DEFAULT SURCHARGE - two surcharges - one imposed because return and tax due on 30 November 2002 were delayed because managing director asked for documents to be posted while he was on holiday and this was not done - not a reasonable excuse - one imposed because tax due on 28 February 2003 was paid late and by instalments because of insufficiency of funds - underlying reason for insufficiency of funds was that company had been trading at a loss for more than a year - not a reasonable excuse - appeal dismissed - VATA 1994 Ss59 (7)(b) and 77(1)(a)
LONDON TRIBUNAL CENTRE

	SPACEWORKS FURNITURE HIRE LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

Tribunal: DR A N BRICE (CHAIRMAN)
MRS E M MACLEOD CIPM

Sitting in public in London on 25 June 2003

Mr Paul Turney, the Managing Director of the Appellant, for the Appellant

Mr Jonathan Holl, an Advocate in the Office of the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003
Draft 12.08.03/2

DECISION

The appeal

1.	  Spaceworks Furniture Hire Limited (the Appellant) appeals against two default surcharges. The first amounts to £10,319.03 and is in respect of the accounting period ending on 31 October 2002. The return and tax were due on 30 November 2002 and were received on 11 December 2002. The second amounts to £9,234.45 and is in respect of the accounting period ending on 31 January 2003. The return and tax were due on 28 February 2003; the return was received on 4 March 2003 and the tax was received by instalments from 25 April 2003 to 27 June 2003. These were the fifth and  sixth defaults. 
2.	 At the hearing the Appellant also referred to a third penalty in respect of the accounting period ending on 30 April 2003 where the tax was due on 31 May 2003 and was intended to be paid by instalments in July 2003. However, at the hearing of the appeal we heard very little evidence about this penalty and we think that it is fairer to the Appellant to reach no decision about it so that it can appeal against it separately if it wishes to do so. 
The law
3.	Section 59 of the Value Added Tax 1994 provides that where Customs and Excise do not receive a return or the tax in time the taxable person is in default. There is no surcharge for the first default but the surcharge for the second default is 2% of the tax outstanding; for the third default it is 5%; for the fourth 10%; and for the fifth and subsequent defaults 15%. Section 59(7)(b) provides that, if the taxable person satisfies the tribunal that there was a reasonable excuse for the return or tax not being sent in time, then the taxable person is not liable for the surcharge. Section 71(1)(a) provides that an insufficiency of funds to pay any tax due is not a reasonable excuse and section 71(1)(b) provides that, where reliance is placed on any other person to perform any task, neither the fact of that reliance, nor any dilatoriness or inaccuracy on the part of the person relied upon, is a reasonable excuse. 
The evidence  
4.	A bundle of documents was produced by Customs and Excise. Oral evidence was given on behalf of the Appellant by Mr Paul Turney, the Managing Director of the Appellant who also represented the Appellant at the hearing.
The facts
5.	From the evidence before us we find the following facts.
6.	The Appellant is a specialist company and was established about thirteen years ago. It hires out furniture for weddings, conferences and other hospitality events. It employs about forty-five to fifty full-time employees (many concerned with transport) and the number rises to about 90 in the summer. Annual turnover is in the region of £2.5M. Much of the business is seasonal with the majority of the turnover occurring from May to September. Mr Turney is the managing director of the Appellant and his wife signs the value added tax returns. 
7.	All went well and the business was profitable until the year 2001 when there was wet weather and foot and mouth disease. Many public events were postponed or cancelled. The business hoped it would outgrow these difficulties. Then after the events of 11 September 2001 business was substantially reduced. At the same time a director of the Appellant became seriously ill. The Appellant raised some short-term finance but its financial year ending on 31 January 2002 was a loss-making year. Turnover was £2,390,875 but there was an operating loss of £95,284 which, with the addition of interest payable, gave an overall loss for the year of £146,395. In August 2002 the Finance Director of the Appellant died. 
The first surcharge
8.	The return and tax for the accounting period ending on 31 October 2002 were due on 30 November 2002. Mr Turney took a holiday from 20 November and asked a very reliable accounts clerk to post the return and tax while he was away. When Mr Turney returned from his holiday he found that the return and tax had not been posted and so he posted them immediately. They were received on 11 December 2002.
The second surcharge
9.	In November 2002 the Appellant traded very well but there was a downturn in December 2002. Trade in January 2003 was half of that expected but the Appellant still had to meet its overhead costs including transport costs. In the financial year ending on 31 January 2003 turnover increased to £2,564,813, the operating loss was reduced to £20,439 and the overall loss was reduced to £49,727. By this time the Appellant had used up all its short term finance.
10.	The return and tax for the accounting period ending on 31 January 2003 were due on 28 February 2003. The value added tax due was £61,563.01. Initially Mr Turney thought that the bank would help because the Appellant was owed money by its customers for work done in January and February 2003. In the third week of February the bank declined to assist the Appellant and so the Appellant sought advice from its auditors. On their advice a specialist consultant was retained to assist the Appellant with the management of its cash flow and with forward planning. On 28 February the Appellant told Customs and Excise that there was to be a meeting with its banks on 6 March and hoped to be able to make proposals for settling the outstanding value added tax liability shortly thereafter. The Appellant wrote again to Customs and Excise on 4 April 2003 to say that it had received a formal offer and hoped to be able to clear its overdue payments within a few days. On 10 April the Appellant wrote again to say that it had received a formal offer of invoice discounting and stock finance and also hoped to receive within a week an offer of finance to be secured on Mr Turney's home. It therefore proposed that the amount of value added tax due for the accounting periods ending on 31 January 2003 and 30 April 2003 be settled before the end of July 2003, by nine weekly payments of £6,000 followed by one further payment on 27 June 2003 of £7,563.01 to clear the January quarter, and then four more weekly payments of approximately £9,000 each commencing on 4 July 2003 to clear the April quarter. . 
11.	On 24 April 2003 Customs and Excise replied to say they would accept the payment of the outstanding debt relating to the January quarter in instalments. The letter also said "Acceptance of this arrangement does not prevent or cancel the recording of defaults, liability to surcharge, and interest where applicable." 
The arguments for the Appellant
12.	For the Appellant Mr Turney argued that, as far as the second default was concerned, the Appellant thought that it had reached an agreement with Customs and Excise that there would be no surcharge. The tax could only have been paid on time if the employees had not been paid their wages.  
The arguments for Customs and  Excise
13.	For Customs and Excise Mr Holl argued that, as far as the first default was concerned, section 71(1)(b) of the 1994 Act provided that reliance upon another could not be a reasonable excuse. Mr Turney or his wife could have posted the return before they left for their holiday or sent the tax by electronic transfer. Turning to the second and third defaults Mr Holl argued that the first mention of difficulties made by the Appellant to Customs and Excise was on 28 February 2003 which was the due date. Mr Holl accepted that the business had general financial difficulties but argued that the tax due would have been received by the Appellant from its customers before the Appellant had to pay it to Customs and Excise. That was very different from the case of Commissioners of Customs and Excise v Steptoe [1992] STC 757..  
Reasons for decision

