[2012] UKFTT 141 (TC)
TC01836
Appeal number: TC/2011/04420
Value
Added Tax – late payment of VAT - default surcharge – s 59(7)(b) VATA 1994 ––
insufficiency of funds - whether reasonable excuse – no – appeal dismissed
FIRST-TIER TRIBUNAL
TAX
FYLDE
OFFICE SERVICE BUREAU LTD Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL: MICHAEL S CONNELL (TRIBUNAL JUDGE)
Sitting in public at Alexandra
House Manchester on 25 October 2011
For the Appellant Mr David W
Parry, Director of the Appellant company
For the Respondents Mr I
Birtles Officer of HM Revenue and Customs
© CROWN COPYRIGHT
2011
DECISION
The Appeal
1. This
is an appeal by Fylde Office Service Bureau Ltd (“the Appellant”) against a
default surcharge imposed by the Commissioners for Her Majesty’s Revenue &
Customs (“the Commissioners”) under the default surcharge regime in relation to
the late payment of VAT for the period 10/2008.
2. The
Appellant is a recruitment service company based in Lancashire. The company
received notice from the Commissioners of a VAT default surcharge in the sum of
£1,297.76, VAT in the sum of £64,888.31 having been received 43 days late by
the Commissioners for the period 10/2008. The surcharge was levied at the
applicable rate of 2%, the Appellant having been in the default surcharge
regime from December 2007.
3. The
Appellant does not dispute that payment of its VAT was late for the period in
question. The Appellant’s argument is that it is not liable to the surcharge
because it has a reasonable excuse for the late payment of the VAT.
4. The
evidence to the Tribunal consisted of a copy of the exchange of correspondence
between the Appellant and the Commissioners relating to the default surcharge
and the facts arising relating to the reasons for the late payment; a schedule
prepared by the Commissioners showing the Appellant’s default surcharge
‘history’; a schedule prepared by the Appellant showing a copy breakdown of
monies received by it for the period 01/06/2008 to 31/08/2008; copy bank
statements for the period from 01/08/2008 to 18/09/2008; and the oral evidence
of Mr David Parry, Director of the Appellant company.
5. Section
59 Value Added Tax Act 1994 (VATA) sets out the provisions in relation to the
default surcharge regime. Under s 59(1) a taxable person is regarded as being
in default if he fails to make his VAT return for a VAT quarterly period by the
due date for that quarter, or if he makes his return by that due date but does
not pay by that due date the amount of VAT shown on the return as payable in
respect of that period. The Commissioners may then serve a surcharge liability
notice on the defaulting taxable person, which brings him within the default surcharge
regime so that any subsequent defaults within a specified period result in
assessment to default surcharges at the prescribed percentage rates. The
specified percentage rates are determined by reference to the number of periods
in respect of which the taxable person is in default during the surcharge
liability period. In relation to the first default the specified percentage is
2%. The percentage ascends to 5%, 10% and 15% for the second, third and fourth
default.
6. A
taxable person who is otherwise liable to a default surcharge may nevertheless
escape that liability if he can establish that he has a reasonable excuse for
the late payment which gave rise to the default surcharge(s). Section 59 (7)
VATA 1994 sets out the relevant provisions : -
‘(7) If a person who apart
from this sub-section would be liable to a surcharge under sub-section (4)
above satisfies the Commissioners or, on appeal, a Tribunal that in the case of
a default which is material to the surcharge –
(b) there is a reasonable
excuse for the return of VAT not having been so despatched then
- 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 ..’
7. It
is s 59(7)(b) on which the Appellant seeks to rely. The burden falls on the
Appellant to establish that it has a reasonable excuse for the late payment in
question.
8. Section
59(7) must be applied subject to the limitation contained in s 71(1) VATA 1994
which provides as follows : -
‘(1) For the purposes of
any provision of section 59 which refers to a reasonable excuse for any conduct
–
(a) any insufficiency of
funds to pay any VAT is not reasonable excuse.’
9. Although
an insufficiency of funds to pay any VAT due is not a reasonable excuse,
precedent case law has established the principle that the underlying cause of
any insufficiency of funds may constitute a reasonable excuse.
