In Social Care 4U Ltd v HMRC 8, the FTT considered the principles set down by the Court of Appeal in Customs and Excise Commissioners v Steptoe 9 and whether insufficiency of funds constitutes a reasonable excuse for late payment of VAT.


Social Care 4U Ltd’s (Social Care) principal activity was the supply of temporary social care workers to managed service companies. Those companies’ clients were the social care departments of London Boroughs, such as Hackney, Haringey, Barnet and Redbridge. The terms under which Social Care operated were “pay when paid”, in other words, Social Care was paid when the managing service companies were paid.

In early 2010, Social Care began experiencing cash-flow problems under contracts with one of its managed service companies, Ranstad Sourceright Ltd (Ranstad). The essence of the  problem revolved around the fact that Social Care had to pay the workers on a weekly basis but were only being paid by Ranstad monthly. This was compounded by the administration of timesheets. The workers were only paid on production of a signed timesheet, but the timesheet had to be entered on to the purchase order system before Ranstad would pay Social Care. The administration of this was not in Social Care’s hands, but in Ranstad’s.

In the light of the cash-flow difficulties, Social Care notified HMRC in advance that they would be unable to pay the liability due on 09/11 in full. However, they did not enter into a “time-to-pay” (TTP) agreement. Accordingly, HMRC issued a default surcharge in respect of the period 09/11.

A TPP agreement was requested for the period 12/11, but this was refused. This was also the case for the period 03/12. As a consequence, Social Care was late in paying the VAT in both periods. HMRC duly issued default surcharges in respect of these periods.

As readers will be aware, the consequences of a default surcharge may be avoided if the person concerned has a reasonable excuse. However, under section 71(1)(a) VATA, an insufficiency of funds to pay any VAT due is not a reasonable excuse. Nevertheless, Social Care appealed the default surcharges levied for the three periods. They relied upon the Steptoe case and argued that it was entitled to rely upon the underlying case of insufficiency. It had to surrender control of its cash flow to Ranstad who accounted for nearly half of its business.

The FTT’s decision

The FTT began by considering the relevant facts and decision in Steptoe. Steptoe concerned an electrical contractor who was late in paying VAT in several quarters. His only customer was the London Borough of Redbridge Council, who was an extremely slow payer. In the circumstances, the Court of Appeal concluded that the taxpayer did have a reasonable excuse. The court concluded that: “if the exercise of reasonable foresight and due diligence would not have avoided the insufficiency of funds which led to the default, then the taxpayer may well have a reasonable excuse for non-payment, but that excuse will be exhausted by the dates on which such foresight, diligence and regard would have overcome the insufficiency of funds.” (the Steptoe test).

The FTT acknowledged that the type of issue Social Care faced in the conduct of its business is capable of reasonable excuse. However, on the evidence before it, the FTT concluded that Social Care had not sufficiently demonstrated that it satisfied the Steptoe test.

In reaching its decision the FTT noted that the documentary material presented did not provide clarity on the precise position for the periods of default. They did not accept that Social Care was in a comparable position to Mr Steptoe. Social Care was not a business that was without cash altogether; its turnover provided an indication of the extent of its overall cash flow. Social Care decided to use its available cash flow to pay its workers for the services, despite Ranstad continuing to delay, or refusing full payment for those services.

In the FTT’s view, there was not enough evidence for the periods in default in question to enable it to conclude that payment of the VAT as soon as Social Care was able to, was all that could be done. The FTT noted that the problems with Ranstad had emerged in 2010, well over 12 months before the periods in dispute. Mr Steptoe was at risk of being offered no further work by the Council if he complained but there was no equivalent evidence in Social Care’s case nor any indication as to what steps were open to it vis-à-vis Ranstad to alleviate its VAT default position.

Social Care’s appeal was therefore dismissed.


Unfortunately for Social Care, the evidence presented at the hearing was not sufficient to  enable the FTT to conclude that it had a reasonable excuse for non-payment. Whilst VAT returns for the periods in default, together with various schedules of payments and invoices were provided to the FTT, no witness evidence was submitted to provide a detailed explanation of the operation of Social Care’s business, its relationship with Ranstad, or its cash flow difficulties.

This decision is a reminder of the crucial role evidence has to play in determining the outcome of appeals before the FTT.

A copy of the FTT’s decision is available to view here.