How to Apply for a Hardship Direction in VAT Cases?

Taxpayers facing a disputed VAT assessment often encounter a procedural barrier before they can have their appeal heard: the requirement to pay, or deposit with HM Revenue & Customs (HMRC), the full disputed amount. Under section 84 of the Value Added Tax Act 1994, an appeal relating to a VAT decision generally cannot be entertained by the First-tier Tribunal until the contested VAT has been paid in full. However, the law and HMRC’s own procedures recognise that payment may be impossible or commercially ruinous for some businesses. In such circumstances, a taxpayer can apply for a “hardship direction” to suspend the payment requirement, allowing the appeal to proceed while safeguarding trading viability.

This article examines the legal framework for hardship directions in VAT cases, explains how and when to apply, explores the evidence required, considers recent tribunal decisions, and sets out practical strategies for maximising the chances of success. It is written for businesses and advisers navigating challenging VAT disputes who need clarity, legal insight, and confidence in the process.

Why Hardship Directions Matter in VAT Appeals

Unlike direct tax appeals, where a mere lodgement of an appeal can suspend payment pending determination, VAT appeals are subject to different rules. The standard position under section 84(3) of the Value Added Tax Act 1994 is that the First-tier Tribunal cannot entertain an appeal against a VAT assessment unless the amount which HMRC has determined to be payable has been paid or deposited.

This requirement can trap businesses in a Catch-22: they are prevented from challenging a VAT assessment that they believe to be incorrect until they pay the disputed tax, but paying may inflict severe financial harm, disrupt cashflow, and even threaten insolvency. The hardship regime is designed to address this dilemma by enabling taxpayers to argue that paying the disputed amount would cause them financial hardship.

Hardship applications thus serve a critical function: they ensure that taxpayers are not compelled to choose between compliance and commercial survival. The availability of a hardship direction can mean the difference between pursuing a substantive appeal and being forced into settlement or liquidation.

Legal Framework Governing Hardship Directions

The statutory provision for hardship applications is found in section 84(3B) of the Value Added Tax Act 1994. It provides that, where paying or depositing the disputed VAT would cause the taxpayer hardship, the tribunal may still entertain an appeal if:

• HMRC accepts that payment would cause hardship, or
• the First-tier Tribunal, on application, determines that the taxpayer would suffer hardship.

HMRC’s internal guidance in the Appeals, Reviews and Tribunals Guidance (ARTG) confirms that hardship is a fact-specific evaluation. The taxpayer bears the burden of demonstrating that payment of the disputed amount would cause serious financial difficulty or jeopardise the viability of their business.

Hardship applications can be made first to HMRC. If HMRC refuses the taxpayer’s application, the taxpayer can then apply directly to the First-tier Tribunal for its own determination. The tribunal will consider the application in its own right and may decide that HMRC’s refusal was unreasonable or that, on the facts, hardship exists.

When to Make a Hardship Application

A hardship application must be made at the appropriate stage of the VAT dispute process. A taxpayer should seek a hardship direction:

• When lodging an appeal against a VAT assessment that has not been paid and
• Before HMRC has enforced payment, such as through enforcement notices or distraint.

Applications can be submitted simultaneously with the notice of appeal or shortly thereafter. Crucially, if an appeal proceeds without payment and without a pending, properly made hardship application, HMRC may request the tribunal to strike out the proceedings for lack of jurisdiction.

In practice, hardship applications often arise in situations where large VAT assessments are raised after an enquiry, sometimes years after the return was filed. Businesses that find themselves unable to meet the full payment, because of cashflow constraints, trading losses, or imminent insolvency, need to consider hardship as a procedural gateway to the substantive appeal.

What Evidence Is Required to Support a Hardship Application

Section 84 does not specify a rigid set of evidential requirements. There is no statutory list of documents that must be provided. However, HMRC’s own guidance makes clear that an applicant must satisfy the decision-maker that paying the disputed tax would cause hardship, and this generally requires clear financial evidence and explanation.

The type of evidence that supports hardship includes:

• audited accounts and management accounts showing income, liabilities, and net cashflow;
• bank statements demonstrating liquidity or overdraft position;
• cashflow forecasts covering a reasonable future period;
• details of assets and liabilities, including fixed assets, real property, or investments; and
• evidence of steps already taken to address the liabilities, such as negotiations with lenders or restructuring plans.

Where applicable, director witness statements explaining the commercial impact of payment on ongoing trading operations can be highly persuasive. HMRC’s hardship team will not accept vague assertions of difficulty; the applicant must demonstrate, on the balance of probabilities, that the business would suffer material financial hardship if required to pay the VAT prior to the resolution of the appeal.

How HMRC Assesses Hardship Applications

When HMRC receives a hardship application, it is considered by the Legal Group’s Indirect Hardship Team, which reviews all supporting evidence and makes a decision in accordance with ARTG3330. The decision-maker must assess each case on its facts and should not decide arbitrarily or on the basis of a checklist alone.

