Taxman may accept recession as excuse for late tax payments

Entrepreneurs submitting late tax payments to HM Revenue and Customs (HMRC) may be able to use the recession as an excuse.

The development follows a recent tax tribunal case in which judges accepted the economic downturn as a "reasonable excuse" for a business owner not paying his taxes on time.

In the case of Mutch v HMRC (TC 232), the taxpayer had built up his carpentry business to meet the needs of the local house builders, but the company had been overtaken by the recession and the impact of the reduction in demand for new houses.

The judge referred to two VAT cases ("Salevon" at the High Court, September 1989, and "Steptoe" at the Court of Appeal, July 1992) where the test of reasonable excuse was considered. He said that the precedent laid down by the Courts was that you should ask whether the taxpayer had exercised reasonable foresight and due diligence in the knowledge that the tax would become due on the particular dates, but those efforts could not have avoided the insufficiency of funds which led to the failures.

Applying those tests the judge found that the way that Mr Mutch reacted to the recession was "fair and business-like" and he had met the required standards.

Richard Mannion, national tax director at Smith & Wiliamson, said: "These cases have arguably shown up HMRC's lack of understanding of just how catastrophic the recession has been for particular types of business and the decisions serve as a rebuke to their more usual unsympathetic approach. I hope that those in charge at HMRC will take the decisions on board and ensure that their staff follow the steps clearly laid down by the courts.
 
"The reported cases underline the fact that an insufficiency of funds can be a reasonable excuse if attributable to events outside the taxpayer's control. This could be the case where the business has a strong track record of good financial management, having met tax deadlines in the past, but cash flow problems had arisen due to circumstances beyond their control, and had been caused, for example, through fraud or a sudden credit problem."

An HMRC spokesperson told BusinessZone.co.uk's sister website AccountingWEB.co.uk: "The issue relates specifically to appeals against loss of gross payment status by businesses that operate the Construction Industry Scheme. The published decisions, based on the facts of each individual case, only therefore have a narrow specific application, and do not change HMRC's interpretation of the legislation.

"We listened to construction industry concerns with regard to a general downturn in work from early 2008 onwards, as a result of which HMRC revised its internal CIS guidance regarding reasonable excuses for late payments due to cash flow problems.

"Where a business has been granted a Time to Pay arrangement and is keeping to the agreed terms, then this will not affect its gross payment status."

Under the Time to Pay scheme, which was introduced as a result of the recession, business owners are able to agree personal tax payment terms with HMRC.

Article provided by businesszone.co.uk




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