[2009] UKFTT 52 (TC)

Appeal
TC00031

Appeal number: LON/2008/0985

Value Added Tax  -  Default surcharge  -  First default occasioned by late refusal of bank to advance monies following a long, and initially encouraging, negotiation – second default occasioned by CHAPS payment being late on account of the failure to note that 7 May 2007 was a Bank holiday -  First appeal allowed and second appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	DUDMAN GROUP LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

				TRIBUNAL: 	HOWARD M NOWLAN (Judge)
						CAROLINE S de ALBUQUERQUE

Sitting in public in London on 8 April 2009

Michael Davies, Finance Director of Dudman Group Limited  for the Appellant

Pauline Crinnion of the Office of the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

1.     This was a default surcharge appeal against two defaults, one for the period 12/06 for which there was no surcharge because this was the first relevant default, and one for the period 03/07.  The second default involved the late payment by two days of VAT of £524,299.77, and since this default attracted surcharge at the rate of 2%, the surcharge imposed was £10,485.99.  

2.     We allow the appeal in relation to the first default for the 03/07 period for the reasons given below. We dismiss the appeal in relation to the second default, though since the elimination of the first default eliminates the actual imposition of penalty for the second default, and since following the second default there were no further defaults in the relevant year period during which defaults are accumulated, nothing in fact turns on the fact that the appeal in relation to the second default is dismissed. 

The facts

3.     Michael Davies explained that the Appellant group conducted an expanding aggregates business. He explained that in order to compete with the dominant companies in the business, the Appellant company generally had to grab opportunities to ensure supplies. He also explained that because the group had been expanding its turnover, and its debtors generally expected 60 to 75 days credit for materials purchased whilst most of its creditors had to be paid immediately, the group companies generally faced pressure in financing their working capital. In the period material to the two defaults the group companies had apparently been factoring 80% of the debts that the group’s factoring arrangement enabled the companies to factor, so that further expansion and acquisition would require bank loans. 

4.     In about October 2006 an opportunity arose to acquire a source of granite by taking some form of lease over a quarry in the west of England from a Colas company. The lease itself would directly involve no capital expenditure, because the lease would require the Appellant merely to pay a royalty on granite extracted.    Exploitation of the quarry would however require additional plant and machinery and the purchase of a further ship. The requirement for the ship resulted from the fact that most of the Appellant’s customers were in the Sussex, Surrey and Hampshire area, and aggregates generally have to be transported by ship because the transport cost of moving aggregates by land very soon exceed the cost of extraction. 

5.     Michael Davies explained that negotiations commenced with Barclays, which had been the group’s bankers for a 10-year period, in October 2006 for a £3 million loan. The loan was intended to be sub-divided into various elements in that part was to be applied in financing the new ship and the further plant and machinery required, and part was to provide a further working capital facility. The group had good relations with the Horsham branch of Barclays, which effectively dealt with business customers for the Sussex, Surrey and Hampshire area, and Michael Davis believed at an early stage that the loan had effectively been agreed by Barclays.    

6.     One of the conditions to the advance of the loan from Barclays was that one of the other group companies would grant a charge over two existing ships that that company owned that were previously unencumbered. This charge was duly put in place. 

7.     Problems arose in finalising the loan.  Michael Davies attributed the difficulties to the fact that Barclays closed the Horsham branch and moved the business of that branch to Canary Wharf and to the resultant fact that he had to deal with new personnel, some of whom were unfamiliar with the Appellant’s business. Barclays claimed that they had become uneasy about the charges given over the two existing vessels, notwithstanding that they had been aware of the description of the vessels for about a year, and notwithstanding that valuations of the vessels suggested that they afforded adequate security for the loan. The concerns of Barclays stemmed from the fact that the ships were registered as “Grey flag” ships, which apparently meant that, in the gradation of ships from white flag to grey flag to black flag (in descending order of value and condition), the ships were not first quality white flag ships, but were in the middle category. Michael Davies asserted that the ships could not possibly be white flag ships because that category was effectively confined to relatively new ships, whilst the two ships in question were about 50 years old. He explained however that the ships were in perfectly serviceable condition and that one had been rebuilt as recently as 2003. He attributed the concern of Barclays either to unfamiliarity with the issue of whether grey flag ships were, as Michael Davis contended, adequate security, or alternatively he suggested that Barclays might have been changing its priorities and starting to amass funds for a then proposed bid for ABN Amro. Barclays in turn might have argued that they were concerned that an existing loan for an acquisition of Dibles Wharf was still being serviced on an interest only basis and that it had not been converted into a repayment loan, though it its turn the Appellant asserted that repayment of the Dibles Wharf loan was only meant to commence when the new facilities had been finally agreed and drawn down. 

