[2011] UKFTT 426 (TC)
TC01279
Appeal number
TC/2011/01629
VALUE
ADDED TAX – late payment of VAT – default surcharges appealed against –
insufficiency of funds – whether the cause of the insufficiency amounted to a
reasonable excuse within section 59)7)(b) VATA and having regard to section
71(1)(a) VATA – Customs and Excise Commissioners v Steptoe [1992] STC 757 considered and applied – the cause was cash flow difficulties resulting from a
combination of defaulting debtors and the reluctance of the Appellant’s bank to
extend further borrowing facilities – held a reasonable excuse had been made
out – appeal allowed
FIRST-TIER TRIBUNAL
TAX
JMS
AGGREGATE SUPPLIES Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS (Value Added Tax) Respondents
TRIBUNAL:
JOHN WALTERS QC
MRS.
NORAH CLARKE
Sitting in public at Ty Nant, Swansea on 7 June 2011
Mrs. S. Morgan, Partner, for
the Appellant
Mrs. Karen Evans, Officer of
HMRC, for the Respondents
© CROWN COPYRIGHT
2011
DECISION
1. JMS
Aggregate Supplies (“the Appellant”), a partnership, appeals against 9 default
surcharges in relation to late payment of VAT. The details, taken from a
Schedule of Defaults prepared by the Respondents (“HMRC”) are as follows:
Period Due
Date Date Return Received Date Payment
Received
06/08 31-7-2008 11-8-2008 11-8-2008
09/08 31-10-2008 18-11-2008 18-11-2008
12/08 31-1-2009 10-2-2009 10-2-2009
03/09 30-4-2009 22-5-2009 22-5-2009
06/09 31-7-2009 2-9-2009 2-9-2009
09/09 31-10-2009 2-12-2009 2-12-2009
12/09 31-1-2010 2-3-2010 2-3-2010
03/10 30-4-2010 18-5-2010 18-5-2010
06/10 7-8-2010 15-3-2011 11-9-2010
2. It
was not suggested that payment was not in full on any occasion, and from the
above table it can be seen that the delay in payment being received varied from
10 days (in respect of period 12/08) to 42 days (in respect of period 06/10).
The surcharges were all at the rate of 15%, and amounted to £6,904.77 in
total. There had, in order to reach the 15% rate of surcharge, been periods
before 06/08 when the Appellant had been in default. In relation to at least
two of these periods (06/06 and 09/07) HMRC have recognised that the Appellant
had a reasonable excuse for the default (a postal strike in re: 09/07). HMRC
have also recognised that the Appellant had a reasonable excuse for the default
relative to the period 09/10 (illness and computer crashes).
3. The
return for the period 06/10 appears to have been the only one of the returns in
issue which was submitted electronically. All the others, according to the
file of papers before us, were submitted in paper form and all the paper
returns appear to have been completed on or before their respective due dates.
4. We
received oral evidence from Mrs. Sandra Morgan, the partner in the Appellant
who submitted the Notice of Appeal and signed all the paper returns in
evidence. We also had before us a bundle of documents including sample bank
statements, correspondence with non-paying trade debtors, correspondence with
solicitors regarding debt recovery and court papers relating to debt recovery
proceedings brought by the Appellant. We also had before us the Appellant’s
(unaudited) financial statements for the year ended 31 March 2009.
5. The
Appellant’s Balance Sheet as at 31 March 2009 shows long-terms loan liabilities
of £364,057 (including a commercial mortgage of £277,972) together with an
overdraft at Barclays Bank of £75,295. The accounts also show a very low level
of drawings from the business in the year ended 31 March 2009, £9,120 in Mrs. Morgan’s case and £60 in the case of Mr. J.W. Morgan, which was more than offset
by £1,364 capital introduced by him in that year.
6. The
Appellant’s evidence (which we accept) was that its business and cash flow had
suffered by reason of several customers defaulting on their debts due to the
Appellant. In a letter dated 8 April 2009, Mrs. Morgan informed HMRC that the
Appellant’s tenant owed it £18,000. The Appellant has been faced with the
necessity of paying its suppliers while suffering customer defaults. Nine
employees had also been retained, although on reduced hours, and the wages
charge for the year ended 31 March 2009 was £101,745, accounting for some 42%
of the Appellant’s non-finance-related expenditure. The bad debt charge was in
the year was £10,000. Recovery of debts by court action has proved expensive
and, on Mrs. Morgan’s evidence, relatively ineffective. She cites one example
of a debtor being ordered by the court to pay £20 a month to discharge a debt
of some £4,660. Admittedly this example related to 2007, before the period in
issue, but it was presented to the Tribunal as an illustration of the
difficulties the Appellant has experienced in getting legal redress against
defaulting debtors.
7. The
Appellant also told us (and we accept) that Barclays Bank had not provided
extra support to ease its cash flow problems even though the Appellant’s
relationship with the Barclays Bank manager concerned remained satisfactory.
Mrs. Morgan had also suffered a period of ill health.
8. The
applicable legislation is contained in section 59(7)(b) VAT Act 1994 (“VATA”) which provides that a person shall not be liable to a surcharge if he would otherwise be
liable (as is this case in relation to all VAT periods in issue) but satisfies
HMRC or, on appeal, a tribunal that, in the case of a default which is material
to the surcharge there was a reasonable excuse for the return or the VAT not
having been despatched on time.
9. It
is further provided (by section 71(1)(a) VATA) that for these purposes an
insufficiency of funds to pay any VAT due is not a reasonable excuse.
10. However, it has
been established by the leading case of Customs and Excise Commissioners v
Steptoe [1992] STC 757 that although insufficiency of funds can never of
itself constitute a reasonable excuse, the cause of that insufficiency – the
underlying cause of the taxpayer’s default – might do so.
