Customs and Excise Commissioners v Steptoe [1992] STC 757

The statute says an insufficiency of funds is not a reasonable excuse. Taken literally that would defeat every late payment appeal, because the immediate reason is always that the money was not there. Steptoe lets the tribunal look one step further back, to why it was not there.

The Case That Rescues the “I Couldn’t Pay” Argument

The penalty legislation contains a blunt exclusion: an insufficiency of funds is not a reasonable excuse. It appears in s71(1)(a) VATA 1994 for VAT default surcharges, and in materially the same terms in paragraph 16 of Schedule 24 FA 2007, paragraph 23 of Schedule 55 FA 2009 and paragraph 16 of Schedule 56 FA 2009, each qualified by the words “unless attributable to events outside the person’s control”.

Read literally and without Steptoe, that exclusion would defeat almost every late payment appeal, because the immediate reason for late payment is always that the money was not there. Steptoe is the authority that lets the tribunal look one step further back.

The Facts

Mr Steptoe was an electrical contractor. The overwhelming majority of his work (on the findings, around 95% of it) was carried out for a single customer, a local authority. That customer habitually paid late, and Mr Steptoe had no practical ability to compel earlier payment or to walk away from the relationship without destroying his business.

The consequence was chronic cash flow difficulty. He was repeatedly late in paying his VAT and incurred default surcharges. He appealed, arguing reasonable excuse.

The Commissioners’ position was straightforward: he was late because he had no money, and the statute says that is not a reasonable excuse. End of argument.

The Ratio Decidendi

The two-step enquiry

1. Identify the immediate cause. This will almost always be the absence of funds, and by itself it is excluded.
2. Identify the underlying cause of that absence. Then ask whether it was outside the trader’s control and unavoidable by a reasonable trader exercising reasonable foresight and due diligence.

The qualifying words matter as much as the principle. The standard is not simply “something happened to me”. It embeds an expectation that the trader will exercise foresight, will make provision, and will conduct the business with proper regard for the obligation to account for tax on time.

The Division in the Court and What Follows From It

The Court was not unanimous, and the dissenting view is worth understanding because it is the argument HMRC will run.

• The majority position is that Parliament cannot have intended the exclusion to defeat every case, since the immediate cause of late payment is always want of money. To give the exclusion any sensible operation, the tribunal must be permitted to look to the underlying cause.
• The dissenting view is that the exclusion means what it says, and that permitting an enquiry into underlying causes effectively reads it out of the statute. On this view a trader who structures his business so as to be dependent on a slow payer has assumed that risk.

The observations on either side about how chronic, as opposed to sudden, difficulties should be treated are not part of the binding rule. They are, however, the terrain on which the argument is fought in practice, and HMRC’s standard submission is that a long-standing cash flow problem is a business risk rather than an event outside the trader’s control.

The Modern Framework

Steptoe now operates within the structured approach laid down by the Upper Tribunal in Perrin v HMRC [2018] UKUT 156 (TCC). The four stages are:

1. establish the facts the taxpayer says give rise to the excuse;
2. decide which of those facts are proven;
3. decide whether, viewed objectively and taking account of this taxpayer’s experience, knowledge, attributes and situation, they amount to a reasonable excuse, and when it ceased;
4. decide whether the failure was remedied without unreasonable delay after the excuse ceased.

Steptoe supplies the analysis at stage three where the facts relied on are financial. Perrin supplies the structure and, importantly, stage four, which is where a great many insufficiency claims fail even after the Steptoe argument has been won.

Practitioner Application

Causes that have succeeded

• A major customer defaulting or entering insolvency, particularly where the exposure was concentrated and the debt was pursued.
• A bank withdrawing or reducing facilities without notice, or refusing to honour an agreed drawdown.
• Fraud or theft by an employee or agent, discovered late.
• A sudden, unforeseeable external shock to the business, as distinct from a gradual decline.
• Illness or incapacity of the person responsible for the finances, where no realistic cover existed.

Causes that generally fail

• Ordinary trading difficulty or a downturn in demand.
• Over-optimistic cash flow forecasting.
• A deliberate decision to pay other creditors first, which HMRC will characterise as using the tax as working capital.
• A repeat of a problem the trader has already experienced, since foresight is expected the second time.
• Failure to seek a Time to Pay arrangement, where one could have been requested.

Building the case

• Prove the underlying cause with documents, not assertion: bank correspondence, facility letters, the customer’s insolvency notice, ledgers showing the exposure, correspondence chasing payment.
• Show foresight and mitigation. What did the trader do to avoid the problem, and to deal with it once it arose? Evidence of chasing the debtor, seeking alternative finance, or approaching HMRC early is exactly what the qualifying words require.
• Address concentration risk head on. Where a single customer dominates the trade, explain why that was commercially unavoidable rather than leaving HMRC to characterise it as an assumed risk.
• Fix the date the excuse ceased and evidence what happened next. Stage four of Perrin defeats more of these appeals than stage three.
• Approach HMRC for Time to Pay early. Doing so both mitigates the penalty position prospectively and demonstrates the responsible conduct the Steptoe standard expects.
• Plead special reduction in the alternative. Special circumstances are a separate statutory route and a separate ground of appeal, and HMRC frequently fails to consider them at all.

Frequently Asked Questions