8.     Whatever the exact causes of the break-down in negotiations for the loan, the end result was that on about 7 January 2007, it finally became clear that Barclays were not going to be willing to advance the funds, or at least advance them in time to enable the Appellant to apply part of the funds borrowed in paying its VAT of approximately £281,000 on 31 January. Barclays did offer a one month facility of £350,000 on 8 January, but since they were not prepared to extend this beyond the one-month period, such that on 8 February the loan would become due at a time when the Appellant would be unable to repay, Mr. Davies said that the Appellant felt unable to draw on a facility that would put the group in default in a month’s time.  Drawing on that one-month facility would put the group’s whole business at risk. 

9.     Following the breakdown of the negotiations with Barclays, the Appellant commenced negotiations with Allied Irish Bank, whilst its own current account with Barclays fluctuated daily between having modest credits and being in substantial unsanctioned overdraft. We were told however that the negotiations with Allied Irish Bank were successful, and that on 30 March the group changed its bankers, and drew down the required funds from Allied Irish Bank. 

10.     We were also told that by the time the negotiations with Barclays broke down, the Appellant had expended about £160,000 on plant and machinery, designed to exploit the quarry being leased from Colas.

11.    The Appellant notified HMRC that it would regrettably be late in paying its VAT for the period 12/06 and that cash flow would enable the payment to be made two weeks after the due date.  In fact this promise was not met but the VAT was paid on 12 March.

12.     The final relevant facts are that following the draw-down of monies from Allied Irish Bank, the Appellant was in a position to pay its VAT liabilities on time, at least for the period 03/07 and for succeeding periods for at least the next year. The delay in making the CHAPS payment for the VAT period 03/07 resulted not from any shortage of funds but from the fact that the Appellant failed to note that May 7 (the last day for making a CHAPS payment of the Appellant’s VAT for the period 03/07) was a Bank holiday, such that in order to make the payment by the due date, the payments should have been paid on 4 May.  As it was it was paid on Tuesday 8 May, and HMRC received the funds on 9 May. 

Our decision

12.     Our decision is that the Appellant had a reasonable excuse for the late payment of its VAT for the period 12/06, but no excuse for the late payment for the period 03/07.

13.   We accept that shortage of funds of itself, and more particularly cash flow difficulties occasioned by rapid expansion, cannot rank as a reasonable excuse for the late payment of VAT liabilities.  The Appellant has however convinced us that it had been negotiating with its established bankers for a loan that it definitely believed would be available to it, and at a very late stage those negotiations broke down. It is not for us to decide whether the Appellant was inexplicably let down by Barclays, or whether Barclays had legitimate concerns with the Appellant’s cash flow difficulties and possibly its over expansion. We consider it sufficient to note that in the very short time scale by 30 March, the Appellant managed to draw down the funds required from a different bank, and that at least for the period for which we were given information during the hearing, the Appellant always paid its VAT on time, save for the Bank holiday error referred to above. We note in particular that by the time the negotiations with Barclays had broken down, the Appellant had laid out £160,000 on acquisitions of plant and machinery, all of which was intended to be financed with the Barclays loan, and that that loan was also designed to fund working capital. We thus consider that the cause of the shortage of funds that occasioned the late payment for the period 12/06 was this late breakdown in the negotiations with Barclays, and we consider that that provides the Appellant with a reasonable excuse for the late payment of VAT for the 12/06 period. 

14.     No special factors were drawn to our attention to provide an excuse for the late payment of VAT for the 03/07 period. The Appellant had been paying its VAT electronically for some time, and was or should at least have been familiar with the date by which electronic payment had to be made. Although the payment was only two days late, and this resulted from what might be described as “a minor slip-up”, it is nevertheless for the Appellant to see that its liabilities are paid on time, and it should certainly have occurred to the Appellant that, with a Bank holiday on 7 May, the last date on which it could pay its VAT on time for the 03/07 period was 4 May. 

15.     We thus allow the appeal for the period 12/06 and dismiss the appeal for the period 03/07.  As already explained nothing actually turns on the fact that the appeal for the later period is dismissed. 

HOWARD M NOWLAN

TRIBUNAL JUDGE
RELEASE DATE:17 April 2009