DEFAULT SURCHARGE – Reasonable excuse – Charity training and employing people with learning difficulties – Costs of running charity met from sales and grants from Employment Service and local government – Introduction of minimum wage greatly increased wages – Coincided with substantial reduction in grants – Underlying cause of insufficiency of funds – Whether reasonable excuse – Appeal allowed – VATA 1994, ss 59(1), (7), 71(1)(a)

LONDON TRIBUNAL CENTRE

	INDUSTRIAL THERAPY ORGANISATION (BRISTOL) LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	ANGUS NICOL  (Chairman)

Sitting in public in Bristol on 29 November 2002

The Appellant was not represented

David Bettoney, of the office of the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	The Appellant, the Industrial Therapy Organisation (Bristol) Ltd, is a charity which trains and employs adults with learning difficulties to manufacture goods, which are then supplied to customers.  The Appellant is registered for VAT, and is appealing against default surcharges in respect of the periods 12/99, 6/00, 12/00 and 3/01.  The schedule of defaults shews that for 12/99 the due date was 31 January 2000, and the payment of tax was received on 13 March 2000.  That was the third default within the surcharge liability regime, and a surcharge of 5 per cent, in the sum of £491.69, was imposed.  In respect of the next two following defaults, no payment was received at all until payments were made under an instalment scheme agreed with the Commissioners.  Surcharges at 10 per cent and 15 per cent were imposed successively.  In respect of the period 3/01, the payment was received on 1 June 2001, the due date having been 30 April 2001.  Again, a 15 per cent surcharge was imposed.  The four surcharges total £3,999.23.

2.	In a letter dated 29 August 2001, the Appellant informed the Commissioners that it wished to appeal against the default surcharge for the period 3/01, giving the following grounds:

•	“We are a registered charity looking after 70 adults with learning difficulties
•	Our financial difficulties have arisen due to the minimum wage policy which has hit a number of charities very hard, with a few larger ones taking the matter to the high court
•	Falling local council support, due to government cutbacks

Please can you look favourably at our case as we do not have the income to support these large surcharges.”

However, it was clear from the correspondence that the appeal was intended to be in respect of all four of the surcharges.

3.	On the day of the hearing the Tribunal was informed that no representative of the Appellant could attend. Since there had already been more than one postponement, I allowed an application by the Commissioners to hear the appeal in the absence of any representative of the Appellant, in accordance with rule 26(2) of the Value Added Tax Tribunals Rules 1986.  Rule 26(3) allows an appellant to make an application to the Tribunal within 14 days after the date of release of the decision, to set aside a decision taken in its absence. On this occasion, having read the correspondence, I adjourned the hearing of the appeal in order to allow the Appellant to submit evidence in writing to shew, if it were the case, that the minimum wage policy and the reduction of an annual grant made by Bristol City Council amounted to a reasonable excuse for the defaults, notwithstanding section 71(1)(a) of the Value Added Tax Act 1994 (“the 1994 Act”), which provides that an insufficiency of funds for paying the tax due is not a reasonable excuse.

4.	That evidence, consisting of a written statement by Mr Nick Murray, chief executive and secretary of the appellant, the Appellant’s accounts for the years to 31 March 1999, 2000, and 2001, and some press cuttings relating to the Appellant and its financial predicament, is now to hand.  Mr Murray also offered, if they were needed, to provide copies of relevant bank statements.  In my view these would be of great assistance, and he was asked to produce, and did produce, statements relating to the due dates and a bracket of two weeks either side.

The law

5.	The law relating to the default surcharge is set out in section 59 of the 1994 Act, which provides, so far as bears upon this appeal, as follows:

“(1)	If, by the last day on which a taxable person is required ... 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.”

Section 59(2) provides that when a taxable person is in default the Commissioners may serve a surcharge liability notice on him. Section 59(4) provides that if a surcharge liability notice has been served and the person is in default within the surcharge liability period notified, that person shall be liable to a surcharge.  Section 59(7) provides that if the person in default satisfies the Commissioners or, on appeal, the Tribunal, that there was a reasonable excuse for the default, he shall not be liable to the surcharge.

