The appellant, Prisma Recruitment Limited, appealed to the FTT relating to PAYE income tax, NICs and a number of VAT default surcharges totalling £11,250. The PAYE element of the appeal was allowed but the judge rejected the argument about VAT overpayment.

Prisma is an employment agency which supplied workers to other companies including the BGM Group Limited (BGM), a workplace consultancy business.

BGM provided consultancy services to customers including Royal Bank of Scotland plc (RBS) and Barclays Capital Limited (Barclays). The work for RBS and Barclays was carried out by the workers supplied by Prisma.

Prisma accounted to HMRC for the tax and NICs deducted for BGM, with payments being made in the tax year 2012/13.

In 2012/13, BGM fell into financial difficulties and was placed in administration on 19 April 2013. Prisma later terminated all agreements with BGM and the agency contracts ended on 28 March 2013.

Prisma paid the workers up to this date. They did not pay income tax or NICs to HMRC after the beginning of January 2013, and they received no payments from BGM.

In total, BGM owed Prisma £156,926.87 which became a bad debt. This resulted in Prisma suffering a large loss, placing the company in financial difficulties.

Mr Loftus, as a director of Prisma, sought ways of mitigating the company’s loss, and contacted HMRC on 7 May 2013, related to the VAT debt.

On 22 May 2013, HMRC issued an underpayment notice related to income tax, NICs and student loan deductions for the 2012/13 tax year.

The notice set out the items due, the amount already paid and the amount owing which, including interest was £31,760.40. This included the disputed PAYE and NICs of £28,199.21.

In addition, HMRC issued a statement of liabilities on 29 July 2013 showing PAYE/NIC underpaid of £31,946.95. It demanded payment in full by 12 August 2013. Prisma continued negotiations into 2014.

On 2 June 2014, Loftus and HMRC established a time to pay arrangement (TTP) related to VAT and PAYE. The amount stated to be owed was £74,272.89 of which £29,227.06 was related to PAYE/NICs and the balance to VAT.

At the FTT, Prisma argued that a Regulation 80 determination had been made, that an overpayment relief claim had been made and refused, and that any repayment would belong to them.

It said that a document can be a Regulation 80 determination even if it does not refer to Regulation 80, which grants HMRC the power to determine the amount of tax that is due by an employer but remained unpaid by the employer.

Judge Marilyn McKeever said: ‘We have found that HMRC did make a Regulation 80 determination which the appellant has appealed. HMRC made a section 8 decision in respect of each of the workers and the appellant appealed against those decisions. We have also found that the appellant made a valid, in time, overpayment relief claim under schedule 1AB Taxes Management Act 1970.

‘We allow Prisma’s appeals against the Regulation 80 determination and the Section 8 decisions and we allow the overpayment relief claim. Accordingly, HMRC must repay to the appellant the amount of income tax and primary and secondary Class 1NICs which it wrongly paid.’

Concerning the VAT appeal, HMRC had charged VAT default surcharges for the relevant quarters under section 59 of the Value Added Tax Act 1994 (VATA).

Prisma appealed against VAT surcharges for the VAT periods 06/16 to 06/16 inclusive totalling £11,250 because it had a ‘reasonable excuse’ for the late payment of VAT.

Section 59 VATA states that a taxpayer who has a ‘reasonable excuse’ for the late payment is not subject to the default surcharge.

Loftus argued that Prisma’s shortage of working capital to fund VAT payments was in part a result of HMRC’s actions. Prisma had paid HMRC the income tax and NICs which it believed were not due.

In defence, HMRC argued that Prisma had ‘recurrent cash flow problems’ and that the collapse of BGM, which occurred between three and four years before the defaults, could no longer be provided as a ‘reasonable excuse’.

Judge McKeever added: ‘We acknowledge that the appellant tried to meet its VAT obligations to the extent it could and that it paid substantial amounts of its VAT liability by the due date. The appellant does not seek to argue that the insolvency of BGM caused cash flow difficulties in the relevant quarters.

‘The appellant’s argument is that had HMRC addressed the dispute over the income tax and NICs in a timely fashion (and presumably agreed with the appellant and repaid the money), the VAT problem would not have arisen.

‘We find that the appellant’s cash flow difficulties during the relevant quarters were no more than the normal hazards of the trade. We do not accept that Prisma’s dispute with HMRC about the PAYE/NICs was the underlying cause of the insufficiency of funds. The reason for the late payment was simply insufficiency of funds and that is not capable of providing a reasonable excuse.’

For the reasons set above, the tribunal held that Prisma was under ‘no obligation’ to pay the income tax and NICs which it did pay.

It, therefore, allowed the appeals with income tax and NICs. However, the FTT dismissed the appeal against the VAT default surcharges on the basis that Prisma did not have a reasonable excuse.