Relevant facts
10. The Appellant’s
default history shows that surcharge default notices were issued for the period
10/2007, 07/2008 (being the default period under appeal), 01/2010 and 04/2010
as a result of a failure to render a return and/or make full payment of the tax
due by the relevant due date. With regard to the 04/2010 default surcharge the
Appellant had contacted HMRC ahead of the due date for that period to request a
Time to Pay Arrangement, and no default surcharge was therefore payable. The
Appellant had successfully completed the default surcharge period to end
07/2008 and therefore the default in 01/2010 resulted in a non-monetary
surcharge.
11. The Appellant’s
principle grounds of appeal are twofold. Firstly, as stated in its notice of
appeal to the Tribunal, that Mr Parry had telephoned HMRC on 5 September 2008
and had been advised that it may be possible for the existing default notice to
be extended rather than a default surcharge being applied. Secondly the reasons
for non-payment of VAT of £64,888.31 on the due date of 31 August 2008 was
because of cash flow problems arising from what the Appellant described as
‘inordinate delays in obtaining payment from its main customers, Blackpool and North Lancashire NHS Primary Care Trusts. In a letter by the Appellant to
HMRC’s Default Surcharge Appeals Team, Mr Parry states that the Appellant
company had hoped to send a cheque for the VAT, having been promised monies
from the Primary Care Trusts with whom they place a lot of staff. Mr Parry said
that ‘unfortunately due to the holiday period within the various departments we
did not receive monies as expected by 31 August 2008. We were not therefore
able to send a cheque which we knew would be honoured and hope therefore to
send a payment within seven days via the banking system. Unfortunately there
were substantial amounts still outstanding owed to us and we were unable to do
so, hence the telephone call on 5 September’. In correspondence with HMRC Mr
Parry on behalf of the Appellant explained that the company’s customer base at
the relevant time was a mix of small local businesses, but that the vast
majority of work invoiced would be for larger institutions including three of
the primary care trusts (PCTs) to whom the Appellant would provide temporary
workers. He explained that when the primary care trusts were late in making
payments the Appellant’s cash flow was affected dramatically and as a
consequence of the PCTs not adhering to its thirty day terms the effects of the
Appellant’s cash flow were quite disastrous.
12. In a further
exchange of correspondence with HMRC Mr Parry said that he had written to HMRC
on several occasions when the first surcharge had been raised, but had not
received a response. He had initially been under the impression that having
asked for a review of the default surcharge HMRC had granted an extension of
the surcharge liability period and waived the default surcharge. He said that
had he been informed otherwise he would have been in touch with the appropriate
personnel at the PCT, but that in any event there had been personnel changes at
the PCT and the administration of its finance processing centre did not appear
to be in order. He said that this resulted in a build up of arrears and whilst
he had been able to obtain a £50,000 short term overdraft facility from the
Appellant company’s bank, this had not been enough to allow the Appellant to
extricate itself from its cash flow problems. Mr Parry concedes however that in
a letter dated 5 November 2010 to HMRC that, had he known that the default
surcharge liability period had not been extended and the default surcharge had
not been waived, he would have ‘.. raised the necessary funds personally and
from our bank in an attempt to clear it at a reduced cost’.
13. The schedule and
breakdown of monies received by the Appellant company for the period from
01/06/2008 to 31/08/2008 appear to show that income received from the PCTs
represented 63.69% of sales for June 2008, 57.97% for sales in July 2008 and
55.48% of total sales for August 2008. Mr Parry said that the delay in the
institutions making payment, particularly given the Appellant’s reliance upon
payments being made within its thirty day term, clearly seriously affected its
cash flow position. Mr Parry said that the average payment was over two months
at that time. He could not explain the precise reason for those delays, except
to say that had he known HMRC had not extended the company’s surcharge
liability period he perhaps may have been able to speak to personnel at East
Lincs Financial Services, the agency which dealt with payment of invoices, to
ascertain the reason. Since then he said there had been changes in personnel
and it was no longer possible to establish the primary cause for PCTs late
payments.
14. HMRC said its
call transcript records show that the member of HMRC who spoke to Mr Parry on 5
September 2008 said that the default would either be a surcharge liability
extension or a 2% surcharge depending on the amount of VAT liability. The
surcharge liability notice for the 07/2008 period was issued on 12 September
2008 and this would have confirmed that a 2% surcharge was in place for that
quarter.
