Reflex Europe.Com Ltd v  Customs and Excise [2004] UKVAT V18693 (14 July 2004)
1869303 792 REFLEX EUROPE.COM LIMITED Mr R Barlow  Manchester 10 June Mr and Mrs Rose for the appellant Mr R Mansell of the Solicitor's Office of HM Customs and Excise, for the Respondents RICHARD BARLOW

	DEFAULT SURCHARGE  — reasonable excuse — appeal allowed

MANCHESTER TRIBUNAL CENTRE

 
 	
	REFLEX EUROPE.COM LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Mr R Barlow (Chairman)

Sitting in public in Manchester on 10 June 2004

Mr and Mrs Rose for the appellant

Mr R Mansell of the Solicitor’s Office of HM Customs and Excise, for the respondents

	© CROWN COPYRIGHT 2004

DECISION

1.	The appellant appeals against a default surcharge in the sum of £947.92 notified by a notice dated 17 October 2003 and confirmed in a letter dated 11 November 2003.  The alleged default relates to the prescribed accounting period 1 June 2003 to 31 August 2003 and was stated to be 15% of the tax outstanding on the due date for payment, being £6,319.47.
2.	The appellant does not dispute that it had been in default in respect of earlier periods within a year before the period in question and that liability to a surcharge would arise for the period in question, unless there was a reasonable excuse for the late payment.
3.	Mr and Mrs Rose of the appellant’s management gave evidence.  My findings of fact are as follows.
4.	Mrs Rose telephoned Clare Harper, a customs officer at the debt management unit, on either 29 or 30 September 2003 to ask for time to pay the tax due on the return for the relevant period which was £9,479.21.  She thought that time to pay had been agreed and enclosed a cheque for £3,159.74 with the return which was posted on 30 September 2003.
5.	In fact, time to pay had not been agreed over the telephone but it was agreed by Customs and Excise following receipt of a letter which reached Customs and Excise on 1 October 2003.  By their letter of 14 October Customs and Excise gave the appellant time to pay by allowing it to pay £3,159.74 on 30 October and £3,159.73 on 30 November.
6.	The appellant company was not the only business operated by Mr and Mrs Rose.  They operated a separate business through another company (Unisight) which closed down its operations and was being wound up in December 2002.  Both companies had banked with the Royal Bank of Scotland and both had guaranteed each others’ debts to the bank.  Following the closure of the Unisight business the bank was seeking repayment of a debt relating to Unisight from the appellant and weekly sums of £500 and later £1,000 were being deducted from the appellant’s balance to repay that debt.
7.	The appellant built up a credit balance at the bank in order to have available cash flow resources but on 13 August 2003 the bank wrote to the appellant stating that it had debited the sum of £42,000 from its account in order to repay that amount of the Unisight debt.
8.	That transaction was wholly unexpected by the appellant and had been effected by the Regional Director of the bank.  The appellant’s dealings with the bank had been mainly with the local branch manager and Mr Rose would have expected warning of any intention to effect such a transaction, though none was given.  At first he looked into the question of challenging the legality of the bank’s action but it was decided not to take action.  The sudden withdrawal of funds left the company unexpectedly unable to pay the VAT due some six weeks later.
9.	In the case of MHC –v- Customs & Excise Commissioners (2004, decision number 18504) I held that where time to pay had been agreed with Customs and Excise before the taxpayer had defaulted in respect of the period for which time to pay had been agreed no surcharge would be applicable for that period, at least because the taxpayer’s expectation that no surcharge would be applied would afford a reasonable excuse for the default.
10.	I held that to be the case despite the wording of the standard form letter used to agree time to pay which contains the following condition (amongst others):
“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 agreement does not prevent or cancel the recording of defaults, liability to surcharge and interest where applicable.”
11.	The first paragraph quoted above referring to future returns cannot be taken to refer to the return for the period for which time to pay is being agreed and that reference to future returns clearly affects the meaning of the second paragraph.  In context the second paragraph, though it is ambiguous and could be read as referring to any default including a default for the period for which time to pay is being agreed, should be read as referring to future defaults.  It is intended to make it clear that the granting of time to pay for whatever period is referred to in the letter cannot be taken as an indication that time either is or will be granted for later periods.
12.	Neither the MHC case nor this case raises the question of what the position might be if Customs and Excise had made it clear that time to pay would only be granted on terms that the default surcharge for the period in respect of which time was being granted would still apply and the taxpayer had accepted the time to pay agreement on that basis.
13.	However, in a case like the present one, where time to pay has not been agreed until after the default has occurred the above considerations do not apply and the later acceptance of a request for time to pay followed by the issue of the letter in the standard form does not cancel the consequences of the default.  The passage quoted in the letter would still apply only to the future returns but as the default had occurred before the time to pay agreement was concluded, unless the agreement specifically excluded the surcharge the defaults would still have their usual consequences, subject to any defences that might be open to the taxpayer.
14.	It follows that the appellants do not succeed in this appeal by relying upon the agreement for time to pay.
15.	Lack of funds is not a ground upon which a reasonable excuse can be founded (section 71(1)(a) VAT Act 1994).  However, where an unexpected or unplanned for event which could not be remedied in time to make the payment has given rise to an insufficiency, that can be a reasonable excuse.  The conduct of the appellant’s bank in debiting £42,000 from its account at short notice is such an event and I hold that it does amount to a reasonable excuse.
16.	I should add that Mr Mansell took no point on the late arrival of the VAT return for the relevant period and conceded that it had been posted in time to arrive by the due date so that the late payment of two thirds of the amount due was the only relevant default for which an excuse was required before the appellant was entitled to succeed.
17.	Accordingly the appeal is allowed.

MR R BARLOW
CHAIRMAN
Release date:14/07/2004
MAN/03/792