MHC (Michael Hammond Partnership) v Customs and Excise [2004] UKVAT V18504 (19 February 2004)

DEFAULT SURCHARGE – reasonable excuse for default – appeal allowed.

MANCHESTER TRIBUNAL CENTRE

 
 MHC
	 (Michael Hammond Partnership)	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Mr R L Barlow (Chairman)

Sitting in public in Manchester on 22 January 2004.

Mr M Hammond and Mr Buckley for the appellant.

Miss H Redmond of counsel, instructed by the Solicitor for the Customs and Excise, for for the Respondents

	© CROWN COPYRIGHT 2004

DECISION
1.	The appellant appeals against two assessments of default surcharges: an assessment of a surcharge of £622.01 being 10% of the tax due in respect of the period ending 30 April 2003 imposed because the return for that period was allegedly not made until 2 June 2003 and because the tax due was not paid until an unspecified date after 30 April 2003; and an assessment of a surcharge of £1028.80 being 15% of the tax due for the period ending 31 July 2003 imposed because the payment of tax due for that period was not made until an unspecified date after 31 August 2003, though the return was made before the due date.
2.	The appellant admitted that the amounts due as tax had not been paid in time but put forward an excuse which it claimed was a reasonable excuse within the meaning of section 59(7)(b) of the VAT Act 1994 (‘the Act’).  The Act does not define reasonable excuse and what is such an excuse is a matter of judgment for the tribunal, the categories of what can constitute an excuse are not closed, though section 71(1) of the Act does preclude certain categories, including the insufficiency of funds.  An inability to pay by reason of an insufficiency of funds is therefore not a reasonable excuse but where there is an underlying cause which gives rise to that inability that can be an excuse if it is an unexpected event such as to make it reasonable that the appellant should be excused its default.   
3.	This case was somewhat unusual in that the appellant admitted it did not in fact pay the tax due by the due dates and that that was because of cash flow problems and, unlike the reasons that are often put forward, the reasons why it could not pay in time were not unexpected events.  Rather the appellant relied upon the effect of certain dealings with Customs and Excise concerning time to pay agreements as the excuse for its late payment of the sums due.
4.	Both Mr Hammond and Mr Buckley gave evidence which I accept as truthful.  My findings of fact are as follows.  The appellant partnership’s business had expanded quickly and as a result it has had cash flow difficulties.  As a result of those difficulties the partnership approached Customs and Excise and entered into agreements with the department under which it was given permission to pay the tax due by instalments in respect of several tax periods leading up to the two defaults under consideration.  On each such occasion discussions had been held on the telephone with the appropriate office and the officer who dealt with the appellant had never told them that they would still be liable to surcharges for late payment even if the payments were made in accordance with the agreements.  The appellant was therefore lulled into a false sense of security which led it to enter into the agreements for payment by instalments without realising that the surcharges would still be imposed.  (“Lulled into a false sense of security” was not the way in which the appellant’s representatives put it but that is what their evidence amounted to).

5.	Had that been the only evidence the situation would have been very simple in my judgment.  If Customs and Excise allow time for payment, having been requested to allow it before the due date for payment, and if they do not say that penalties for late payment will still apply; it seems quite clear that the taxpayer will be acting entirely reasonably if he concludes that the penalty will not be imposed and that that conclusion will provide a reasonable excuse if he does not pay in full in time.  To allow time for payment but to impose, without warning, a penalty for late payment where the taxpayer has complied with the terms on which delay was permitted would be such an unreasonable act that the taxpayer would be entitled to assume that the penalty would not be imposed, if he thought about that question at all and having arranged his affairs on that basis he would be entitled to a decision in his favour on the ground that the implied representation that the penalty would not be imposed would afford a reasonable excuse.  Such conclusion would have been re-enforced in this case by the fact that no penalty was imposed, when defaults which could have given rise to a 2% and a 5% penalty occurred in respect of periods ending October 2002 and January 2003, which is why the first penalty was at 10%.  
6.	Mr Hammond admitted that if time to pay had been refused the appellant would have been able to pay the sums due by the due date and, in effect, only delayed payment because it had been possible to persuade Customs and Excise that they needed that indulgence.  Whilst Customs and Excise might not have allowed time to pay if they had known the full facts, that amounts to the appellant having changed its position as a result of the implication to be drawn from the time to pay agreement and if it had to pay the surcharge the change of position would be to its detriment, which is a further reason for regarding the appellant’s reasonable conclusions about the time to pay agreement as a reasonable excuse.
7.	In this case the situation is complicated by the fact that the appellant received letters from Customs and Excise, as was frankly admitted by the appellants’ witnesses, that could, on one possible reading, suggest that the penalty would still be imposed.  These letters were apparently sent in respect of each default period before the period ending April 2003 and in respect of that period, though the only one I was shown related to the period ending July 2003.
8.	The letters set out the agreement to delay payments and the timetable for the payments and then state, so far as is relevant:
“This arrangement is subject to the following conditions:
Future value added tax returns are to be rendered by the due date and accompanied by payment of the tax declared.
…
Acceptance of this arrangement does not prevent or cancel the recording of defaults, liability to surcharge, and interest where applicable”
The last paragraph quoted is in heavy type in the letters.

9.	I conclude that the first condition (“future value added tax returns” etc) is intended to make it clear that the agreement to delay payment cannot be taken to afford any latitude for periods after the one referred to in the letter.  Each time a tax period had ended, the appellants applied for another time to pay agreement and it was granted.  That makes it clear that the letter was not saying that it would be impossible to obtain another agreement, only that the letter was not granting one for any later period.  The second paragraph quoted from the letter must be read in that context and should only be read as stating that liability to later penalties will still arise unless a further agreement to delay payment is negotiated, not as ruling out any further agreements.  I therefore conclude that the correct reading of those letters does not afford an argument that the appellant was told that surcharges would apply even if time to pay was granted for later periods.
10.	Therefore, in my judgment, the existence of these letters does not affect the reasonableness of the excuse in respect of each period for which an oral agreement to delay payment was negotiated and then followed by the letters, as was the case in respect of the two default periods in question.  Accordingly I allow the appeals in respect of the defaults relating to late payment of tax in both periods.
11.	In respect of the period ending April 2003 it was alleged that the return was not received until 2 June 2003, which would be two days late.  It was clear that the appellant’s witnesses had not realised that this might be a question about which they would be asked and the only evidence given about that question was that Mr Hammond said that he may have some proof of posting.  Customs and Excise produced no evidence to prove that the return was in fact received late, though that was alleged in the schedule produced at the hearing.  Evidence about the date of receipt of the return and about the posting was therefore very limited.  On the balance of probabilities I am satisfied that the return was posted in time.  That was the implication of Mr Hammond’s evidence and I so find.  Accordingly the appellant has the defence afforded by section 59(7)(a) of the Act in respect of that alleged default and no excuse is needed for any default that may have occurred by the late arrival of the return, if indeed that was the case, though I make no finding that the return was in fact received late.
12.	The appeals are allowed.  The appellant did not ask for costs and I make no award.

Richard Barlow
Chairman
Release date:
MAN/03/689