14.	We first consider the surcharge for the accounting period ending on 31 October 2002. Here we have to agree with the arguments of Mr Holl. Section 71(1)(b) provides that reliance upon another is not a reasonable excuse; Mr Turney relied upon his accounts clerk to post the return and tax and she did not do so; that dilatoriness cannot be a reasonable excuse. 

15.	With regard to the second surcharge we begin with the terms of the legislation. Although section 59(7)(b) of the 1994 Act provides that there is no liability for a surcharge if there is a reasonable excuse, section 71(1)(a) provides that an insufficiency of funds to pay any tax due is not a reasonable excuse. The ambit of section 71(1)(a) (which was then section 33(2)(a) of the Finance Act 1985) was considered in Commissioners of Customs and Excise v Salevon [1989] STC 907 and also in Steptoe. Those decisions established four main principles. 

16.	First, as section 71(1)(a) makes clear, an insufficiency of funds is not a reasonable excuse for late payment. As Nolan J (as he then was) said in Salevon:

"Suppose a trader was able to demonstrate as a matter of fact that when the time for payment came he was, at least temporarily, bereft of funds and unable to borrow what was needed; that might be regarded in the absence of [section 71(1)(a)] as a reasonable excuse for non-payment. The law does not as a general rule require the impossible. But [section 71(1)(a)] makes it plain that an insufficiency of funds cannot be so regarded. Insolvency is not enough."

17.	Secondly, it is necessary to distinguish the reason for late payment and the underlying cause or excuse for late payment. Even though the reason for the failure to pay on time is an insufficiency of funds, the underlying cause could, depending on the facts, be a reasonable excuse. A trader who lacks the money to pay his tax because of his culpable default would not have a reasonable excuse but a trader who is deprived of the means to pay his tax for some adequate reason might well have a reasonable excuse even though  the direct cause of late payment is the insufficiency of funds.

18.	Thirdly, it is for the tribunal to decide whether the underlying cause constitutes a reasonable excuse. The wrongful act of another person, or some unforeseeable or inescapable misfortune, leading to an insufficiency of funds, could well be a reasonable excuse but there are limits on what could be regarded as a reasonable excuse. The test was outlined by Lord Donaldson in Steptoe in the following way:

"If the exercise of reasonable foresight and due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, then the taxpayer may well have a reasonable excuse for non-payment; but that excuse will be exhausted by the date upon which such foresight, diligence and regard would have overcome the insufficiency of funds."

19.	Finally, the cases in which a trader with insufficient funds to pay the tax can successfully invoke the defence of reasonable excuse are rare because traders receive from their customers the amount of tax which must be paid to Customs and Excise. If they use that money in their business and lose it, and so cannot hand it over when the date for payment arrives, they will normally be hard put to it to persuade the tribunal  that there is a reasonable excuse for late payment.

20.	Applying those principles to the facts of the present appeal it is clear that the mere fact that the Appellant had an insufficiency of funds to pay the tax due cannot be a reasonable excuse. It is necessary to look at the underlying cause of the insufficiency of funds. The tax was due on 28 February 2003 and, in the financial year ending on 31 January 2003, trading had improved; annual turnover had increased to £2,564,813, the operating loss was reduced to £20,439 and the overall loss was reduced to £49,727. Thus trading conditions in the year ending on 31 January 2003 were good (or at least better than the previous financial year). Although sales were down in January 2003 that could be a reflection of the seasonal nature of the business. What the Appellant did not have was adequate sources of finance. This lack was not due to the wrongful act of another person, or to some unforeseeable or inescapable misfortune. As far as we are able to judge it was due to the fact that a loss had been made in the year ending on 31 January 2002 and the business was not sufficiently capitalised. The Appellant was able to make arrangements for additional financing and did so. However, in our view it left it very late. There was nothing surprising about the amount of tax due on 28 February 2003. We consider that the exercise of reasonable foresight and due diligence and a proper regard for the fact that the tax was due on 28 February 2003 would have avoided the insufficiency of funds because, if the financing arrangements had been put in hand earlier, the money would have been available on time. Also, the Appellant had received from its customers the amount of tax due to Customs and Excise and so should have been able to hand it over when the date for payment arrived.      
Decision
   
21.	Our decision is that there was no reasonable excuse for either default.

22.	The appeal is, therefore, dismissed. 

DR A N BRICE

CHAIRMAN

RELEASE DATE:

LON/2003/0295
12.08.03