18867

DEFAULT SURCHARGE – Reasonable excuse – Shortage of funds – Building contractor – Payments due withheld by customer – Whether foreseeable – Whether reason for defaults – Whether defaults avoidable – Appeals dismissed
APPEAL – Extension of time to appeal – 15 to 20 month delay in appealing – Appellant not misled – Customs opposed leave in respect of 3 surcharges but not in respect of another 3 – Leave refused for first three

LONDON TRIBUNAL CENTRE

	T&S ACOUSTICS CONTRACTS LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	THEODORE WALLACE  (Chairman)
					MRS SHEILA EDMONDSON FCA	 

Sitting in public in London on 20 October 2004

Stephen Harvey, director, for the Appellant 

Jonathan Holl, senior officer advocate, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This appeal concerns six default surcharges imposed on the Appellant from the period ending 30 April 2002 (04/02) to that ending on 31 July 2003 (07/03).

2.	The notice of appeal was received on 26 March 2004 and included an application for leave to appeal out of time.  The notice was served on Customs who made no response. No direction was made on the application. The appeal was originally listed for 28 July but was deferred at the Appellant’s request.  It was relisted for 18 August and was deferred by agreement being relisted for 20 October at 2.00pm.  On 11 October Customs asked for the hearing to be listed for a full day.

3.	At the outset of the hearing Mr Holl pointed out that the appeals were out of time and stated that Customs would object to leave being given in respect of periods 04/02, 07/02 and 10/02.  He said that Customs did not oppose leave for the appeals against the 2003 surcharges.

4.	Since leave has never been given, we proceeded to hear the application.

5.	The surcharges for 04/02, 07/02 and 10/02 were notified on 26 July, 13 September and 13 December 2002 respectively.  On the reverse side it was stated that the trader could appeal to an independent Tribunal but no address was given and no time limit was stated.

6.	The Appellant did not appeal at that stage.  On 14 May 2002 Mr Harvey wrote asking for extra time to pay the VAT due to cashflow problems and mentioned the need to recover money due from main contractors.  On 24 May 2002 Customs responded agreeing to accept the balance of the outstanding debt on 21 June on condition that future VAT was paid on time and that the arrangement did not prevent liability to surcharge.  The balance was not in fact paid by that date.  Further time to pay agreements were subject to similar terms.  On 15 October Mr Harvey wrote that the Appellant was taking High Court proceedings to enforce £42,000 unpaid from an adjudication award.

7.	The first letter from the Appellant questioning the surcharges was on 14 January 2003 when Mr Harvey wrote that the surcharges “seem excessive and unfair under the circumstances.  We therefore urge you to disregard these costs.”  However the letter was primarily directed at time to pay.  Further telephone calls and correspondence following directed to the arrears.

8.	On 19 September 2003 Mr Harvey wrote to Customs to appeal against the surcharge for 07/03 stating that the VAT was paid in time.  On 7 October Customs wrote upholding the surcharge and stating that the Appellant had 21 days to appeal to the Tribunal.

9.	On 14 January 2004 the Appellant wrote to Customs appealing against the default surcharges from 04/02. Customs responded asking for extensive information and on 1 March 2004 wrote stating that the surcharges from 04/02 to 07/03 had been reviewed but were being maintained.  They stated,

“You have a period of 21 days from the date of this decision letter in which to appeal to an independent VAT and Duties Tribunal if you wish.”

The Appellant wrote asking how the case was to be referred to tribunal.  Customs wrote confirming the surcharges and referred the Appellant to the Tribunal web-site “if you still wish to appeal.”

10.	At no stage does it appear that the Appellant was informed by Customs of the 30 day time limit for appeals under the Tribunals Rules.  The Appellant ticked the box on the Notice of Appeal asking for an extension of time to appeal.  No action was taken on the application.  The appeal was listed and it was only at the hearing that Mr Harvey was told that Customs were opposing leave to appeal against the earlier surcharges.

11.	Mr Harvey very frankly accepted that apart from the exchange of letters as to 07/03 there had been no correspondence or telephone conversations about appeals against the surcharges until 2004 and said that he had not been misled in any way by Customs.  He agreed that the Appellant had not been prejudiced.

