Snow Factor Limited v The Commissioners for HMRC

Under section 85B(5) of the Value Added Tax Act 1994, “financial extremity” is a more demanding condition than hardship. It must be assessed as a whole, by asking whether there is an objectively reasonable basis for expecting that financial extremity may result from HMRC’s payment decision before the further appeal is determined.

The inquiry is forward-looking. It is not confined to immediate consequences or to the appellant’s resources alone. It may include the position of its corporate group and reasonable temporary steps to meet the liability, while allowing a prudent cushion for uncertainty. A causal nexus is required, but direct and immediate causation is not.

Where the threshold is met, the Tribunal has a discretion, to be exercised judicially and consistently with the statutory balance between revenue protection and an effective appellate process, to replace, vary or supplement HMRC’s decision.

Snow Factor Limited appealed against a First-tier Tribunal decision, reference TC/2016/01847, which held that receipts from lift passes at its indoor snow dome were standard-rated for VAT. Permission to appeal to the Upper Tribunal was granted on statutory construction and fiscal-neutrality grounds.

After the First-tier Tribunal decision, HMRC required payment of £300,000 in instalments under section 85B of the Value Added Tax Act 1994. Snow Factor applied to the Upper Tribunal under section 85B(5), contending that the decision might cause financial extremity. The central issue was whether financial extremity might reasonably be expected to result from HMRC’s decision and, if so, what relief should be ordered.

1. The application succeeded in part. The statutory conditions in section 85B(5)(a)–(c) of the Value Added Tax Act 1994 were met. The Tribunal replaced HMRC’s decision and required payment of £155,000 within 30 days.

2. “Financial extremity” has its ordinary meaning and is more onerous than hardship. It lies at the far end of the spectrum of financial health. The Tribunal declined to formulate a generic list of states, including insolvency, which would necessarily amount to financial extremity. The statutory expression must be applied to the circumstances as a whole.

3. The phrase “might be reasonably expected” requires more than a theoretical possibility. The question is objectively informed, but takes account of the taxpayer’s particular circumstances and business choices. The word “results” requires a causal nexus with HMRC’s decision, but does not require direct or immediate causation. The relevant timeframe runs until the further appeal is determined, so a foreseeable later effect on a cyclical business may qualify.

4. The silence of section 85B(5) as to the person affected permits consideration of the wider corporate group. The Tribunal had to consider reasonable steps that the applicant and its sister company could take temporarily to meet the liability, including modest increases in receipts, reductions or deferral of expenditure, and an approach for a larger overdraft. It was not reasonable to assume action by the holding company, given its control position and fixed debt commitments.

5. On the evidence, even after reasonable mitigating measures, the group would face significant deficits exceeding £100,000 for several months before the substantive appeal was likely to be resolved. That was financial extremity. The discretionary power was then exercised judicially to preserve the statutory balance. A payment of £155,000 was fair and just because it left positive immediately available group resources over the relevant period.

• Upper Tribunal (Tax and Chancery Chamber): granted permission to appeal the substantive VAT decision on statutory construction and fiscal neutrality, and allowed this section 85B(5) application in part.

• First-tier Tribunal (Tax Chamber): by decision reference TC/2016/01847, held that the lift-pass supplies were standard-rated. It refused permission to appeal on both proposed grounds.