Valco Ltd v Customs & Excise [2003] UKVAT V18328 (25 September 2003)

DEFAULT SURCHARGE – reasonable excuse – unforeseen downturn in telecommunications industry in 2001 resulting in continuing losses – whether still a reasonable excuse in 2003 – yes 

LONDON TRIBUNAL CENTRE

	VALCO LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					MICHAEL SILBERT FRICS

Sitting in public in London on 17 September 3003

Terry Tilbrook, managing director, for the Appellant

Jonathan Holl, senior officer, HM Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	Valco Limited appeals against default surcharges for the periods 09/02, 12/02 and 03/03 for late payment of tax.  The Appellant was represented by Mr T Tilbrook, its managing director, and the Commissioners by Mr J Holl.
2.	We find the following facts:
(1)	In the year ended 31 December 2000 the Appellant’s turnover was £2.66m, it was expanding and the turnover was expected to be £3.5m in the following year.  As a result the Appellant invested in new machinery and equipment, took larger premises and employed more senior staff.
(2)	A downturn in the telecommunications industry occurred in early 2001 as a result of which the turnover for that year decreased to £1.19m and the Appellant made a loss of £400,000.  The turnover for 2002 was £1.3m and the loss was £155,000.  The Appellant was still in a loss position in the 8 months to August 2003 but it hoped to break even in the year to 31 December 2003.
(3)	The Appellant moved into smaller premises and sublet the old premises from September 2002.  Other costs were cut including staff, company cars and pension scheme contributions.  Four of the new machines which had not been used but which the Appellant was committed to paying for were put into storage.
(4)	Mr Tilbrook moved into a smaller house, his wife sold two investment properties and his loans to the company increased to £74,000.  He is currently drawing only a nominal salary.
3.	Mr Tilbrook contended that the three periods under appeal were a continuation of the situation where the Tribunal had previously allowed its appeal.  Mr Holl contended forcefully that as the Appellant had entered into an invoice discounting arrangement under which it received 75 per cent of the invoice amount which was recoverable if it failed to recover the invoice within 90 days, it had sufficient funds to pay its VAT.  The fact that it used the funds for other purposes could not result in its having a reasonable excuse.  Shortage of funds was excluded from being a reasonable excuse by section 71(1)(a) of the VAT Act 1994.
4.	In Customs and Excise Comrs v Steptoe [1992] STC 757 Lord Donaldson agreed with Nolan LJ:
“…that if the exercise of reasonable foresight and of 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 on which such foresight, diligence and regard would have overcome the insufficiency of funds.”
Scott LJ applied a more stringent test that the insufficiency of funds must arise from an unforeseeable or inescapable event.
5.	In the previous proceedings relating to earlier periods (VAT Tribunal Decision No.17,925), the Tribunal found that the Appellant had a reasonable excuse for the defaults:
“The downturn in the communications industry which started in January 2001 was not foreseeable.  The Appellant had entered into substantial revenue commitments in 2000 anticipating a continuation of business at current levels.  When the downturn came, the Appellant was left with severely reduced incomings and continuing liabilities which it could not meet.  Despite good crisis management the Appellant was unable to fund its VAT payments for the periods under appeal.  It has at all times acted reasonably.”
6.	Whichever test in Steptoe is applied on the facts of this case, it is possible in law for the Appellant to have a reasonable excuse; the events leading to the Appellant’s difficulties was unforeseeable.  In our view, taking into account the invoice discounting arrangements, reasonable foresight, diligence and regard would not have avoided the insufficiency of funds.  The present case is a continuation of the last one, and the same reasons continue to apply.  We can understand Mr Holl’s concern that the excuse cannot go on for ever and it is clear from the fact that the Appellant was able to pay the tax on time in the 06/03 period it can no longer have a reasonable excuse based on the same cause.
7.	Acordingly we allow the appeal.

J F AVERY JONES

CHAIRMAN

LON/03/678