A director has lost a First Tier Tribunal (FTT) appeal over a VAT default penalty issued by HMRC for £20,000 for a payment that was only four days late
The appellant, Yiannakis Georgiou Polycarpou, appealed against a VAT default surcharge issued by HMRC for £20,165 issued to his company, Polyteck Building Services Ltd.
The due date for the VAT return and payment for the period 03/21 was 7 May 2021. Polycarpou paid VAT between 7 May 2021 and 11 May 2021, by full payment submission (FPS).
However, he later became liable to a penalty at 10% of the outstanding VAT due, as the payment was late.
The total outstanding VAT was £526,656.15 and the penalty charged was £52,665.61. HMRC conducted a review and found that £325,000 had been paid before the due date, so the surcharge was reduced to £20,165.61.
On 5 April 2022, Polycarpou took his dispute to the tax tribunal.
HMRC argued that by failing to pay VAT by the due date, Polycarpou failed to comply with the Value Added Tax Act (VATA) and the Value Added Tax Regulations 1995.
However, the appellant contended that a VAT notice of assessment and a surcharge liability notice of extension (SLNE) were not received about the 03/21 period. HMRC stated that their systems ‘demonstrate’ that the necessary documents were posted to him.
Polycarpou also argued that he had already been in discussions with HMRC debt management at the time that the VAT return and payment were due to request a time-to-pay (TTP) arrangement.
He added that his business, which provided building services, had suffered due to the pandemic and that it had affected cash flow. The payment of additional penalties for a minor default of four days had exacerbated the problem.
The time-to-pay arrangement was requested on 6 May 2021, according to HMRC, and was refused on 10 May 2021, as the appellant already had an arrangement in place for another period.
HMRC argued that the appellant’s ‘cash flow difficulties’ were neither new nor sudden, existing before the pandemic. Due diligence required Polycarpou to secure sufficient funds from different sources. It submitted that insufficient funds did not constitute a reasonable excuse.
As a director, Polycarpou’s duties included looking after staff, key clients and large accounts. He added that everything concerning the business’ finances came through him. In respect of cash flow, he added that he did his ‘utmost best’, but that the VAT payments were due at the same time as wages.
He then proceeded to say that he had suffered a heart attack during the period in question and that his turnover had halved during the pandemic.
On top of this, despite having numerous clients, Brent Council had delayed making payment of an invoice. The income should have come in on the Friday before the default and, at one point, the Council owed him £1,000,000.
About the notice from HMRC for the period 03/21, he told the tribunal that he ‘opens all of the post’ and hands it over to his accountant, who dealt with it on his instructions.
Section 59(4) VATA provides that if a person defaults in respect of a period ending within a surcharge liability period and has outstanding VAT for the period, he becomes liable to a surcharge.
The FTT was satisfied that the appellant was in default of an obligation imposed by statute. When looking at whether Polycarpou had a reasonable excuse for the default, the tribunal stated that a ‘prudent and reasonable taxpayer exercising reasonable foresight and due diligence’ would have proper regard for their responsibilities when paying tax.
Judge Natsai Manyara said: ‘This is because the appellant failed to pay the VAT due by the statutory deadline. By failing to pay VAT, he failed to comply with the legislation. Subject to considerations of ‘reasonable excuse’, the surcharge imposed is due and has been calculated correctly.
‘Whilst we accept that the appellant’s turnover may have halved to what it was in 2020, Polycarpou’s evidence was that payment was being expected from a customer. We find that a client not paying an invoice immediately is a normal business circumstance.
‘We find that the underlying problem was cash flow. There is considerable force in HMRC’s submissions that these problems were neither sudden nor new. As to the cash flow problem, we are satisfied that the problems encountered by businesses are nothing more than the normal hazards and difficulties encountered by most traders. Problems such as slow payment from clients cannot provide shelter when such a situation occurs with reasonable regularity.
‘Whilst the coronavirus pandemic was an unforeseeable (or inescapable) event for all, we are satisfied that measures were put in place to assist taxpayers. While having every sympathy for the personal losses and illness suffered by Mr Polycarpou, it is the case that the appellant had never put forward illness or bereavement as a reason for the default in this appeal.’
For the reasons above, the tribunal was satisfied that the appellant had not established a reasonable excuse. The appeal was dismissed.