[2010] UKFTT 100 (TC)

TC00411

Appeal number:  TC/2009/12178

Appeal against default surcharges – whether the Appellant had a reasonable excuse for a number of late VAT returns and payments because of cash flow problems

FIRST-TIER TRIBUNAL

TAX 

	H & I Toiletries Ltd	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

				TRIBUNAL: Mrs S.M.G.Radford  (Judge)
						Mrs.R.S.Johnson

Sitting in public at Audit House in London on 7 October 2009

Mr Dennis Aaronson, director of the Appellant

Mrs Pauline Crinnion for the Respondents

© CROWN COPYRIGHT 2009

DECISION

The Appeal
1. The Appeal is against the default surcharges for periods 12/06, 03/07, 09/07, 12/07, 03/08, 09/08 and 12/08 being the second and subsequent defaults which also includes period 09/06.
2. The Appellant submitted that the defaults arose as a result of a number of unforeseeable cash flow problems which arose in 2008.
The Law
3. Section 59 VAT Act 1994 sets out the provisions in relation to the default charge:-
(1) If on the last day on which a taxable person is required in accordance with    regulations under this Act to furnish a return for a prescribed accounting period –
            (a) the Commissioners have not received that return or
(b) the Commissioners have received that return but have not received the     amount of VAT shown on the return as payable by him in respect of that period
then that person shall be regarded for the purposes of this section as being in default in respect of that period.
(2) Subject to subsections (9) and (10) below, subsection (4) below applies in any case where- 
(a) a taxable person is in default in respect of a prescribed accounting period; and 
(b) the Commissioners serve notice on the taxable person (“a default liability notice”) specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of the period referred to in paragraph (a) above and beginning subject to subsection (3) below on the date of the notice.
(3) If a surcharge liability notice is served by reason of a default in respect of a prescribed accounting period and that period ends at or before the expiry of an existing surcharge period already notified to the taxable person concerned, the surcharge period specified in that notice shall be expressed as a continuation of the existing surcharge period and, accordingly for the purposes of this section, that existing period and its extension shall be regarded as a single surcharge period.
(4) Subject to subsections (7) to (10) below, if a taxable person on whom a surcharge liability has been served – 
(a) is in default of a prescribed accounting period ending within the surcharge    period specified in (or extended by) that notice, and 
(b) has outstanding VAT for that prescribed accounting period,
he shall be liable to a surcharge equal to whichever is the greater of the following, namely, the specified percentage of his outstanding VAT for that prescribed accounting period and £30.
(5) Subject to subsections (7) to (10) below the specified percentage referred to in subsection (4) above shall be determined in relation to a prescribed accounting period by reference to the number of such periods in respect of which the taxable person is in default during the surcharge period and for which he has outstanding VAT, so that – 
(a) in relation to the first such prescribed accounting period the specified percentage is 2 per cent;
(b) in relation to the second such period, the specified percentage is 5 per cent; 
(c) in relation to the third such period, the specified percentage is 10 per cent; and 
(d) in relation to each such period after the third, the specified percentage is 15 per cent.
(6) For the purposes of subsections (4) and (5) above a person has outstanding VAT for a prescribed accounting period if some or all of the VAT for which he is liable in respect of that period has not been paid by the last day on which he is required (as mentioned in subsection (1) above) to make a return for that period; and the reference to subsection (4) above to a person’s outstanding VAT for a prescribed accounting period is so much of the VAT  for which he is liable as has not been paid by that day.
(7)  If  a person, who, apart from this subsection, would be liable for a surcharge under subsection (4) above satisfies the Commissioners or, on appeal, a tribunal that,  in the case of a default that is material to the surcharge- 
(a) the return or, as the case may be the VAT shown on the return, was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit, or
(b) there is a reasonable excuse for the return or VAT not having been so despatched,
he shall not be liable to the surcharge and for the purposes of the preceding provisions of this section he shall be treated as not having been in default in respect of the prescribed accounting period in question (and accordingly any surcharge liability notice the service of which depended upon that default shall be deemed not to have been served).
4. Section 71(1)(a) VAT Act 1994 states that for the purpose of any provisions of sections 59 to 70 which refers to a reasonable excuse for any conduct – an insufficiency of funds to pay any VAT due is not a reasonable excuse.
Background and facts
5. Mr Aaronson, director of the Appellant, gave evidence that the Appellant is a manufacturer of bath and beauty products. Its products are sold from garden centres and gift shops.
6. 40% of his products are exported and he also supplies John Lewis and Waitrose.
7. The trading conditions have been difficult for  the last 2 or 3 years.
8. The business account was moved to the FIBI bank and they insisted on a personal guarantee for the overdraft using the family home as security.
9. The Appellant used to get an 85% advance from the bank based on the money owed by the customers but last year this changed to only 50% of the money owed by uninsured customers.
10. The customers take credit insurance so that if they go “bust” the credit insurance will pay 90% but recently the credit insurance is being refused or withdrawn. 
11. Liberty had its credit insurance withdrawn as did Wyevale (garden centres).
12. Waitrose used to pay 16 days from date of delivery but now pay on date of delivery or receipt of invoice whichever is later. It is difficult to prove the date of receipt of the invoice and so the Appellant has no way of knowing when the money will arrive.
13. Mr Aaronson has put £1.75 million of family money into the Appellant which he cannot now withdraw.
14. The Appellant first indicated delays in the collection of payments in a letter of 1/2/05. 
