Tribunal considers test of 'financial extremity' for not paying disputed tax after FTT loss

The case concerned whether disputed VAT had to be paid after a First-tier Tribunal (FTT) decision in favour of UK tax authority HM Revenue & Customs (HMRC) which was being appealed to the Upper Tribunal.

"This is the first time the tribunal has considered what level of financial difficulties a taxpayer has to show to be able to appeal an unfavourable FTT decision to the Upper Tribunal without having to pay the VAT in dispute, " said Steven Porter, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.

Judge Andrew Scott said: "The ordinary meaning of [the expression financial extremity] takes matters beyond mere hardship. 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 case related to indoor snow dome operator Snow Factor Limited, which lost a case in the FTT concerning the rate of VAT chargeable on lift passes and appealed to the Upper Tribunal (UT). Usually disputed VAT has to be paid before a taxpayer can appeal to the FTT, but a taxpayer can apply to HMRC to not be forced to pay the VAT on the basis that paying it would cause 'hardship'.

In the case of Snow Factor, HMRC accepted that requiring payment of the VAT before the FTT hearing would cause hardship and so the disputed tax, amounting to around £300,000 was not paid.

After the company's unsuccessful appeal to the FTT, the disputed tax became payable, but a different provision allowed the taxpayer to apply to HMRC to not have to pay the tax before the UT appeal on the basis that "financial extremity might reasonably be expected to result".

HMRC accepted that payment of the whole of the outstanding tax in one go might cause 'financial extremity' for Snow Factor, but requested the payment of £300,000 in three instalments. The company applied to the UT on the ground that financial extremity might be reasonably expected to result from HMRC's decision.

"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. The expectation is a reasonable one, and that is an issue to be decided by reference to what one considers might reasonably happen if payment were made in accordance with HMRC’s decision," Judge Scott said in the UT.

"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," he said.

Although the financial extremity must result from HMRC's decision, the judge dismissed HMRC's submission that the result had to be direct and immediate. Although Snow Factor was projected to have a surplus until June 2019 even if it paid the full outstanding amount, the judge looked at the likely financial position of the business until the time the UT decision was likely to be given, in October 2019. As a result of the cyclical nature of the snow dome business, there was a projected deficit from July to October.

The judge said that unlike section 84(3B) of the VAT Act 1994, which deals with hardship claims before a FTT hearing, section 85B(5)(c), which deals with the position after an FTT decision is silent as to the person who must be in a state of financial extremity.

He said this meant that the position of the group had to be taken into account. Steps that could be taken by other group members should also be taken into account, provided it was reasonable to expect that to happen.

Having considered the company's evidence as to its financial position, and in particular the cyclical nature of its business, the judge considered that the company could reasonably be expected to have put in place a temporary modest increase in prices or advancement of receipts, a temporary modest decrease in expenses or delay in their payment and a temporary increase in its overdraft.

He decided that if these steps were taken the company would have the resources to pay £155,000 of the VAT and so he ordered payment of that sum within 30 days of the release of the decision to the parties.

"It is clear from the case that it will be difficult for a taxpayer to show financial extremity if it has not made any attempt to improve its finances or look for funding. The test for not having to pay the tax after an unsuccessful FTT appeal will be more difficult to satisfy than the hardship test before an FTT appeal," Steven Porter said.

The position in relation to paying the disputed tax is different for a direct tax appeal, where the taxpayer can apply to postpone the payment of the tax, and the tax will not usually have to be paid before the FTT hears the case.

In 2018, the Supreme Court decided that the requirement to pay disputed VAT before an appeal would be entertained by the FTT did not breach the EU principle of equivalence.

In that case, Totel Limited, a mobile phone company, had argued that appeals against assessments to income tax, capital gains tax and stamp duty land tax were claims which were similar to appeals against assessment to VAT and that, because a VAT appeal was subjected to a 'pay-first' requirement whereas those other appeals were not, the UK's procedural rules for VAT appeals were less favourable than those governing similar domestic claims. The Supreme Court said these taxes were not true comparators to VAT because the economic burden of VAT usually fell upon the ultimate consumer and the trader was usually collecting it from the consumer and accounting for it to HMRC, rather than paying it from its own resources.