Snow Factor – Upper Tribunal determines the meaning of "financial extremity"

In Snow Factor Ltd v HMRC [2019] UKUT 77 (TCC), the Upper Tribunal (UT) has determined the meaning of the phrase "financial extremity" in section 85(B), Value Added Tax Act 1994 (VATA).

Background

Snow Factor Ltd (the applicant), was unsuccessful in its appeal against two VAT assessments in the sum of £274,715 before the First-tier Tribunal (FTT). The appeals concerned the rate of VAT applicable in respect of receipts relating to lift passes sold by the applicant in running its indoor snow dome.  The FTT agreed with HMRC that the applicable rate of VAT was the standard rate rather than 5%, as contended for by the applicant.  

The applicant appealed to the UT.  

HMRC decided that, pending the determination of the applicant's appeal in the UT, the applicant should pay the VAT due in three equal instalments.  In response, the applicant made an application to the UT, under section 85B, VATA, to not have to pay the VAT in dispute pending determination of its appeal, on the ground that it would suffer "financial extremity".  

UT decision 

In considering the meaning of section 85B(5)(c), the UT focused on whether "financial extremity might be reasonably expected to result" from HMRC's decision.  The UT noted that:

a) financial extremity was a more onerous test than "hardship" and "financial extremity" was at the very far end of financial health;

b) what might be "reasonably expected" was something more than a theoretical possibility and there had to be some reasonable basis that it might occur;

c) the matter had to be decided on the basis of what might reasonably happen if the VAT was paid in advance of the appeal hearing;

d) The financial extremity had to "result" from HMRC's decision and there had to be a causative link between the decision requiring the payment of some or all of the disputed VAT and the financial extremity.

In the view of the UT, the test of reasonableness was, in essence, an objective one. Having regard to all the circumstances, what steps would it be reasonable to expect the taxpayer to take in order for it to meet the tax liability. However, the UT also considered the test has certain subjective elements and account should therefore be taken of the particular circumstances affecting the taxpayer concerned and the way in which it had chosen to carry on its business. 

The UT noted that section 85B(5)(c) was silent as to the person who had to be in a state of financial extremity, therefore, this could extend to include a group of companies affected by HMRC's decision.  

The UT further noted that it had power under section 85B(6)(a) to replace, vary, or supplement, HMRC's decision. The UT concluded that the conditions in section 85B(5)(c) were satisfied and considering the applicant's financial circumstances, it should pay £155,000 of the disputed VAT to HMRC within 30 days.   

Comment

This decision provides helpful guidance on the test to be applied when considering "financial extremity" for the purpose of an application under section 85B(5)(c), VATA. This is the first time the UT has considered the test in any detail and it has made clear that "financial extremity" is more than financial hardship. Taxpayers cannot therefore assume that if HMRC, or the FTT, have granted relief from payment of the disputed VAT on the grounds of "hardship" under section 84(3), VATA, they will automatically not have to pay the disputed tax should the matter proceed on appeal to the UT, or higher courts, on the basis of financial extremity.   

A copy of the decision can be viewed here.