18850
DEFAULT SURCHARGE – Reasonable excuse – Late payment – Lack of funds – Unexpected late receipt from major creditor – Whether foreseeable and avoidable – No – Whether reasonable excuse – Yes – Appeal allowed

LONDON TRIBUNAL CENTRE

	R G V ENGINEERING (NETHERAVON) LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	STEPHEN OLIVER QC  (Chairman)
					S K DAS	 

Sitting in public in London on 3 November 2004

David Burke, managing director, for the Appellant 

Mr Dougal for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	RGV Engineering (Netheravon) Ltd (“RGVE”) appeals against a default surcharge (5%) of £1,302 imposed in respect of its prescribed accounting period 2/02.  The due date was 31 March 2002.  RGVE had arrangements to pay by BACS which (it is agreed) gave them until 7 April to transfer to the Commissioners of Cutoms and Excise the £36,036 payable in respect of that period.  The money was actually received by Customs on 10 April.  The return had, it appears, been posted in time.  

2.	The mechanics of payment are not in dispute.  RGVE was short of funds until Monday 8 April.  It could not have paid without substantially breaching its overdraft limit.  On that Monday, David Burke, the managing director who also gave evidence, collected a cheque for £19,321 from an overdue customer.  He went straight to the bank and arranged payment to the Commissioners who received it by Wednesday 10 April.

3.	RGVE, through its managing director, is conscientious and responsible in its VAT compliance obligations.  But for the fact that shortage of funds is, by statute, no excuse, RGVE would have satisfied us that it had a reasonable excuse for late payment. We are however required by cases such as “Steptoe” to examine the reasons for the shortage of funds to see if they, in their own right, can amount to a reasonable excuse.

4.	RGVE has consistently had an annual turnover of over £1m.  It sales for the 2/02 quarter had been some £270,000 and £332,000 have been received from customers.  It had a cashflow problem caused initially, Mr Burke explained, by a liquidation of the client of one of RGVE’s customers. RGVE had entered into a contract with that customer in the middle of 2001 and the contract had lasted until November 2001.  The amount owing by the customer at the start of 2002 had been some £20,000.  £19,500 was recovered through court action sometime in 2003.  To judge from the day books of RGVE for the quarter to the end of February 2002 the £20,000 was the largest of its trade debts; 90% of the trade debts were £1,500 or less.  RGVE’s bank had extended the overdraft by £15,000 to £60,000, as a temporary measure, to cover the cash shortfall caused by the £20,000 debt.  The debit referred to above had been the cause of defaults for the 5/01 and 8/01 quarters; the present appeal was not directed at the SLN and the surcharge for those periods.

5.	The Easter bank holiday weekend in 2002 started on Friday 29 March and ended on Monday 1 April.  At the end of February RGVE had issued an invoice for £19,321 to a new customer and the payment was due in 30 days.  The new customer, unknown to Mr Burke at the time of issuing the invoice, closed its accounts department for the Easter break until (as he subsequently discovered) Monday 8 April.

6.	The bank records available to us do not indicate exactly what the overdraft position of RGVE was at the date for the BACS payment (i.e by Sunday 7 April); it was                     £44,000 at the start of April and wages were payable at the end of the first week (by 5 April).  Whatever the exact figure for overdraft, it is clear that RGVE did not have the resources to pay the £26,000 of tax due to be cleared through BACS by Sunday 7 April. 

7.	Mr Burke had, as noted, despatched the return in time and this had shown the amount due to the Commissioners.  The new customer who owed RGVE £19,321 by 31 March is well respected in the Salisbury area (where RGVE carries own most of its business).  Mr Burke had expected to be paid by Wednesday 3 April the latest.  This would have given him plenty of time to arrange the BACS payment of £26,036 to the Commissioners.  He had not foreseen that the customer kept only a skeleton staff and had no facilities for making payments to creditors during the week following Easter.  So, on Monday 8 April he went round to the customer in person, collected the cheque by hand and took it to his bank.

8.	Mr Dougal for the Commissioners pointed out that, with receipts of £330,000 in the relevant quarter, RGVE should have been able to manage its cashflow to ensure that the Commissioners were paid on time.  The earlier bad debt had been covered by overdraft and in any event had been a foreseeable hazard of the trade.  We accept Mr Dougal’s points so far.  Regarding the immediate problem of the £19,321 due from the new customer, the Easter break problem should (Mr Dougal contended) have been foreseen by Mr Burke.  He should have anticipated this and taken steps to secure funds to make the VAT payment.

9.	We assume that 28 February was the proper date for despatch of the invoice for £19,321 to the new customer.  Thirty days was the normal and predictable period for payment.  Payment of the £19,321 would not on any reasonable basis have been effected by Easter.  That would not have been a problem to RGVE which had until 7 April to pay the Customs.  But, should Mr Burke as a reasonable competent businessman have foreseen that the new customer was going to give its account staff a holiday in the week following Easter?  Or should Mr Burke have taken some other steps to enable RGVE to pay the £26,035 to the Customs by 7 April, such as not paying other creditors or putting pressure on other debtors?  Clearly it could not have delayed payment of wages.  There was very little time to collect in-payments from other debtors.

10.	We are therefore left with the single exercise of judgment contained in the following question. Did RGVE have a reasonable excuse on account of its new creditors’ failure to pay the £19,321 by the end of March?  We have not found this easy. Easter was early that year. The new customer was relatively large in comparison to RGVE’s other customers.  It was, we think, reasonable to expect that a customer of that size would still be issuing payment cheques to debtors in the week immediately following Easter. The corollary of this is that the new customer’s failure to pay was unforeseeable and the consequence to RGVE was, in practice, unavoidable.  As it was Mr Burke acted with despatch.  It was too late for RGVE to get in funds from other customers.  Mr Burke did all he could to make sure that the Commissioners were not kept out of their money for more than three days.  

11.	For all those reasons we think that RGVE had a reasonable excuse.  We therefore allow the appeal.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 29 November 2004

LON/04/1118