Archive for month: November, 2019

 

Introduction

The recent decision of the Upper Tribunal in Snow Factor Limited v HMRC [2019] UKUT 0077 (TCC) is the first determination of the ‘financial extremity’ test under section 85B(5) of VATA 1994.  The decision is, therefore, likely to be of considerable to taxpayers and practitioners alike.

 

The facts

The issue before the Upper Tribunal (“UT”) was the amount of value added tax which the applicant, Snow Factor Limited (“Snow”) must pay following a decision made in favour of HMRC by the First-tier Tribunal (Tax Chamber) (“FTT”) on 24 January 2018. Two assessments to VAT were in issue totalling £294,715. The FTT’s decision related to the rate of value added tax applicable to receipts from lift passes sold by the applicant in running its indoor snow dome, and the FTT agreed with HMRC that the supplies were liable to VAT at the standard rate.

Snow had not paid any of the disputed VAT before appealing the assessments made by HMRC. HMRC decided (on an application to it) that to require the payment of the VAT would cause hardship to the applicant. However, following the FTT’s decision, s. 85A(3) of VATA 1994 required Snow to pay the amount of VAT that the FTT had determined to be payable.

As a result, Snow applied to HMRC for a decision to exercise one or more of the following powers: to stay the requirement to pay, to require the provision of adequate security, or to reduce the amount required to be paid (s.85B VATA 1994). HMRC was entitled to grant the application if satisfied that financial extremity might be reasonably expected to result if payment (of the full amount) was required.

In a letter of 15 November 2018 to the applicant, HMRC referred to the current assessed debt of £484,521.38 (plus interest) and decided that to pay the whole of that amount might cause financial extremity. But HMRC did consider that a lesser amount should be paid. They decided that it “would not cause ‘financial extremity’ to Snow if it was required to pay £300,000 in three equal instalments: the first instalment of £100,000 by 15 December 2018, the second instalment of £100,000 by 15 January 2019 and the final instalment of £100,000 by 15 February 2019.

 

The legislation

The effect of s.85(B)(5) would be to allow HMRC or the UT, if they took the view that financial extremity was in issue, to vary or supplement the decision by HMRC by doing one or more of the things listed in subsection (6) namely:

• decide how much, if any, of the amount under appeal should be paid or repaid as appropriate;
• require the provision of adequate security from the original appellant;
• stay the requirement to pay or repay the VAT in issue.

 

This was the first determination of an application under section 85B(5) of VATA 1994 an, in deciding the application there was no directly relevant case law. Submissions were, however, made by both parties in relation to the case law relevant to hardship applications under section 84(3B) of VATA 1994.

 

The evidence

In making its application for relief, Snow relied on a spreadsheet drawn up on 14 December 2018 showing the cash flow forecast for the applicant’s group for the 12 months ending 30 November 2019. 28. The cash flow forecast was prepared on a group basis. It showed accounts for three separate companies of which Snow was one.  From the spreadsheet it could be shown that, as a result of HMRC’s decision, the immediately available resources available to the group would go into a deficit of £105,230.37 in June 2019, with a deficit continuing until November 2019 of at least £218,773.27.

 

The UT’s decision

The UT noted that the test differed from the one operating before the taxpayer entered the appeal process (“would cause the appellant to suffer hardship”) and said that this was to be expected, as there was ‘no reason to suppose that a test designed to police the entry of taxpayers into the appeal process ought to be the same as the test operating once an appeal has been judicially determined (albeit that the determination is then subject to further appeal).’ The UT agreed with the parties that that the ‘financial extremity’ test was a more onerous test to satisfy than the ‘hardship’ test. ‘Extremity is just that: it is at the very far end of the spectrum of financial health. Life should not be merely hard. More is required.’

 

The UT stated that the key question was whether the circumstances were such that financial extremity “might be reasonably expected” to result from HMRC’s decision. In this respect, there were two aspects of that qualification critical to a proper understanding of the test to be applied under section 85B(5) of VATA 1994. The first is that the test is “might” not “would”. It is a question of possibilities. The second is that not any old possibility will suffice: it must be “reasonable.”

 

The UT said:

‘What might be reasonably expected is something more than a theoretical possibility. There must be some reasonable basis for thinking that the possibility might come to pass…. I consider that the test of reasonableness here is, in essence, an objective one: having regard to the totality of the circumstances, what steps would it be reasonable to expect to be taken to meet the liability. But the test also has subjective elements: account must be taken of the particular circumstances affecting the taxpayer and the way in which it has chosen to carry on its business…… ‘

 

The UT then discussed what steps should be taken by the taxpayer to meet its liabilities. The UT said:

 

The critical issue in this application is, in my judgment, the extent to which (if at all) it is reasonable, before the determination of the substantive appeal, to expect steps to be taken so that the applicant is in a position to meet some or all of the liability to pay the disputed VAT without financial extremity resulting. It is not sufficient for the applicant simply to point to the projected cash flow drawn up on the basis that no steps are taken to meet any part of the liability to pay the disputed VAT and leave it at that.

In considering what steps might be reasonable I should have regard to all the circumstances. Those circumstances include the following:

(1) even though the disputed VAT became payable in accordance with section 85A(3) of VATA 1994 on 24 January 2018 when the FTT determined the appeal, the applicant has taken no steps to pay any part of that amount; (2) the applicant did not approach HMRC to discuss payment and did not initiate an application to HMRC under section 85B(4) of VATA 1994; (3) the applicant did, however, take steps to clear arrears on other debts (see [36] above) and make sure that all other creditors with the exception of HMRC were being paid; (4) the applicant did not at any time approach its bank to discuss extending its overdraft and nor did it approach any other bank or financial institution for funding; and (5) the applicant did not consider taking steps, whether by increasing prices or reducing expenses or by any other means, to increase its cash flow for a temporary period so as to be in a position to make any payments to HMRC…

I consider that, having regard to the matters set out above, the applicant could reasonably be expected to have taken a combination of steps: a temporary but modest increase in prices (or advancement of receipts), a temporary but modest decrease in expenses (or delay in their payment) and a temporary increase in its overdraft to £80,000….

 

On the particular facts of this case, even after taking the above action, the UT was in no doubt that financial extremity was still in issue.

 

‘The question then is whether this state of affairs is, within the ordinary meaning of that expression, “financial extremity”. I consider that it is. The deficit figures are, in my view, significant: in each case they exceed £100,000. The position lasts for a number of months. The applicant would have to consider taking much more significant action than I have assumed above in order to return the group to a more stable financial footing. Such action would, in my judgment, go beyond what can be reasonably expected.

Accordingly, my decision is that, in relation to HMRC’s decision of 15 November 2018, the tests in section 85B(5)(a) to (c) of VATA 1994 are met.’

 

Conclusion

The Snow decision is the first of its kind on the ‘financial extremity’ test and is, therefore, likely to be appealed by HMRC. It is also likely, in the author’s view, that the Court of Appeal will grant leave given that the case raises an important legal issue as to how the test should be applied. For the moment, whilst the UT’s decision will not doubt be welcomed by taxpayers, they will also note that to succeed in an application they must:

• Prepare meticulous witness evidence to support any application;
• Convince the Tribunal by being proactive in managing their financial affairs to pay off as much of the VAT debt as possible.

Snow is certainly not a hardship relief panacea for the taxpayer.

 

Levy and Levy – the tax resolution specialists