A recent VAT tribunal ruling (TC6488) has confirmed that a lack of cash can't be used as a valid reason to avoid penalties for the late payment of VAT - so what can you do?
KD Productions Ltd is a company which provides sets for theatre shows and also supplies 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.
Te company appealed it had a reasonable excuse for not paying the fine, on the basis that it had suffered a £60,000 loss wit a customer going into liquidation, and a late-paying customer who owed £48,000.
The tribunal ruling
The tribunal ruled against the company, on the basis that;
- They were using the cash accounting scheme for VAT, under which the company 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.
- 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.
- A lack of cash is not acceptable as a reasonable excuse for a late VAT payment.
- The reality was that KD had used the 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.”
So what can a company struggling to pay its VAT bill on time do?
Here's a quick checklist to help anyone struggling to pay the VAT bill on time;
- The Business Payment Support Service (BPSS) – but remember that 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.