11. The facts of Steptoe
were that the taxpayer was an electrical contractor in a relatively small
way of business, 95% of whose work was for the London Borough of Redbridge,
which was an extremely slow payer (paying on average 6 weeks to 2 months after
delivery of a bill. The taxpayer was late in making his returns for two
periods in a year (11/86 and 08/87). In each case the delay was about two
months. He was again in default for the 11/87 period and for the 02/88, 05/88
and 11/88 periods. The excuse put up by the taxpayer for late payment in these
periods was cash flow difficulties. That was rejected by the Commissioners, but
accepted by the tribunal (on the grounds of Redbridge Council’s conduct in
paying late), and, on appeal to the High Court, by the Judge (Kennedy J).
12. Scott LJ’s view
was that although the reason for an insufficiency of funds can be put forward
as a reasonable excuse, that reason must amount to something more than that the
business of the taxpayer has been carried on unprofitably or that conditions of
trade produce cash flow problems (ibid. at p.765). He said that
“absent some ‘unforeseeable or inescapable’ event, cash flow problems are, in
my opinion, barred … from constituting a ‘reasonable excuse’” and that “it is
only if the events giving rise to the insufficiency of funds are outside the
normal course of the taxpayer’s business that a possibility of a reasonable
excuse can arise” (ibid. at p.765). He would have held that no
reasonable excuse was made out in the Steptoe case.
13. Nolan LJ reached
the opposite conclusion. He accepted (albeit with some reluctance) the finding
of fact by the tribunal that the conduct of Redbridge Council in paying
consistently late had had the result that the taxpayer had found himself in the
situation that at the due date for the relevant accounting periods he was
without sufficient funds to pay the tax due. (ibid. p.769). He
considered that Scott LJ’s test for an acceptable cause of insufficiency of
funds, that it would have to be caused by an ‘unforeseeable or inescapable’
event, was too narrow.
14. Lord Donaldson
reached the same conclusion as Nolan LJ. He expressed the test, which must be
taken as the test to be applied by us, as follows:
“If
the exercise of reasonable foresight and of due diligence and a proper regard
for the fact that the tax would become due on a particular date would not have
avoided the insufficiency of funds which led to the default, then the taxpayer
may well have a reasonable excuse for non-payment, but that excuse will be
exhausted by the date on which such foresight, diligence and regard would have
overcome the insufficiency of funds.” (ibid. p.770)
15. On the facts as
found, we consider that Mrs. Morgan, for the Appellant, who impressed us as an
honest and responsible witness, did indeed exercise reasonable foresight, due
diligence and a proper regard for the fact that the tax would become due on the
various due dates. This is demonstrated by the fact that the paper returns
were made out on or before the respective due dates.
16. Nevertheless the
insufficiency of funds was not avoided and the cause of that (as opposed to the
excuse for late payment – a distinction drawn in Customs and Excise
Commissioners v Salevon Limited [1989] STC 907 and cited in Steptoe
(ibid. at p.767)) was, we have found, that the Appellant’s business and
cash flow suffered by reason of several customers defaulting on their debts due
to the Appellant, coupled with the refusal of Barclays Bank to provide the
Appellant with extra support to ease its cash flow problems. This is borne out
by the high levels of indebtedness (including the overdraft debt) recorded in
the Appellant’s Balance Sheet as at 31 March 2009 and the very low level of
partners’ drawings recorded for the year ended on that date. (It is relevant
to note that Mrs. Evans for HMRC told us that it was not open to the Appellant
to elect to account for its VAT on the cash basis – a topic discussed in Steptoe.)
17. We conclude
therefore that the Appellant’s exercise of reasonable foresight and of due
diligence and the Appellant’s proper regard for the fact that the tax would
become due on a particular date did not avoid the insufficiency of funds which
led to the default.
18. There is a
further finding which is necessary for the Appellant’s success in this appeal,
which is that the Appellant’s exercise of reasonable foresight and due
diligence and its proper regard for the fact that the tax had become due on a
particular date must have led to payment of the tax due as soon as the
insufficiency of funds could be overcome.
19. On this aspect
of the matter we note that payment was made in full after no more than 42 days
in the case of any period in issue, and after as little as 10 days in the case
of the period 12/08. We regard this fact as demonstrating that the Appellant
took its obligations to pay VAT on time sufficiently seriously and, having
regard to the exceptional difficulties being experienced in its trade, did all
that could reasonably have been expected of it to make timely payment of the
VAT due.
20. Some discussion
took place at the hearing of the appeal of the availability after 24 November 2008 of HMRC’s ‘Business Support Service’ in certain cases. We understand
that where HMRC extend that service, no default surcharges are levied in cases
of late payment of VAT made in accordance with a prior agreement concluded
between HMRC and a particular taxpayer. The Appellant did not reach any
agreement with HMRC pursuant to the ‘Business Support Service’, although it may
well have qualified to do so. Mrs. Morgan told us of the many difficulties she
had had in communicating with HMRC, which may be relevant in this regard. In
any event, we regard these facts as irrelevant to the issue which we have had
to decide, namely, whether the Appellant had a reasonable excuse for late
payment within section 59(7)(b) VATA.
21. In the result,
on the exceptional facts of this case and for the reasons given above, we
conclude that the Appellant has shown a reasonable excuse for its late payment
of VAT in the periods in issue for the purposes of section 59(7)(b) VATA and we allow the appeal.
22. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
JOHN WALTERS QC
TRIBUNAL JUDGE
RELEASE DATE: 29 JUNE 2011
