A FAMILY business has convinced a tax judge to take the unprecedented step of ruling that the harsh effect of the economic downturn was a reasonable excuse for failing to pay a VAT bill on time.

Scrimsign Micro-Electronics, which makes electronic displays, was hit by the taxman with default charges worth thousands after failing to make VAT payments before deadlines in 2012.

The North Ayrshire company - which saw its turnover plummet by half after the economic downturn bit in 2010 - had its pleas for mercy from the penalties rebuffed by HM Revenue and Customs (HMRC).

However, a judge at a First-Tier Tax Tribunal, sitting in ­Edinburgh, ruled that Scrimsign should be exempt from the charges as its late payments were due to "factors flowing from the general effects of the recession".

Judge Gordon Reid, QC, said the company, founded in 1986, was badly hit by the global economic meltdown, losing around £10,000 in the two years leading up to December 2011.

The Irvine firm, which m­anufactures digital displays for the transport, health and financial industries, found itself in dire straits but managed to stay afloat after securing credit agreements with some of its suppliers.

The judge added: "However, their own customers have not been so understanding. Many of them are in the position to dictate their own terms of business and frequently provide for payment after 60 days or more."

Between July and December 2012, the firm - which employs five people - was hit with three surcharge notices totalling £3022.67 for failing to pay VAT bills on time.

The company's managing ­director, Keith Scrimshire, contacted HMRC and explained it was experiencing severe financial difficulties entirely attributable to the economic climate.

However, HMRC refused to accept the company had a reasonable excuse for late payment as it had failed to show that its financial problems were caused by factors "outside its influence or control" and not just the "normal hazards of trade".

Mr Scrimshire told the tribunal that in 2010 the company's t­urnover was reduced by 50 per cent, but it managed to continue trading.

The judge said: "Cashflow was tight, the working week was reduced, he gave up his company car. Big customers were throwing their weight about by delaying payment beyond even the 60 days for which they began to stipulate."

The grinding halt in credit from banks was another issue that severely hampered the firm.

Mr Scrimshire said that if the three late VAT payments had been made on time it would have had to cease trading.

"The business was operating from day to day and there was no way of predicting whether his customers would pay timeously. He pointed out that the VAT was always paid in full and was frequently only a few days late," the judge said.

Elizabeth McIntyre, of HMRC, contended that "a prudent taxpayer would, in the circumstances described by Mr Scrimshire, have contacted HMRC and made suitable time to pay arrangements."

However, Judge Reid said: "The effects of the recession have travelled far afield and have affected many businesses in many different ways at different times. In the present appeal, these effects seem to me to be somewhat different from the normal hazards of trade.

"I accept Scrimsign was placed in difficult financial circumstances which arose because of a combination of factors flowing from the general effects of the recession."

He added: "I consider that it (the information supplied by Scrimsign) is just sufficient to enable me to conclude that the company has a reasonable excuse for the failure to make payment timeously on the three occasions which are still in issue. All outstanding sums were paid as soon as it was reasonably possible to do so."

The judge allowed the appeal and quashed the surcharges.