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HMRC internal manual

VAT Civil Penalties

HM Revenue & Customs
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Default Surcharge: Discretion, reasonable excuse and mitigation: Insufficiency of funds

Although insufficiency of funds can never in itself be a reasonable excuse, the reason for the default might be a valid excuse. This was tested in the case of J B Steptoe CA July 1992, [1992] STC 757.

Mr Steptoe was an electrical contractor. His main customer was a local council who took an exceptional amount of time to pay and caused him acute cash flow problems. This led him to submit his returns and payments late and he appealed against the resulting surcharges. The Tribunal (LON/89/745Z) agreed that he had suffered unforeseeable and unavoidable misfortune and granted his appeal.

The Commissioners appealed to the High Court and then the Court of Appeal on the grounds that lack of funds was specifically excluded by the FA 1985 s33 as a reasonable excuse. However, both courts upheld the Tribunal ruling.

This judgement introduced the concept of legal distinction between pleading a shortage of funds and pleading, as a reasonable excuse, a series of unforeseeable circumstances which directly lead to the shortage of funds. You should take account of the following when considering an appeal on the grounds of insufficiency of funds

  • Could the trader have reasonably foreseen the insufficiency of funds or was he faced with a sudden cash crisis - for example sudden reduction or withdrawal of overdraft facilities, sudden non payment by a normally reliable customer, insolvency of a large customer, fraud, burglary or act of God such as fire?
  • Did the trader receive enough money before the end of the period to pay the VAT due?
  • Have any payments been received during the periods concerned (details of outgoings may also be relevant) - if so did the trader pay part of his VAT on time?
  • What steps have been taken to overcome the difficulties for example has the trader taken steps to collect overdue debts or obtain alternative finance such as increasing his overdraft to cover the VAT due?
  • Is the trader tied to a single (or very few) customer(s)?
  • Have any actions by HMRC contributed to the grounds of appeal - for example investigations, failure to answer trader’s correspondence or failure to make prompt repayments?

You can find a draft letter requesting information in support of an appeal on the grounds of insufficiency of funds at VCP10568.

This letter should be issued in all cases where inability to pay is, or appears to be, the reason for appeal and the trader has not already given us enough details.