18678	

VALUE ADDED TAX – default surcharge – insufficiency of funds - Christmas shutdown in construction industry – whether reasonable excuse – no -  appeal dismissed – VATA 1994 Ss 59(7)(b) and 71(1)(a)

LONDON TRIBUNAL CENTRE

MULTIMAC SURFACES LIMITED
Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE
Respondents

			Tribunal:	DR NUALA BRICE (Chairman)
MISS S WONG CHONG FRICS

Sitting in public in London on 9 June 2004

Mr Steve Millard, a director of the Appellant, for the Appellant 

Mr Philip Webb, of the Office of the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The appeal

1.	Multimac Surfaces Limited (the Appellant) appeals against a default surcharge of £1,911.72 for the accounting period ending on 30 November 2002. The return and tax should have been received by 31 December 2002 and were not received until 8 January 2003. This was the fourth default.

The legislation

2.	Section 59 of the Value Added Tax Act 1994 provides that where a return or the tax is not received in time then there is a default. There is no surcharge for the first default but there is a surcharge for each default after that. The rate is 2% of the tax paid late for the second default, 5% for the third, 10% for the fourth, and 15% for the fifth. Section 59(7)(b) provides that there is no liability for a surcharge if the Tribunal is satisfied that there was a reasonable excuse for the delay. However, section 71(1)(a) provides that an insufficiency of funds to pay the tax is not a reasonable excuse.

The evidence

3.	A bundle of documents was produced by Customs and Excise. Oral evidence on behalf of the Appellant was given by Mr Steve Millard, a director of the Appellant. However, it was Mr Millard's wife, Mrs Caroline Millard, who looked after the company's administration and finances and she was unable to give evidence at the hearing because of ill-health. 

4.	There were two relevant matters arising out of the documents before us upon which Mr Millard did not feel able to comment. At the conclusion of the hearing we directed that if the Appellant wished to provide further written evidence about these matters it should send copies to the Tribunal and the Respondents before 23 June 2004 and that if nothing were received by then the Tribunal would release its decision. Mrs C T Millard of the Appellant wrote on 18 June 2004 with some further evidence which we have taken into account in reaching our decision. Copies of the further evidence were sent to Customs and Excise but we did not need to call upon Customs and Excise to comment on it.  

The facts

5.	From the evidence before us we find the following facts.

6.	The Appellant has been in business for twenty-two years. It now has two directors, Mr Steve Millard and Mrs Caroline Millard (his wife) who is also the company secretary. A third director resigned on 26 September 2001. The company’s principal activity is that of general construction and civil engineers. It does about 50% of its work for local authorities. For the year ending on 28 February 2002 it had a turnover of £518,014 which was down from the turnover of £682,318 in 2001. Directors' emoluments were £104,762 in 2002 as against £116,288 in 2001. In 2001 it made a loss for the year of £7,395 which was increased in 2002 to £11,127. Debtors at the end of 2001 were £120,097 but in 2002 were £82,674. 

7.	The Appellant has been in the surcharge regime since December 2000. The return due on 31 December 2000 was received on 21 February 2001 and the tax was paid in instalments ending on 16 October 2001. There was a second default in August 2001 and a third in December 2001 when the return due on 31 December 2001 was received on 30 January 2002 and again the tax was paid by instalments ending on 20 November 2002. Thus for the three years 2000, 2001 and 2002 the return due at the end of the year was received late.

8.	For the four months from September 2002 to December 2002 the Appellant invoiced its customers for a total of £348,395.41. Four credit notes were issued amounting in total to £53,054.67. Thus the net amount invoiced was £295,340.74. In the same period the amount received from customers was £332,475.43. The difference was £37,134.69. A few of the amounts received had been invoiced in the previous accounting periods ending on 31 May 2002 and 31 August 2002. 

9.	Although in the four months ending in December 2002 the Appellant received more money than it invoiced there are occasions when customers pay late. The evidence supplied on 18 June 2004 illustrated three examples; in one a certificate was issued on 15 June 2004 in respect of construction works completed by the Appellant for a local authority in January 2004.  However, the invoices were not issued until 15 June 2004 and so the Appellant did not have to pay the value added tax at a time that it had not been received. 

10.	The construction industry closes down from 24 December in each year until about 6 or 7 January in the following year. The return for the accounting period ending on 30 November 2002 should have been received by Customs and Excise by 31 December 2002 and was in fact received on 8 January 2003. It showed a turnover for the accounting period of three months of £245,671 and the tax due was £19,175.91. 