15. The VAT return and VAT payment for period 09/06 were not received by the due date of 31/10/06 and a default liability notice was issued.
16. The VAT return and VAT payment for period 12/06 were not received by the due date of 31/01/07 and a notice was issued imposing a default surcharge of 2% of the VAT due equal to £1,071.05.
17. The Appellant sought a time to pay agreement by letter of 31/1/07 attaching a provisional profit and loss account and cash flow forecast. A time to pay agreement was issued to the Appellant on 14/3/2007.
18. At that time £36,772.80 was owed by the Appellant, £1071.05 of which was the 2% default charge.
19. In terms of the agreement £18,386.40 was due on 31/3/2007 and £18,386.40 on 30/4/2007.
20. The VAT return and VAT payment for period 03/07 were not received by the due date and a notice was issued imposing a default surcharge of 5% of the VAT due.
21. The VAT return and VAT payment for period 09/07 were not received by the due date and a notice was issued imposing a default surcharge of 10% of the VAT due.
22. The VAT return and VAT payment for period 12/07 were not received by the due date and a notice was issued imposing a default surcharge of 15% of the VAT due.
23. The VAT return and VAT payment for period 03/08 were not received by the due date and a  notice was issued imposing a default surcharge of 15% of the VAT due.
24. The 12/07 and 3/08 returns were submitted with a letter dated 7/5/08 again citing delays in payment and seeking a further time to pay agreement. This was rejected by HMRC in a  letter dated 13/6/08.
25. The VAT return and VAT payment for period 09/08 were not received by the due date and a notice was issued imposing a default surcharge of 15% of the VAT due.
26. The Appellant wrote to HMRC again on 30/10/08 referring to general delays in payment. A further time to pay agreement was issued on 17/12/08 for the outstanding arrears for period 09/08 and earlier of £80,601. 
27. This letter informed the Appellant that as it had now had three time to pay agreements in 2 years no further such agreements would be issued.
28. The Appellant wrote to  HMRC asking that they waive the default surcharges on the basis of its cash flow problems.
29. HMRC  asked for details of monies received by the Appellant and its bank statements.
30. The Appellant replied on 3/6/09 enclosing the requested information and documents. He stated that they had taken on an extra person to help to collect their debts and have been chasing the bad debts with legal letters. Their sales force was helping to collect the debts but all their customers were taking longer to pay.
31. They used invoice accounting in their accounting for VAT which meant that if the customers had not paid they did not have the money.
32. Their bank facility was based on their debtors and stock levels but as all their customers were no longer covered by credit insurance their facility had been reduced.
33. They had tried asking the customers to place smaller orders to limit the risk and were not delivering new orders until the debts were paid. 
34. HMRC analysed the data received which indicated that for the period 03/08 the Appellant actually received approximately 92% of the declared outputs during the 3 months to the due date.
35. Receipts on the same basis for the period 09/08 were approximately 82% of the outputs.
36. Specifically a total of £695,899 was received by the Appellant during the period 02/08 to 04/08 and the declared outputs plus output tax totalled £755,165 for the period 03/08.
37. A total of £1,074,942 was received for the period 08/08 to 10/08 and the declared outputs plus output tax totalled £1,310,117.
38. Taking into account the month from the period end to the due date there ought to have been sufficient funds to pay the VAT.
39.  Given that the financial data was provided in euros, sterling and dollars a conversion was done using the exchange rate shown on HMRC website assuming the least favourable conversion rate for the month. In reality the monies received may have been greater.
40. The receipts for the period November 2008 to January 2009 actually exceeded the 12/08 declared outputs.
41. HMRC noted that the Appellant had a wide client base of some 400 clients and it appeared that bad debts were kept to a low level. The three largest clients each accounted for some 7% whilst 65% of the business was held with 300 small accounts. HMRC considered that the Appellant should have considered a factoring agreement.
42. The Appellant had referred to exchange rate problems being both inescapable and unforeseeable but HMRC regarded these as a normal hazard of the trade for a wide range of businesses.
43. HMRC contended that as the Appellant had defaulted previously it had had an opportunity to consider future procedures in the light of the potential consequences of further defaults. That delay in securing payment was a recognised issue was indicated by the ongoing contact with the HMRC  Debt Management Unit since 02/05.
44. HMRC whilst acknowledging that bad debts were kept to a fairly small level  noted  from the evidence provided that payments equivalent to the majority of the declared outputs were received by the due date for the VAT return and payment during the period 02/08 to 01/09. Yet excluding period 06/08, the defaults were all consecutive.

Findings

45. The Tribunal found Mr Aaronson’s evidence truthful and direct and that the Appellant had experienced great difficulty in collecting its debts.
46. The Tribunal found however that the Appellant had no reasonable excuse for the continual late submission of the VAT returns and VAT payment.
47.  An insufficiency of funds is precluded under Section 71(1)(a) VATA 1994 from providing in itself a reasonable excuse for default.
48. Whilst trading conditions had been difficult for the last few years the financial information provided indicated that in respect of the latter periods  monies were received by the due date for the VAT return and payment equivalent to the majority of the declared outputs.
49. It appeared that the defaults had commenced even before the tougher regime imposed by the Bank.
50. The exchange rate problems were a foreseeable issue of the general economic climate.

Decision

51. The Tribunal decided that the appeal is dismissed and the default surcharges are hereby confirmed.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules.   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.

TRIBUNAL JUDGE MRS S.M.G.RADFORD

RELEASE DATE: 02 March 2010