Traders who choose to put tax at the bottom of their payment priorities are asking for trouble. However, in one case, a businessman persuaded a tax tribunal that he acted reasonably in delaying VAT payments so that he could pay his hard-pressed staff in the midst of the COVID-19 pandemic.

The man ran an interior renovations company that suffered particularly severe cashflow problems during the pandemic. Jobs, which involved members of staff spending lengthy periods inside customers’ homes, took much longer to complete than usual and liability to pay VAT on invoices often arose before payment from customers was received. HM Revenue and Customs (HMRC), however, took a firm line and issued substantial surcharge and penalty demands against the company after a number of VAT payments were made late.

Challenging the demands before the First-tier Tribunal (FTT), the man pointed to the negative consequences of the pandemic on his business. He stated openly that he had, on occasions, made conscious choices to pay staff and suppliers before HMRC. He said that paying tax late had far less consequence than a member of his staff missing a mortgage payment or being unable to buy food.

Ruling on the matter, the FTT noted that it is a distinctly unattractive argument for a trader to assert that it is better to pay staff and suppliers first, in preference to HMRC, as this will keep the business going longer and provide a better overall result for the exchequer. The tax system does not permit taxpayers to take matters into their own hands by speculating with funds due to HMRC.

In upholding the company’s appeal, however, the FTT found that the man managed the business with foresight and diligence amidst the unforeseeable, almost daily, changes in the law and government guidance that accompanied the pandemic. The trading difficulties were brought about by factors outside his control and outstanding VAT was paid as soon as cashflow allowed. In all the circumstances, delaying payment of VAT was a reasonable course to take.

Source: CC News