18900

DEFAULT SURCHARGE – Reasonable excuse – Late payment – Shortage of funds – Appellant factored debts on basis that it could draw down amounts required to pay VAT – Appellant notified debt-factor of intention to draw down but received payment from debt-factor seven minutes late – Appellant unable to meet 3.30pm deadline for payment to Commissioners – Whether delay in receiving payment from debt-factor foreseeable – No – Whether reasonable excuse for late payment of tax – Yes 

DEFAULT SURCHARGE – Reasonable excuse – Late payment – Appellant had team of two individuals to arrange electronic transfers – Senior member of team unexpectedly absent on account of son’s illness – Junior member of team failed to activate payment by 3.30pm on the due date – Whether reasonable excuse - Yes
LONDON TRIBUNAL CENTRE

	SHORTERM GROUP LIMITED	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 STEPHEN OLIVER QC (Chairman)
						 ALEX McLOUGHLIN

Sitting in public in London on 8 December 2004

J J Pinder of BDO, accountants, for the Appellant 

Pauline Crinnion for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	Shorterm Group Ltd (“SGL”) appeals against a default surcharge assessment in respect of the second instalment (£197,063) and the final balance (£804,579) of the VAT due from it for the period 8/03.  The second instalment was due to be paid on or before 29 August and the final balance on or before 14 October 2003.  The surcharge has been calculated at 10%.

2.	SGL pays its VAT by electronic transfer.  It operates a special regime.  This requires it to make instalment payments by agreed dates each month and balancing payments by an agreed date after the end of each accounting period.  The electronic transmission system enables instant clearance, i.e. receipt by the Commissioners, for purposes of section 59(1) of VAT Act 1994.  But SGL’s bank requires payment to be activated by 3.30pm if clearance is to be effected that same day.  The first default happened because SGL missed the cut-off time by seven minutes.  The second default happened because SGL failed to activate payment until 8.37am the morning after the due date.

3.	SGL have advanced the “reasonable excuse” defence to both assessments.  They called Stephen Clague, their finance director since September 2002, to give evidence and explain the factual background to the defaults.  

Facts : background

4.	SGL has been in business for some thirty years.  It provides recruitment services of technical and professional engineers in the engineering, aerospace, communications, electronics, automotive and rail industries.  It acts as principal and accounts for VAT output tax on payments received by way of commission and to cover remuneration payable by it.  Over the last ten years its turnover increased from some £5 million to £50 million. Growth outstripped its debt collection.  Cashflow problems resulted.  It failed to pay VAT on occasions during that period.  It entered into time-to-pay agreements and, by 8/03, it was on the 10% default surcharge rate.

5.	Following his appointment Stephen Clague took steps to improve debt collection.  Initially the problem got worse and 90-day-old debts reached an all time high of £1.3 million by February 2003.  Mr Clague made improvements to SGL’s debt management department and arranged for the factoring of its debts.  Starting from  August 2003, Five-Arrows Commercial Finance Ltd (part of the N M Rothschild Group) agreed to allow SGL to draw down up to 90% of the value of invoices raised (excluding debtors more than 90-days old).  SGL had the right to draw down on the facility without notice up to an agreed percentage of an amount equal to 90% of the value of the invoices; SGL had to notify Five-Arrows specifically if it wished its drawings to exceed that level.

6.	By the due dates for payment in respect of the 8/03 period SGL’s cashflow position and its arrangements for covering its own payment obligations were in better shape.  But, said Mr Clague, things were still very hand-to-mouth and the cash position had to be monitored constantly.  

7.	For ten years until December 2003, the tax compliance obligations of SGL had been handled by a Mr W.  Mr W was respected for his experience and his reliability; but the tenfold increase in SGL’s turnover with its consequential cashflow problems had outgrown Mr W’s capacity to cope.  Mr Clague had worked closely with him.  The VAT payment dates were regarded as red letter days and it had become Mr Clague’s practice to sit by the screen with Mr W watching their banking information and making whatever arrangements were necessary to effect payment to the tax authorities.  By the end of July 2003 SGL had decided to re-organize their financial management arrangements.  Mr W’s job was abolished with effect from December 2003 and he was notified that he was to be made redundant.

