In ETB (2014) Limited v HMRC [2016] UKUT 0424 the Upper Tribunal (UT) held that the sale of a company's business and the director's illness were not a reasonable excuse for late payment of VAT.

Penalties for failure to file and pay VAT on time are charged under the default surcharge regime in s59 VAT Act 1994.  No default (and therefore no penalty) is deemed to arise if the taxpayer has a reasonable excuse for late filing / payment.

In the current case the company accepted that they had failed to pay VAT on time for the quarter ended December 201, but claimed they had a reasonable excuse:

  • On 31 December 2014 the company sold its entire assets and goodwill of the business.
  • As a result, all debts and work in progress had to be brought into account for VAT purposes.
  • This resulted in a very large VAT payable balance, which the company did not have the funds to cover on the due date.
  • From 1 January 2015 the company no longer employed staff and the director of the business responsible for submitting the returns was ill.

The First Tier Tribunal (FTT) had previously rejected the taxpayer’s appeal.  The UT were extremely critical of that decision, highlighting a number of errors.

In particular, the FTT had made an error of law in stating that the taxpayer had to show that the late payment was ‘due to unforeseen circumstances or events beyond its control’.  The UT highlighted that the correct test established by case law was that:  

  • insufficiency of funds is not a reasonable excuse,
  • but the underlying cause might be a reasonable excuse provided the insufficiency was not reasonably avoidable.

The UT exercised their powers to overturn the FTT decision.  However they came to the same decision though applying the correct test:

  • The sale of the business was not a reasonable excuse: this was reasonably avoidable and it should have been obvious to the company and director that the sale would lead to a large VAT bill.
  • The director’s ill health and lack of other staff was not a reasonable excuse: although they accepted he had been ill there was no evidence that this prevented him from dealing with the lack of funds or contacting HMRC.

The taxpayer’s appeal was therefore dismissed.


The UT was very critical of the quality of the FTT, indicating that their decision (which was made on paper without a hearing) could have been a rushed job.

In addition to the critical error of law, they also picked up a number of typos, a lack of background, poor layout and reasoning and limited findings of fact.

Where a decision goes against the taxpayer, it is worth considering the quality of the decision as well as the facts of the case before deciding whether to appeal further or call it a day.


Our subscriber guides:

Penalties (VAT)

Appeal: insufficiency of funds & reasonable excuse

Case reference: ETB (2014) Limited v HMRC [2016] UKUT 0424