McMurray v Customs & Excise [2003] UKVAT V18256 (30 July 2003)

	DEFAULT SURCHARGE  -  insufficient funds in bank account for VAT cheque to be met when presented  -  cheque “bounced”  -  appellant having reasonable expectation that there would be sufficient funds at time of presentation  -  excuse accepted as reasonable and appeal against default surcharge allowed

MANCHESTER TRIBUNAL CENTRE

 
 	
	PATRICK McMURRAY LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Mr M S Johnson (Chairman)
						Mr J D Kippest

Sitting in public in Birmingham on the 9th July 2003

Mr P McMurray, director of the Appellant, for the Appellant

Mr B Haley, of the Solicitor’s office of H M Customs and Excise, for the Respondents

	© CROWN COPYRIGHT 2003

DECISION

1.	 This is an appeal against the imposition of a default surcharge in respect of the Appellant’s value added tax accounting period ending 31 August 2002 (“the August quarter”).  The amount of the surcharge is £2,517.94.  The Appellant, represented before the tribunal by Mr McMurray, one of its directors, trades in the hairdressing business from a unit in The Parade, Sutton Coldfield, under the style “Toni & Guy”.  

2.	Mr McMurray gave evidence before the tribunal as the only witness in the appeal.  He was cross-examined by Mr Haley, appearing for the Commissioners of Customs and Excise (“Customs”).  Mr Haley helpfully provided the tribunal with a bundle of documents relevant to the appeal.

3.	We find that the facts of the case are as follows.

4.	At the end of September 2002, the finances of the Appellant’s business were very tight.  The business was in arrears with its rent, and in order to keep the goodwill of its landlords was obliged to issue them with signed cheques, for presentation at future dates.  The Appellant’s rent for its premises was £40,000 per annum plus VAT.

5.	On 24 September 2002, Mr McMurray went down to his landlords’ head office and handed over a cheque for £10,000 and 2 cheques for £5,000 each.  These were all dated 24 September 2002, but were not handed over on the basis that they would be presented at once; rather they were handed over on the understanding that the £10,000 cheque would be presented in about a fortnight, to allow for payment of the Appellant’s value added tax for the August quarter, and the £5,000 cheques on dates after that.  The landlords were well aware that the cash-flow of the Appellant’s business was critical, depending upon a week-by-week income of £11 – 12,000.

6.	We are satisfied that Mr McMurray made it plain to his landlords on 24 September 2002 that he must be able to clear the Appellant’s value added tax at the end of September – the due date being 30 September 2002 – before the Appellant could meet its rent dues, and that it was only on that basis that he was handing over the cheques. 

7.	The Appellant had a good relationship with its bank, Barclays.  Although the Appellant was heavily overdrawn, the bank manager was accommodating, provided that Mr McMurray was frank with him about the Appellant’s trading position from time to time.  Mr McMurray realized that payment of his value added tax at the end of September 2002 would render him even more heavily overdrawn, so he took the precaution of checking specifically with the bank manager that the cheque for VAT that he intended to issue would be met.  The cheque was for £16,786.28.  The manager said that a cheque for that amount would be met.

8.	When that conversation with the manager took place, neither he nor Mr McMurray was aware that the landlords might present the £10,000 cheque before the end of September.

9.	Contrary to the understanding between Mr McMurray and his landlords, the £10,000 cheque was presented and paid on 30 September 2002.  Meanwhile, the Appellant’s VAT return for the August quarter and the cheque for £16,786.28 had been sent.  These arrived with Customs on 1 October 2002.

10.	When Customs presented the cheque for VAT for payment on 3 October 2002, the bank was obliged to refuse payment.  Colloquially, the cheque “bounced”.

11.	The non-payment of VAT resulted in the surcharge imposed.  

12.	Mr McMurray submitted to the tribunal that the presentation of the cheque for £10,000 was not a matter that he could reasonably have foreseen, and that it was most unfortunate that this should have happened just before presentation of the cheque to Customs, rather than a few days afterwards, as intended (by which time additional trading income would have been credited to the Appellant’s account).  We see Mr McMurray’s point.

13.	For Customs, Mr Haley submitted that this was simply a case of shortage of funds, and that the Appellant might have prevented the situation described ever arising.  He could have made sure that the rent cheque was dated with a date after the cheque to Customs would have been presented and met.  He ran the risk that the cheque to Customs would not be met when presented. 

14.	However we accept Mr McMurray’s evidence that his dealings with his landlords were “the art of the possible”.  He needed to keep his landlords content, and the way to do this was by presenting them with an earnest of good intent, namely the three cheques all dated 24 September 2002.  That does not however mean that the understanding with the landlords was that the cheques or any of them might be presented at once.  We are clear that the Appellant was to have a fortnight’s grace before the first cheque was presented.  The Appellant did not get that, yet it was reasonable to expect that it would.

15.	We are satisfied that the Appellant does have a reasonable excuse, within the meaning of section 59(7)(b) of the Value Added Tax Act 1994, for not having despatched its VAT for the August quarter in time.  That excuse is that it drew a cheque for the VAT, which was in Customs’ hands by 1 October, which the Appellant reasonably expected to be met as soon as presented.  The prior presentation of the cheque for £10,000 was an aberration which it was reasonable for the Appellant to have discounted.

16.	We therefore decide that the Appellant is not liable to the surcharge in dispute and we allow this appeal.

M S JOHNSON
CHAIRMAN
RELEASE DATE:

MAN/03/0014