Facts : the first default

8.	Payment of the second instalment for the 8/03period was due on 29 August 2003.  This was the first VAT payment made while the Five-Arrows agreement was in place.  On 29 August an advance request for payment was made to Five-Arrows.  Five-Arrows did not immediately action their payment to SGL’s account and it was not cleared through their banking system until 3.37pm.   Mr Clague and Mr W had been together by the SGL screen at the time, but had been unable to speed things up.  The moment payment was cleared into SGL’s account, SGL’s onward payment to the Commissioners was effected.  Because 29 August was a Friday, the Commissioners did not receive payment until the first business day the next week.  

First default : conclusion

9.	SGL should, Mrs Crinnion argued, have effected payments on time.  SGL knew that payment was due.  SGL had insufficient funds at the moment of payment.  SGL could have asked Five-Arrows to release the funds at least a day earlier.  SGL’s response was based on Mr Clague’s evidence.  Only at the end of Thursday 28 August did SGL know that they had the “headroom” under the factoring agreement to draw down the £197,063 of tax due to the Commissioners the next day.  They had to leave their formal notification to Five-Arrows until the morning of 29 August.  That had been within the scope of their agreement with Five-Arrows.  They had every reason to expect that Five-Arrows would comply with the notification and that timeous payment into SGL’s bank account would be effected.  

10.	We are satisfied that SGL acted with the care and sense of responsibility expected of a reasonable competent business person in comparable circumstances.  SGL had discount funding arrangements in place with a wholly reliable financial institution.  Those gave it access to sufficient funds to cover the tax due from SGL on 29 August. SGL had notified Five-Arrows in time that it wanted the £197,063 transferred into its (SGL’s) account.  We can see no reason why that amount should not have been with SGL in time to meet the 3.30pm deadline.  That the money arrived from Five-Arrows seven minutes late was unexpected and unforeseeable.  For those reasons we think that SGL had a reasonable excuse for the late payment of the second instalment.  

Facts : second default

11.	SGL had notified Five-Arrows of  its requirement for the £804,579 drawdown to meet its liability to pay tax (the balancing payment for the 8/03 period) on 14 October 2003.  The funds were in SGL’s bank account at 2.14pm that day and arrangements to transfer the balancing payment to the Commissioners had been made.  But nobody at SGL activated the machinery for payment until next morning at about 8.30am.  Only Mr W had been in a position to make the payment on 14 October.  He did not tell anyone at SGL of his failure.

12.	Why Mr W failed to make the payment by 3.30pm on 14 October, we do not know.  It may be because he was distracted by the implications of his impending redundancy.  VAT payment dates were, as we have already observed, red letter days and those responsible were well aware of the default surcharge implications of failure to pay on time.  The arrangements with Five-Arrows were sophisticated and new to Mr W.  On those days Mr W and Mr Clague worked as a team, often sitting together by the screen and waiting for the funds to reach the amount required to cover the VAT due.  Thus, accident or oversight apart, there was a back-up in place; in particular, Mr Clague’s presence should have ensured that Mr W did not fail to activate the payment procedure.  As it happened, Mr Clague’s four year old son was undergoing open heart surgery and following the operation on 6/7 October he was in a state of enforced coma for several days.  The condition had been life-threatening for some years and from a date in late September Mr Clague knew that the operation was to take place.  In the days leading up to 14 October, Mr Clague was at the hospital.  He was completely pre-occupied with his son’s condition. The operation and its consequences had been more serious that Mr Clague had ever expected.  It had not occurred to him in the days leading up to 14 October to appoint a replacement to back-up Mr W on matters relating to the balancing payment.

Second default : conclusion

13.	Where, as here, we have a company which is under a special payment regime has only recently installed a debt-factoring arrangement has a high VAT liability and is exposed to default surcharges at the 10% rate, we would expect a correspondingly high level of care and supervision to ensure proper compliance. SGL’s position was all the more acute because Mr W was facing redundancy at the time.  The only reason why SGL did not have a fail-safe system in place was Mr Clague’s absence and his own failure to appoint a substitute to work with Mr W.  We are however satisfied that the pressures on Mr Clague were extraordinary and more serious than he had foreseen.  His unexpected absence left SGL without the necessary supervision of the arrangements for making the balancing payment on 14 October 2003.  In the circumstances we think that SGL has shown a reasonable excuse.  

14.	For the reasons given above we allow the appeal against the default surcharge for the 8/03 period in its entirety.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 30 December 2004
LON/04/143