11.	On 31 December 2002 the Appellant had an overdraft limit of £40,000 and an overdraft of £27,642.08. The amount of £332,475.43 received from customers in the four months ending on 31 December 2002 had been spent in paying suppliers, wages and the Inland Revenue. 
 
The arguments

12.	For the Appellant Mr Millard argued that there were two reasons for the delay. The main reason was that the company did not have the funds to pay the tax; some of the tax which had to be paid to Customs and Excise had not been received from the company's clients and a great deal of time had been spent in December 2002 chasing customers for money owed. Local authorities could take three months to pay an invoice. The other reason was that the construction industry shut down at Christmas and the value added tax return had not been sent before the break due to an oversight; he had taken a week's holiday before the break which meant that Mrs Millard had to do the work of two during that time and the pressure of work gave rise to the oversight. Finally, Mr Millard said that the return was only eight days late and a surcharge of 10% was excessive; it would take the Appellant a long time to make the amount of £1,911.72.

13.	For Customs and Excise Mr Webb argued that section 71(1)(a) of the 1994 Act provided that an insufficiency of funds could not be a reasonable excuse. The facts of this appeal did not come within the principle in Commissioners of Customs and Excise v Steptoe [1992] STC 757; there was no particular problem at the time that the tax was due. Also the Christmas break could not be a reasonable excuse because it could be foreseen. 

Reasons for decision

14.	The Appellant's first argument was that it did not have the funds to pay the tax. The legislation which is now in section 71(1)(a) of the 1994 Act was considered in Commissioners of Customs and Excise v Salevon [1989] STC 907 and in Steptoe.

15.	Those authorities establish three main principles. First, that although the legislation says that an insufficiency of funds is not a reasonable excuse for late payment it is also necessary to look at the reason for the insufficiency of funds because the reason could be a reasonable excuse. For example, a trader who lacks the money to pay his tax by reason of culpable default does not have a reasonable excuse but a trader who is deprived of the means to pay the tax for some adequate reason might well have a reasonable excuse even though the direct cause of the default is the insufficiency of funds.
  
16.	Secondly, it is for the tribunal to decide whether the reason for the insufficiency of funds constitutes a reasonable excuse; the wrongful act of another, or some unforeseeable and inescapable misfortune, could well be but there are limits. The test was outlined by Lord Donaldson in Steptoe in the following way:

	"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 upon which such foresight, diligence and regard would have overcome the insufficiency of funds."

17.	Finally, the cases in which a trader with insufficient funds to pay the tax can successfully claim a 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 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 was a reasonable excuse for late payment.
	
18.	Applying the above principles to the facts of the present appeal it is relevant that on the date on which payment was due (31 December 2002) the Appellant had just completed a four month period during which it received £31,134.69 more than it had invoiced. There was no unforeseeable or inescapable misfortune here. The money had been received and it included the tax which was due to Customs and Excise. The tax should not have been used in the business unless it was also available for payment on the due date. The exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax was due on 31 December 2002 should have avoided the insufficiency of funds which led to the default. In our view the difficulties faced by the Appellant result from the fact that it is not sufficiently capitalised. For this reason it had to spend the value added tax it received from its customers in paying its suppliers and wages and so could not hand it over to Customs and Excise when the date for payment arrived. According to Steptoe a trader in such a position is hard put to it to persuade the tribunal that there was a reasonable excuse for late payment. On the evidence before us we are not persuaded that there was a reasonable excuse. 
   
19.	The Appellant's second argument was that the return was due during the Christmas break and was not prepared due to an oversight. However, the Christmas break occurs every year. It can be foreseen and proper arrangements should be made for the return and tax to be sent on time. The Appellant was aware of this as in the two previous years it had also been late. 

20.	Mr Millard mentioned the amount of the surcharge. The amount of the surcharge is a percentage of the tax paid late. The percentages are set out in section 59 of the 1994 Act and cannot be changed by the Tribunal or by Customs and Excise. 

Decision 

21.	We conclude that the Appellant does not have a reasonable excuse for the delay in sending the return and tax which were due on 31 December 2002. 

22.	The appeal is, therefore, dismissed. 

 
	DR NUALA BRICE

	CHAIRMAN

	RELEASE DATE:01/07/2004

LON/2003/0533
30.06.04