15. The Appellant’s
bank statements for the period from 01/08/2008 to 12/09/2008 show that the
Appellant company’s overdrawn balance oscillated between approximately £19,000
and £53,000 which appeared to indicate that the company operated within its
bank facility for most of the time.
16. Mr Birtles on
behalf of HMRC said that the company had not provided copy bank statements for
June and July 2008. He said that there had been a pattern of default and that
to establish a reasonable excuse the Appellant had to demonstrate that the
causative event giving rise to the lack of funds for the relevant period was
entirely outside the normal hazard of trade, in that there was some element of
inescapable or unforeseeable misfortune which resulted in the default. Mr
Birtles argued that because there had been a build up of several months arrears
in terms of PCTs payment of invoices the cash flow problems would have been an
ongoing, and an identified factor and therefore not outside the Appellant
company’s control. He argued that the Appellant had not entered into any kind
of factoring arrangement or negotiated an increase in its bank overdraft
facility. He submitted that, because no details had been provided in terms of copy
bank statements as to what monies had actually been received by the Appellant
during the relevant quarter, it is conceivable that the Appellant may even have
received more than its output figures suggested.
17. Mr Birtles on
behalf of HMRC asserted that the Appellant had acknowledged that the average
payment by PCTs was over two months at the time of the default and therefore
late payments had virtually become ‘the norm’ and as such not unforeseeable.
The Appellant had not done everything which a prudent and competent business
person, mindful of their obligations to VAT, would have done, in the same or
similar circumstances to try and pay the tax due. In any event Mr Birtles
argued, the copy bank statements which had been provided for August showed that
the Appellant had some head room right up to September 2008 to pay at least
part of the outstanding VAT and therefore reduce the potential default
surcharge.
18. In Customs
& Excise Commissioners –v- Steptoe [1992] STC 757 the tax-payer argued
that although the proximate cause of his default was insufficiency of funds,
the underlying cause of that insufficiency, namely the unexpected failure by a
major customer to pay him on time, amounted to a reasonable excuse. The Court
determined on a majority that the statutory exclusion of insufficiency of funds
as an excuse did not preclude consideration of the underlying cause of
insufficiency and that a trader might have a reasonable excuse if it were
caused by an unforeseeable or inescapable event or when, despite the exercise
of reasonable forethought and due diligence, it could not have been avoided.
The Court nevertheless made it clear that the test had to be applied strictly.
19. To decide
whether a reasonable excuse exists where insufficiency of funds causes the
failure the Tribunal must take for comparison a person in a similar situation
to that of the actual tax-payer who is relying on the reasonable excuse
defence. The Tribunal should then ask itself, with that comparable person in
mind, whether notwithstanding that person’s exercise of reasonable foresight,
due diligence and a proper regard for the fact that the tax would become
payable on the particular dates, those factors would not have avoided the
insufficiency of funds which led to the failures. That has been the approach
taken by the Courts in a VAT context where the tax-payer on account of
insufficiency of funds has failed to make payment of tax on time.
20. Having
considered the Appellant company’s circumstances and the background facts and
circumstances leading up to the default the Tribunal finds that the underlying
and primary cause of the default was not the late payment by one of the
company’s major customers. The Tribunal takes the view that a prudent tax
person in circumstances similar to that of the Appellant company could have
avoided the insufficiency of funds had they put in place appropriate
precautionary measures. The company did not operate factoring, had not
approached its bankers for an increase in its banking facilities and, as Mr
Parry conceded, the Appellant could possibly have paid at least part of the
amount due by the due date by raising funds from other sources. The Appellant
company had been late in making its VAT payments in respect of periods
immediately before and after the default period under appeal and therefore
there was a pattern of the Appellant failing to adhere to its VAT payment
obligations. The Appellant would have been aware of the consequences of failing
to make VAT payments on time as this had been adequately explained in the surcharge
liability default notice. The burden of proof is on the Appellant to show that
the underlying cause of its failure to meet its VAT payment obligations was due
to unforeseen circumstances or events beyond its control and in the Tribunal’s
view that burden has not been discharged.
21. For the above
reasons the Appellant has not shown that there was a reasonable excuse for its
late payment of VAT for the 07/2008 quarter. The Tribunal therefore dismisses
the Appellant’s 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.
MICHAEL S CONNELL
TRIBUNAL JUDGE
RELEASE DATE: 17 February 2012
