VAT: is there a reasonable excuse due to coronavirus?

Trading challenges

Many businesses may have only focused on surviving during the pandemic, perhaps dealing with a loss of business and the need to furlough staff and seek government assistance. The submission of VAT returns and payments on time might not have been top priority, leading to a default surcharge being issued by HMRC. But this is not the end of the story. A business can appeal against the surcharge if it has a “reasonable excuse” for the late payment.

The government and HMRC are obviously aware of the business problems caused by the pandemic and appeals will be treated with sympathy.

What is a reasonable excuse?

The challenge for a business is to show to HMRC that the late returns and payments that led to the default surcharge have been caused by specific coronavirus issues. For example, illness at a crucial time to a key member of staff; the difficulties of keeping up to date with accounts because of remote working; cash-flow challenges caused by reduced trading. The key is to stand back and ask the question: if there had been no coronavirus, would the payment have been late? If the answer is “probably not”, the business should appeal.

If a business receives a surcharge liability notice from HMRC for the first late return or payment, i.e. no actual penalty is issued, it should still appeal against this notice if ythere is a reasonable excuse. Once a notice has been issued, the business must submit all returns and payments on time for the next twelve months. Surcharges are issued at 2%, 5%, 10%, and finally 15% for subsequent offences.

Example. Annie took over the accounting function at ABC Estate Agents in July 2020 because of redundancies and illness to other members of staff. The business cancelled its direct debit to HMRC for the March 2020 VAT period, to take advantage of the VAT payment holiday window available from HMRC for that period. Annie was not aware of this, so the June 2020 return was paid late and incurred a default surcharge. She arranged payment as soon as the direct debit oversight came to light.

ABC should make a written appeal to HMRC to show the full circumstances that created this problem. A reasonable excuse appeal is likely to be successful because the late payment came about due to coronavirus challenges.

Prevention of future problems

If a business cannot pay its VAT liability on time, a three-way strategy should be adopted by:

• always submit the VAT return on time, even if it cannot pay all of the tax
• pay as much as it can on time
• contact HMRC’s Payment Support Service (PSS) before the due date to discuss a time to pay arrangement. If this is agreed before the due date, there will be no surcharge penalty or liability notice issued by HMRC.