that the company might have utilised the refund elsewhere was dismissed as conjecture. A delay of almost a year by HMRC of refunding an amount overpaid to a taxpayer fell within the definition of ‘an unexpected or unusual event that is either unforeseeable or beyond a person’s control’ and therefore amounted to a reasonable excuse. The default surcharge penalty was therefore overturned.