Payment of disputed VAT before appeal can proceed - hardship applications

In VAT appeals, the disputed tax has to be deposited with HMRC before an appeal can proceed, unless the taxpayer can show that to do so would cause hardship.

The hardship test looks at the ability of the taxpayer to pay from resources which are immediately or readily available. In this case the Upper Tribunal (UT) confirmed that the First-tier Tribunal (FTT) had not erred in law in failing to consider whether the taxpayer could borrow under a new facility or sell fixed assets not used in the business.

HMRC denied Elbrook credit for input tax of around £771,000 which had been deducted by Elbrook in computing its VAT for previous periods.  Elbrook appealed against the decision and made a hardship claim. It produced evidence to demonstrate that its bank deposit had reduced from £5 million to £300,000 and that the company had used up its loan facilities of £5 million. It did not want to approach its bank for a further loan as it did not want to panic the bank.

The FTT found in Elbrook's favour and granted the hardship claim. HMRC appealed to the UT.

HMRC argued that the FTT had erred in law in failing to consider whether Elbrook could borrow to fund the VAT. HMRC also argued that the FTT should have considered whether Elbrook could have paid the VAT if it had sold fixed assets not used in the business. It also argued that Elbrook had not provided full information about its financial circumstances and had 'wilfully delayed' proceedings.

The UT drew the following principles from previous cases:

• Hardship relief should not be applied so as to operate as a fetter on the right of appeal.
• The hardship enquiry should be directed to the ability of the taxpayer to pay from resources which are immediately or readily available. It should not involve a lengthy investigation of assets and liabilities, and an ability to pay in the future.
• The test is not simply of capacity to pay, but capacity to pay without financial hardship. So, the mere existence of cash or other readily realisable resources will not necessarily suffice, if using those resources to pay the disputed tax would have consequences that would cause financial hardship.
• The availability of resources by way of borrowing may be considered, where there are unused facilities, or the facilities are immediately available with minimal formality and without the obtaining of those facilities in itself giving rise to financial hardship.
• The normal rule is that the tribunal should look at the position as at the date of the hearing. The tribunal should not speculate as to what might become available to the taxpayer in the future and should not ordinarily have regard to the position at any earlier time.
• The burden of proof is on the taxpayer to establish that the payment or deposit of the disputed tax would cause financial hardship. The taxpayer therefore has to provide relevant, and up-to-date, evidence.
• The test for financial hardship is an 'all or nothing' one. The only question is whether payment or deposit of the whole of the disputed tax would cause financial hardship. It is not relevant that payment of some lesser amount might be capable of being achieved without hardship.
• The tribunal may take into account whether the taxpayer is responsible for putting himself in a position where he cannot pay the tax due. This extends to where the taxpayer has been responsible for delaying the hearing of the application if that has led to him not having the resources to pay.
• The test looks at financial hardship to the taxpayer. This might be to the business of the taxpayer, but it could equally be personal financial hardship.

The UT said that ordinarily the possibility of the taxpayer obtaining access to a new source of borrowing should not be regarded as a resource that is immediately or readily available. It said that this did not mean that such borrowing should not be taken into account in particular circumstances, for example where it is shown that arrangements for the finance are at such a stage where it has become readily available. It said that the mere fact that other sources of finance might be explored, or that a taxpayer might have equity in a property or other security to support possible borrowing, will not of itself render such borrowing capacity as a resource which is either immediately or readily available.

It said that the same principle applied to borrowings secured by non-business assets. There may be circumstances in which the ability to make such borrowings may be regarded as constituting an immediately or readily available resource which may be realised without giving rise to financial hardship. Ordinarily, however, the process of obtaining such finance would mean that it could not be said to be immediately or readily available. The UT said it was therefore not an error of law for the FTT to conclude that the prospect of such borrowing would not constitute immediately or readily available resources capable of being realised without financial hardship.

This case related to VAT. For direct tax cases, disputed tax does not have to paid before an appeal to the FTT can proceed. HMRC usually agrees to postpone the tax until after the FTT decision, unless an accelerated payment notice or follower notice has been issued. If the taxpayer loses in the FTT, the tax then usually becomes payable even if the decision is appealed.

Whether a taxpayer can show financial hardship will depend upon the particular circumstances of the case, but this decision is a helpful one for taxpayers and a useful reminder of the case law on the test for financial hardship.