Judgment summary
Pertemps Limited appealed against two HMRC decisions, dated 2 and 9 January 2025, imposing late payment penalties of £115,741.02 and £830.03 under Schedule 26 to the Finance Act 2021, in respect of VAT for period 10/24 (1 August 2024 to 31 October 2024) (paras 2, 23).
The Tribunal considered whether Pertemps had a reasonable excuse for the late payment and, if not, whether HMRC had considered a special reduction and whether one should be made (para 3).
The Tribunal heard evidence from Jonathan Noad, Head of Tax, after the intended witness, Stephen Carlo Mogano, the Group Finance Director, was unable to attend due to illness (paras 5-6).
The Tribunal dismissed the appeal, finding no reasonable excuse for the failure to pay VAT on time and declining to reduce the penalties for special circumstances, notwithstanding a finding that HMRC's own decision-making on special circumstances was flawed (paras 63, 69, 77).
Background
Pertemps has been VAT registered since 1 August 2004 and is the representative member of the Pertemps VAT group, subject to the VAT payments on account regime (para 24).
The group's last reported turnover was £1.2bn with profit before tax of £11.6m, and in 2024 it paid over £200m to HMRC in taxes including VAT, PAYE and Corporation Tax. It had a good history of payment and tax compliance, with no evidence of previous VAT penalties (paras 25-26).
Pertemps Recruitment Partnership Limited (PRP), the main trading business, supplies flexible workers in sectors including Retail, Logistics and Delivery, with peak trading in the last quarter of the calendar year (para 27).
A significant customer (SC) increased its demand for flexible workers from about 3,000 in 2021 to about 9,000 in 2024, following the award of a Managed Service Provider (MSP) contract in Q3 2024 covering new geographical areas (paras 28-29). Demand from SC could not be readily forecast, as requests were made weekly by phone at short notice and no forecast was provided (para 30).
Flexible workers were paid weekly while credit terms with SC were 67 days, meaning Pertemps funded higher debt for around 60 days (para 31). A bank cap on SC's outstanding debt was increased from £37m to £42m in September 2024, but the debt rose to £61.8m by end of December 2024, reducing the total available facility by £19.8m (para 32).
On 29 November 2024 Pertemps made a VAT payment of £6.5m rather than the full amount, as full payment would have left insufficient funds for the following week's payroll of £8.3m (para 33). Further payments were made in December 2024 (£3m on 6 December, £1m on 9 December, £1m on 31 December), leaving £1.9m outstanding at year end (paras 34, 40). Pertemps approached NatWest on 17 December 2024 and HMRC on 19 December 2024 seeking time-to-pay arrangements, which HMRC rejected on several occasions (paras 35-39). The remaining balance was paid on 3 January 2025 (para 43).
Core dispute
The dispute concerned two issues: first, whether Pertemps had a reasonable excuse for failing to pay VAT owed as a payment on account balance for period 10/24; and second, if there was no reasonable excuse, whether HMRC had considered a special reduction under paragraph 13 of Schedule 26 FA 2021 and, if not, whether the Tribunal should find circumstances justifying such a reduction (para 3).
Pertemps argued that the unforeseeable and unprecedented increase in demand from SC, driven by a new MSP contract, created an insufficiency of funds attributable to events outside its control, and that paying its temporary workers rather than HMRC was necessary to avoid catastrophic commercial consequences (para 46).
HMRC maintained that the penalties were correctly imposed and, in its Statement of Case, asserted that special reduction had been considered, though this was not reflected in the review conclusion letter (paras 66-67).
Court findings
The Tribunal accepted several facts relied on by Pertemps, including the scale of increased demand from SC and the difficulty in forecasting weekly demand, but found that a responsible trader would have done more to forecast the level of trade with SC and would not have entered into a contract forcing it to supply demand it could not finance (paras 47-49).
The Tribunal found that dealings with NatWest were not prudent, as Pertemps should have returned to its bank no later than 29 November 2024, rather than waiting until 17 December 2024 (para 50). It also found that the decision to pay workers rather than HMRC was, on Mr Noad's own evidence, a commercial one, and that there was no legal obligation to prioritise wages over VAT (para 52).
Applying the objective test from Clean Car and the structured approach in Perrin, the Tribunal held that Pertemps' cash-flow difficulty arose from its own commercial arrangements, including expanded supply to SC and extended credit terms, rather than from an external event such as customer default as in Steptoe (paras 53-62). The Tribunal was not satisfied that Pertemps had a reasonable excuse for the late payment (para 63).
On special circumstances, the Tribunal found that HMRC's review conclusion letter did not refer to special circumstances, and the first apparent reference appeared only in HMRC's Statement of Case, which is a pleading and not evidence, following the approach in John Arnfield v HMRC [2014] UKFTT 52 (TC) (paras 66-67). The Tribunal therefore found that HMRC had failed to consider special circumstances, amounting to a public law flaw, giving the Tribunal jurisdiction to consider the matter itself (paras 69, 65).
Having considered the matter afresh, the Tribunal weighed factors including the absence of previous VAT default, the prompt payment of the outstanding balance, and the potential reputational and commercial consequences of non-payment of workers, against the fact that the cash-flow difficulty stemmed from Pertemps' own commercial choices and inadequate early steps to manage funding (paras 71-76). The Tribunal concluded that the circumstances were not sufficiently special to justify a reduction (para 76).
Outcome
The Tribunal dismissed the appeal against both penalties. Although HMRC's decision on special circumstances was found to be flawed for lack of consideration, the Tribunal's own assessment led it to decline to reduce the penalties under paragraph 13 of Schedule 26 FA 2021 (paras 77-78).
Major issues / areas of contention
- Whether Pertemps had a reasonable excuse under paragraph 12 of Schedule 26 FA 2021 for failing to pay VAT by the due date for period 10/24 (para 3).
- Whether the insufficiency of funds was attributable to events outside Pertemps' control, given the statutory exclusion of insufficiency of funds as a reasonable excuse (paras 13, 62).
- Whether HMRC had properly considered special circumstances under paragraph 13 of Schedule 26 FA 2021 before or during the review process (paras 66-69).
- Whether, if HMRC's decision on special circumstances was flawed, the Tribunal should itself find special circumstances justifying a reduction in the penalties (paras 70-77).
- The evidential weight to be given to a witness (Mr Noad) who adopted a statement originally prepared by another individual unable to attend due to illness (paras 5-6).