In Hospital Telecommunications Services Limited v HMRC [2016] UKFTT 161 (TC), the FTT considered whether the company had a reasonable excuse for late payments of VAT.


Hospital Telecommunications Services Limited (HTS) supplied services to hospital trusts. Prior to 2010, many of its customers had taken several months to pay its bills. Substantial sums were owed to HTS by a number of its customers and some had remained outstanding for over six months. As a result, HTS’s finances were under considerable pressure.

In the light of its financial issues, HTS asked if it could switch to a cash accounting basis for the purposes of dealing with its VAT liability. HMRC refused this request and no explanation was offered as to why the request had been refused. The refusal was made despite the fact that HTS was not in debt to it and its turnover was within the permitted range.

Some years later, after numerous defaults and default surcharge penalties, HTS was informed by HMRC that most of the problems were of its own making and that it should have changed over to cash accounting.

HTS appealed against the imposition of further default surcharges. The issue before the FTT for consideration was whether it had a reasonable excuse for the late payments.

The FTT’s decision

The FTT considered the Steptoe principle (CCE v Steptoe [1992] STC 757) which confirms that the factor which leads to a shortage of funds can in certain circumstances constitute a reasonable excuse for late payment and is therefore a defence against a default surcharge.

The fact that HTS was facing late payment by numerous customers, rather than by a single customer, made reliance on the Steptoe principle difficult.

However, the FTT noted a number of significant errors made by HMRC in dealing with this case. HMRC’s initial failure to allow HTS to account for its VAT on a cash accounting basis was relevant. The FTT commented that whilst the continuing cash flow problems might have made it impossible for HTS to transfer over to cash accounting at a later date, that was not the case when the initial request was made. In its view, this failure was the dominant reason for the problems HTS faced thereafter.

The FTT noted HMRC’s apparent lack of concern to help HTS and in particular, its failure to advise the taxpayer to consider making bad debt claims. In addition, HMRC made repeated errors with regard to time-to-pay arrangements. On one occasion HMRC wrongly took, by direct debit, both the instalment payment under the time-to-pay arrangements and the total debt at the same time. On another occasion, HMRC failed to take a direct debit payment it could and should have taken.

The refusal by HMRC to agree to allow HTS to account for VAT on a cash accounting basis and HMRC’s repeated errors lead the FTT to conclude that HTS had a reasonable excuse for its  late payments.


In determining whether the taxpayer had a reasonable excuse in this case, the FTT considered events which had occurred at the beginning of the payment difficulties in 2010.

In reaching its conclusion, the FTT was assisted by a detailed witness statement prepared by the taxpayer, which set out in considerable detail the history of the dispute since 2010. As this case demonstrates, the importance of well-prepared witness evidence cannot be underestimated when appealing to the FTT.

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