Recession used as ‘reasonable excuse’ in VAT case

The managing director, Keith Scrimshire, contacted HMRC and explained that it was experiencing severe financial difficulties entirely attributable to the economic climate. Picture: PA

Scrimsign Micro-Electronics Ltd, which makes electronic displays, were targeted by the HMRC with default charges worth thousands after failing to make VAT payments before deadlines in 2012.

The North Ayrshire company - which saw its turnover plummet by half after the economic downturn bit in 2010 - had its pleas for mercy from the penalties rebuffed by HM Revenue and Customs (HMRC).

But a judge at the First-Tier Tax Tribunal, sitting in Edinburgh, has now ruled that Scrimsign should be exempt from the charges as its late payments were due to “factors flowing from the general effects of the recession”.

Judge Gordon Reid QC said the company, founded in 1986, was “badly hit” by the global economic meltdown, losing around £10,000 in each of the two years leading up to December, 2011.

The Irvine-based firm, which manufactures digital displays for the transport, health and financial industries, found itself in dire straits but managed to stay afloat after securing credit agreements with some of its suppliers.

“However, their own customers have not been so understanding. Many of them are in the position to dictate their own terms of business and frequently provide for payment after 60 days or more,” the judge said.

Between July and December, 2012, the firm - which employs five people - was hit with three surcharge notices for failing to pay VAT bills on time.

The company’s managing director, Keith Scrimshire, contacted HMRC and explained that it was experiencing “severe financial difficulties” entirely attributable to the economic climate.

But HMRC refused to accept that the company had a “reasonable excuse” for late payment as it had failed to show that its financial problems were caused by factors “outside its influence or control” and not just the “normal hazards of trade”.

Mr Scrimshire told the tribunal that in 2010 the company’s turnover was reduced by 50 per cent, but it managed to continue trading.

“Cash flow was tight, the working week was reduced, he gave up his company car. Big customers were throwing their weight about by delaying payment beyond even the 60 days for which they began to stipulate,” the judge said.

The grinding halt in credit from banks was another issue that severely hampered the firm. Mr Scrimshire said that if the three late VAT payments had been made on time it would have had to cease trading.

“The business was operating from day to day and there was no way of predicting whether his customers would pay timeously. He pointed out that the VAT was always paid in full and was frequently only a few days late,” the judge said.

Elizabeth McIntyre, of HMRC, contended that “a prudent taxpayer would, in the circumstances described by Mr Scrimshire, have contacted HMRC and made suitable time to pay arrangements.”

But Judge Reid said: “The effects of the recession have travelled far afield and have affected many businesses in many different ways at different times.

“In the present appeal, these effects seem to me to be somewhat different from the normal hazards of trade.

“I accept that Scrimsign was placed in difficult financial circumstances which arose because of a combination of factors flowing from the general effects of the recession.”

He added: “I consider that it (the information supplied by Scrimsign) is just sufficient to enable me to conclude that the company has a reasonable excuse for the failure to make payment timeously on the three occasions which are still in issue.

“All outstanding sums were paid as soon as it was reasonably possible to do so.” The judge allowed the appeal and quashed the surcharges, worth about £3,000.