Agency Did Not Have Reasonable Excuse for Late VAT Payment

The First-tier Tribunal (FTT) has dismissed an appeal by a recruitment agency against penalties for late payment of VAT, finding that it did not have a reasonable excuse for failing to pay the VAT on time.

The agency provided flexible workers across all sectors of the UK and had an annual turnover of £1.2 billion. In the third quarter of 2024 a contract with a significant customer led to a substantial increase in the number of workers supplied. Requests were received at short notice and the customer did not provide a forecast of future demand. Workers were paid weekly and the credit terms with the customer were 67 days from the date of invoice, meaning that the agency was funding significantly higher debt for a period of 60 days.

In November 2024, the agency submitted its quarterly VAT return but did not pay the VAT in full, as that would have left it without sufficient funding to pay the following week's payroll. In December, it contacted its bank regarding additional funding facilities. It also contacted HM Revenue and Customs (HMRC) seeking a Time to Pay arrangement, but HMRC rejected several proposals. After HMRC imposed late payment penalties totalling £116,571, the agency appealed to the FTT.

The FTT considered that a responsible trader would have done more to forecast the level of trade with the customer. Evidence was not provided as to whether the contract required the agency to supply whatever level of labour the customer requested, but the FTT found that a reasonable trader would not enter into a contract forcing it to supply demand it could not finance, or choose to supply such demand. The agency should have contacted its bank when it was aware that it was unlikely to be able to finance both the payroll and the VAT, which the FTT found was no later than when the VAT return was submitted. The same applied to HMRC: by the time the company sought a Time to Pay arrangement, the VAT had been due for nearly three weeks.

The FTT accepted that the agency had faced unattractive choices. Non-payment of workers would likely have caused serious commercial and reputational consequences. However, those consequences had arisen because it had taken on, or chosen to meet, a level of supply it could not finance without failing to discharge its VAT liability on time. Taking all the circumstances into account, the FTT was not satisfied that the agency had a reasonable excuse for failing to pay the VAT by the due date.

The FTT found that HMRC had failed to consider whether there were special circumstances, but concluded that the circumstances were not sufficiently special to make it right to reduce the penalties. The agency was a substantial, experienced and long-registered VAT trader. It had found itself in a difficult position, but that position had arisen from commercial arrangements it had entered into and from the absence of timely steps to secure funding or engage with HMRC. The promptness with which the VAT had ultimately been paid, the absence of previous default and the seriousness of the potential commercial consequences were all relevant matters but, taken together, they did not outweigh the considerations pointing the other way.