12.	Since Customs did not object to the extension of time as to the 2003 surcharges and had given the Appellant the expectation that it could appeal by the letter of 1 March 2004, we gave leave for appeals against the last three surcharges.

13.	However we refused leave in respect of the 2002 surcharges.  The appeals against those surcharges were 15 to 20 months late and apart from the letter of January 2003 the Appellant raised no question about those until 2004.  There was no suggestion that the Appellant was misled as to the need to appeal or that it had been prejudiced or had incurred expenditure because it was not told of Customs’ objection.  Since the surcharges for 01/03 to 07/03 were 15 per cent even without reference to the surcharges for 04/02 to 10/02 because of earlier defaults, the 04/02 to 10/02 surcharges had no impact on the rates of surcharge. We decided that the delay was too great. We hope that in future the time limit for appeals can be stated on the surcharge notices and that Customs notify any opposition to late appeals promptly on receipt of the Notice of Appeal.

The appeals in respect of 01/03, 04/03 and 07/03

14.	The excuse advanced by the Appellant for all of those defaults was the failure by Beck Peppiatt Ltd (“Peppiatt”) to pay substantial sums for work done by the Appellant on a construction project for Guinness plc at Park Royal until adjudication and legal proceedings. In addition Mr Harvey initially asserted that the VAT for 07/03 was remitted in time, however he did not pursue this ground of appeal when cross-examined.

15.	Mr Harvey produced substantial documentation including an Adjudicator’s decisions dated 25 September 2002 and a Statement of Claim in the Technology and Construction Court served in December 2003.  Mr Holl put in a bundle of 294 pages.  We find the following facts.

16.	On 22 January 2002 the Appellant was engaged under a sub-contract by Peppiatt to provide labour, plant and materials to carry out the ceilings and dry linings at a project at Park Royal for £348,179 plus VAT.  The Appellant had in fact started work on 15 October 2001 and completed work apart from minor snagging on 21 June 2002.  Practical completion of the main contract was certified as having occurred on 9 August 2002; this included the Appellant’s work.  There had been substantial variations and additions.

17.	During the course of the works the Appellant submitted various applications for payment culminating in an account dated 17 June 2002 valuing the work at £705,073 net of VAT with £45,130 plus VAT to be paid on 15 August after the 5 per cent retention under the contract. Peppiatt valued the work at only £602,218 and withheld £42,000 for contra charges only paying £53.

18.	On 25 September 2002 the Adjudicator valued the work at £623,009 and ordered Peppiatt to pay £61,751 plus VAT with interest and Adjudicator’s fees, disallowing the £42,000 contra charge.

19.	Peppiatt paid the £61,751 plus VAT by 25 October 2002. On 10 October the Appellant issued a Final Account for £726,982 net of VAT providing further substantiation for sums which had been insufficiently documented previously. On 13 December Peppiatt paid £15,575 being half the retention.

20.	On 22 May 2003 the Appellant submitted a revised Final Account for £679,943 net of VAT.  £55,501 net of VAT remained unpaid until a writ was issued in December 2003.  An Adjudicator had ordered Peppiatt to pay a further £13,637 in September 2003.  The balance of the Final Account was paid in January 2004.

21.	To summarise, £61,751 plus VAT, which was found on Adjudication to be due in respect of the accounts payable in May and August 2002, was not paid until September and October 2002.  A further £55,501 plus VAT relating to work completed in June 2002 was only paid in January 2004 following the issue of a writ.

22.	We accept Mr Harvey’s contention that those sums were wrongfully withheld from the Appellant in that they were either found by the Adjudicator to be due or were eventually conceded.  We observe however that the sum of £55,501 does not appear to have been sufficiently documented until October 2002 after the Adjudication.

23.	It is necessary to consider, however, whether the late payments by Peppiatt were unforeseeable and whether they were the real reason for the defaults on the footing that they deprived the Appellant of the ability to pay the VAT when due.