In assessing hardship, HMRC considers whether the taxpayer’s evidence demonstrates that payment would cause genuine financial stress. The decision-maker will weigh business prospects, available reserves, and the potential impact on operations. It is important to recognise that the fact that a taxpayer could meet the payment through selling assets or liquidating investments does not automatically mean that hardship does not exist; what matters is whether payment would materially impair the taxpayer’s ability to trade or meet other essential obligations.

Where HMRC accepts the hardship application, the taxpayer will be notified that payment is suspended and that the appeal can proceed without deposit of the VAT.

What Happens if HMRC Refuses a Hardship Application

If HMRC refuses the hardship application, the taxpayer has a separate right to apply to the First-tier Tribunal for its own consideration of hardship. The tribunal’s jurisdiction in this regard is distinct; it can decide whether hardship exists even if HMRC has refused the original application.

An application to the tribunal in these circumstances allows the taxpayer to put forward evidence anew. The tribunal will evaluate the hardship evidence afresh, considering whether HMRC’s refusal was reasonable and whether, objectively, hardship is demonstrated. If the tribunal concludes that hardship exists, it will grant a hardship direction, thereby enabling the appeal to be entertained without payment or deposit.

Failing to engage with the hardship process can be fatal to an appeal. Unless the amount is paid or a hardship direction is granted, the tribunal simply does not have jurisdiction to hear the appeal under section 84(3).

Tribunal Cases Demonstrating Hardship Principles

Recent tribunal decisions show how the hardship framework operates in practice.

In Clear Pay Payroll Ltd v HMRC [2025] UKFTT 916 (TC), the First-tier Tribunal allowed the appellant’s hardship application, finding that payment of the disputed VAT would cause the company material hardship and that the tribunal had jurisdiction to hear the substantive appeal without payment. The tribunal carefully considered the financial position and the consequences of requiring payment before the appeal could be entertained.

Older decisions also demonstrate that hardship can be accepted where the evidence of financial difficulty is clear and coherent. For example, in HMRC v Elbrook (Cash & Carry) Ltd [2017] UKUT 0181, the Upper Tribunal upheld a finding of hardship where the taxpayer proved that paying a substantial VAT assessment would adversely affect its core business activities, rather than simply being a matter of liquidity or access to finance.

Common Pitfalls and Strategic Considerations

One common error is relying on insufficient evidence or failing to demonstrate the specific effects of payment on future trading. A taxpayer should not assume that producing accounts alone will satisfy HMRC. Hardship needs a narrative backed by documentation explaining how payment would affect cashflow, operations, employment, or the ability to meet other creditors.

Another pitfall is waiting too long to apply. A hardship application should ideally accompany the notice of appeal or be made promptly thereafter. Delays can signal to HMRC a lack of urgency or seriousness, undermining the credibility of the application.

Taxpayers should also be mindful of procedural requirements: if HMRC refuses a hardship application, an immediate application should be lodged with the tribunal, before pressing the underlying appeal. This preserves the taxpayer’s rights and avoids unnecessary jurisdictional complications.

Practical Steps for Applying for a Hardship Direction

To maximise the likelihood of success, a hardship application should:

1. Be made in writing at the earliest stage possible, ideally together with a notice of appeal.
2. Clearly identify the disputed VAT amount and the basis of the substantive appeal.
3. Explain why payment would cause hardship, with reference to specific financial effects on the taxpayer’s business.
4. Include comprehensive supporting evidence, such as recent audited accounts, forecasts, and bank statements.
5. Address any HMRC requests for further information promptly and substantively.

Failure to provide sufficient evidence often leads to refusal by HMRC, which then requires a tribunal application that could have been avoided with a well-prepared original submission.

Why Specialist Representation Matters

Hardship applications sit at the intersection of procedural law, financial evidence, and commercial litigation strategy. HMRC’s internal manual and tribunals apply the statutory framework strictly, and success often depends on presenting evidence in a legally coherent form rather than simply submitting financial statements.

Legal advisers experienced in VAT disputes can assist from the outset by structuring the hardship application correctly, advising on which documents to include, and ensuring that the written narrative aligns with tribunal expectations. This often involves converting raw financial material into persuasive legal evidence, anticipating HMRC’s arguments, and preparing for potential tribunal hearings if HMRC refuses the application.

Conclusion: Hardship Directions as a Procedural Gateway

Hardship directions are a critical procedural mechanism, without them, many meritorious VAT appeals simply cannot be heard. By understanding the statutory basis in section 84(3B), the evidential requirements, and the tribunal’s power to grant hardship where HMRC refuses, taxpayers can protect their right to challenge VAT assessments without compromising their commercial viability.

Early advice, timely application, and robust evidential support are essential components of a successful hardship strategy. In many cases, securing a hardship direction determines whether an appeal will proceed at all, and can secure breathing space critical to the ongoing survival of the business.