6.	Section 71 of the 1994 Act includes the following provision:

“(1)	For the purpose of any provision of sections 59 to 70 which refers to a reasonable excuse for any conduct—

	(a)   an insufficiency of funds to pay any VAT due is not a reasonable excuse;
	(b)   .  .  .”

Perhaps I should mention at this point that neither the Commissioners nor this Tribunal has any power to mitigate the surcharge, no matter how worthy the cause pursued by the taxpayer.  If there is a reasonable excuse, the taxpayer is not liable to the surcharge at all; if there is no reasonable excuse then he is liable to the whole surcharge.

The Appellant’s evidence

7.	The Appellant was established in 1960 for the purpose of giving adults with mental health problems or learning difficulties the opportunity to gain work experience and training, so as to equip them with the confidence and ability to help them obtain employment in the community. The Appellant has the capacity in its workshop to accommodate up to 150 such people, and at the time of the hearing about 70 were attending daily.  The Appellant is the only body providing such a service in the district comprising Bristol, South Gloucestershire and North Somerset.  Most of the work undertaken is the manufacture of patient case-note files and folders for hospitals, contract packing, and direct mail campaigns for other charities.  The greater part of the cost of running the Appellant is met from the proceeds of sale of those goods and services.  The Appellant also received funding from several bodies and from the Employment Service.  The Appellant’s accounts shew that in the year to 31 March 1999 income from grants amounted to £192,845, of which £175,917 was from the Employment Service and local authorities, including £30,741 from the City of Bristol.  In the next following year, grants amounted only to £179,596, that from the City of Bristol being reduced to £22,675.  In the year to 31 March 2001, grants came to a total of £223,383, but the contribution from the City of Bristol was further reduced to £11,220.

8.	Mr Murray’s statement went on to say that the Appellant had been financed by local hospital trusts, but that more recently those grants had been withdrawn.  The Appellant managed to remain in operation relying on its commercial income and the City of Bristol, either making a small loss or breaking even.  But in 1999 the national minimum wage was introduced.  A large number of those who used the services of the Appellant were eligible for the national minimum wage.  In the first year this increased the wages paid by the Appellant by £57,000, not including the increased national insurance and PAYE liabilities that were the consequence of the increased wages.  The accounts for the three years shew that the factory wages were, in 1998-99, increased to £150,954 and in 1999-2000 to £207,871.  In 2000-01 the wages came to £222,050.  In those three years the Appellant made losses, respectively, of £94,024, £49,932, and £110,305, and sales brought in £251,713, £338,867, and £294,162 respectively.  The total cost of sales and overheads for those three years were respectively £288,557, £245,921, and £278,737.

9.	Because of that significant loss of income coupled with the major increase in costs, Mr Murray said, the Appellant did not have the money available to pay the VAT on the due dates in the default periods.  Eventually an arrangement was made with the Commissioners under which the Appellant paid an outstanding amount of £18,645.31 by monthly instalments.  It was also the case that in 1999 a customer went into liquidation owing the Appellant some £16,000.

10.	The Appellant also submitted bank statements relating to two accounts for a week or two either side of the relevant due dates.  These reflected the situation indicated by the Appellant’s financial statements, and shewed a substantial overdraft on one account and a modest credit balance alternating with an overdraft on the other.  It was clear that the Appellant would have been unable to pay more than a proportion of the tax due in any of the relevant periods.  But on the other hand there was also a pressing obligation to pay, each week, the wages which had been significantly increased by the minimum wage policy.  In any other kind of business, a solution might have been the pruning of staff in order to keep outgoings under control.  In the Appellant’s business, to do so would be to defeat the purpose of the charity.  This appears to me to be a case which is very near that thin line which separates a reasonable excuse from a case where there is none.  But in my judgment it just falls on the reasonable excuse side of that line.  The available figures shew that the minimum wage, coupled with the reduction in grants, had an unforeseeable, and, when it came, unavoidable impact upon a type of business which in its nature was particularly vulnerable to exactly those occurrences.  In my view, the causes underlying the lack of funds for paying the VAT in those periods did provide a reasonable excuse for the defaults.

11.	For the above reasons, this appeal is allowed.  There was no application for costs, and I therefore give no direction as to costs.

ANGUS NICOL
CHAIRMAN

RELEASED:

LON/2001/1043