24.	It is relevant that the Appellant had defaulted on the VAT due on the previous four periods before 04/02, which was the first period which Mr Harvey attributed to Peppiatt.  It is clear that the Appellant was short of funds before the difficulties with Peppiatt and indeed before the work for Peppiatt started.

25.	The Accounts to 30 April 2002 show a profit of only £17,541 before tax on a turnover of £2,064,690. Shareholders funds were £11,115 at the year end with net current liabilities being £16,228. Dividends of £60,005 were paid in the year in addition to the salaries paid to the two directors. We are driven to the conclusion that the Appellant was undercapitalised, that its profit margins were inadequate and that in the circumstances the money drawn by the directors was too great.

26.	By 28 February 2003 when the £24,008 VAT for 01/03 was due to be paid, the £61,751 plus VAT awarded by the Adjudicator had been paid.  However £55,501 plus VAT remained unpaid on the Final Account apart from a claim for disruption and prolongation costs and interest charges and consultant and legal costs.

27.	The Appellant only issued VAT invoices when the sums were agreed by Peppiatt so that the disputed valuations were not reflected in the output tax due on the VAT returns. Although the Appellant was not accounting on a cash basis, it was not faced with accounting for tax on substantial unpaid invoices.

28.	The 01/03 return showed outputs plus VAT as £276,900, inputs plus VAT of £217,685 and net VAT due of £24,008.

29.	On 28 February 2003 the Appellant had an overdraft of £69,308 compared with a limit of £80,000. The trading position however had improved with the end of the Peppiatt sub-contract and in the year to April 2003 there was a pre-tax profit of £32,390 on a turnover of £1,237,221. Dividends paid in the year were lower at £23,808. Mr Harvey’s co-director died in December 2002; however it was not suggested that this was material to the default.

30.	The 04/03 return showed outputs plus VAT as £292,654 and inputs as £325,175 with net VAT due as £21,930.  The overdraft on 31 May 2003 was £62,566 but a direct debit to Swale Council of £15,872 was paid on 2 June.

31.	The 07/03 return showed outputs plus VAT of £478,050 and inputs of £426,768 with net VAT £31,299.  The overdraft at the end of August was £106,686.

32.	Mr Harvey said that if the Peppiatt moneys had been paid when demanded the Appellant could have paid the VAT on the returns in 2003. On the basis of the statement of claim the payments held up in 2003 were £55,501. In addition the Appellant incurred professional fees mainly relating to the dispute of £5,472 in 2001/02 and £11,009 in 2002/03.

33.	Mr Holl said that the Appellant received sufficient funds in the period to pay the VAT.  He stressed that their output tax liability approximated to that on a cash basis because of the invoicing arrangements. The company had taken a commercial decision as to which bills to pay.

34.	All of these observations are correct, however it is in our view too simplistic to regard them as concluding the matter.  The fact is that the type of business undertaken by the Appellant involves entering into contracts which it was obliged to perform.  There is no legal obligation to segregate VAT from other funds or to give VAT absolute priority over all other obligations including other taxes, rent and wages.  The requirement is to show a proper regard for the fact that the VAT was due.  It is however much more difficult for a trader to succeed in showing that defaults were unavoidable when substantial sums have been received.

35.	The Appellant faces the problem however that the VAT due was well under one-tenth of receipts in each period.  While the contractual and other obligations were substantial, the fact remains had the Appellant paid dividends of £60,005 in the year to April 2002 and £23,808 in the following year.  Mr Harvey said that the dividends were in effect part of the remuneration of the directors.  The reality is however that given its VAT obligations the company was not in a position to pay those dividends.   It is also relevant that the payments withheld throughout 2003 which were the basis of the writ were relatively small compared with the turnover.

36.	We accept that Mr Harvey introduced some personal funds and made strenuous efforts to keep the company afloat.  However no other cause beyond normal trading was established for the shortage of funds.  Some element of dispute is in our view a hazard of trade in the construction industry as the dispute process recognises. We are not satisfied that the late payments by Peppiatt have been shown to be the real cause of the default.

37.	The appeal is dismissed.

THEODORE WALLACE
CHAIRMAN

RELEASED: 8 December 2004

LON/04/276