19259
	DEFAULT SURCHARGES — numerous periods — over-riding under capitalisation of the business — various additional factors appertaining to individual periods — appeal allowed in part

MANCHESTER TRIBUNAL CENTRE

 
 	
	ROSSETT HALL HOTEL LIMITED	Appellant

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Lady Mitting (Chairman)

Sitting in public in Manchester on 12 September 2005

Mr D Shaw and Mr R Davies for the Appellant 

Bernard Haley for the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	The Appellant was appealing against the following default surcharges:
	      £	
10/99	4384.51	
01/00	4214.45	
07/00	1684.55	
10/00	  396.94	
01/01	2013.11	
01/02	3000.00	
07/02	  480.00	
01/03	1482.56	
04/03	2000.00	
07/03	4496.97	
10/03	2442.62	
01/04	1500.00	
04/04	2435.25	
07/04	3147.21	
10/04	4531.00	
01/05	5864.51	

2.	The Appellant’s case was put by one of the directors, Mr Darryl Shaw, and the company accountant, Mr Robert Davies.  The factual aspects of their evidence were not challenged by the Respondents and based on both what I heard and on a very helpful bundle of documents put in by the Appellant, I find the facts to be as follows.
3.	Rossett Hall is a family run hotel, acquired in 1987.  Over the years, it has been developed quite considerably and until 1999 / 2000, the development was managed without major financial problem.  
4.	In early 1999, a decision was made to build a new and larger restaurant to be attached to the side of the existing Grade II listed hotel building.  When work began, it was found that the existing building did not have sufficient foundations to support the new extension and considerable unanticipated expense was incurred in underpinning.  Additionally, and by mischance, the Appellant had employed a rogue builder who, after complaints by the local authority building inspector, was sacked by the project manager, thus necessitating the employment of a second builder.   The Appellant had projected the cost of the extension at £230,000 and this amount had been budgeted for.  However, due to these problems, the actual cost approached £400,000 and there was a capital overspend of £140,000.  The Appellant’s bankers refused to cover the overspend as they had reached the maximum of their lending facility and the project was only financed by the introduction into the business by the shareholders of as much personal capital as could be found and the utilisation of every available working capital facility.
5.	This alone would have been difficult as the company had, by now, exposed itself financially to such an extent that further and increased turnover was necessary to help repay the capital outlay.  However, the hotel found itself unable to generate further turnover as a result of a number of independent isolated events.  First, in September 2000, the fuel protest led to a down turn in takings of £14,000 as people did not leave their homes.  This prevented the hotel from even reaching its break even position during that period.  
6.	In October 2000, for the first time in 30 years, the village of Rossett flooded; the main road into the village was not passable for eleven days and this effectively cut the hotel off.  Again, turnover for this month was also well below the break even point.  
7.	From February to June 2001, trade was exceedingly badly hit by the Foot and Mouth outbreak.  The hotel is in a rural situation and the public stopped taking leisure breaks in rural areas.  The hotel has a number of contracts with the government for housing their employees in the area, but these contracts were all cancelled. The hotel was the lead hotel for the RAC rally of Wales, an event which again was cancelled.  The business had a very high percentage of fixed costs and could not adapt in the short term to the severe down turn in business.  For the months February to June 2001, the business had forecast a turnover of £406,000 but achieved only £375,000, a figure which was considerably below not only its budget but against the previous year’s takings.  
8.	The directors were so concerned at the financial situation of the company that in May 2001, they even consulted solvency experts to ensure that the business was trading solvently and for any further advice which could be given. 
9.	Trade was further hit in September 2001 by the terrorist attacks in New York.  In the proximity of the hotel are several very large American run plants and some 60 – 70 per cent of the hotel’s business is corporate.  This trade clearly declined badly. 
10.	In 2003, the war in Iraq again hit trade as for some ten days or so, people were uncertain how to react and a noticeable fall in takings was observed.
11.	Following the overrun of the capital expansion to the hotel in 2000, general refurbishment had had to be deferred.  This meant that the appearance of the hotel became somewhat tired, resulting in, in particular, a decline in the number of wedding receptions booked.  
12.	From March 2003 onwards, and indeed continuing, the Appellant has been desperately trying to restructure itself financially and to raise sufficient finance to provide itself with further working capital and to repay all outstanding VAT.  The Appellant thought on two occasions that deals had been reached, only to find that both were “reneged on”.  I was told that a third deal is very near to completion and is likely to be in place within the next couple of months.
13.	Mr Haley, on behalf of the Respondents, conceded, from what he had heard, that the Appellant did have a reasonable excuse for the defaults in 10/99; 01/00; 07/00; 10/00 and 01/01.  Thereafter he argued that the excuse was spent and that none of the other factors were sufficiently unexpected to provide a reasonable excuse. 
14.	One further factor came out in closing, appertaining to the period 10/04.  It transpired that for that period, the Appellant had put in its return on time, accompanied by a cheque in full payment, again received in time, but the Respondents had asked the Appellant to stop the cheque and pay by CHAPS instead.  This, the Appellant did, but of course by this time the CHAPS payment, when it was received, was inevitably late and the company were surcharged.  Mr Haley accepted that this had happened as it was backed up in the Respondents’ records and quite properly he conceded that the surcharge should not have been raised as the remittance had been dispatched in proper time.
Conclusions
15.	I need not refer further to the periods 10/99, 01/00, 07/00, 10/00, 01/01 or 10/04 other than to record that, in accordance with Mr Haley’s concession, I find that there was a reasonable excuse for the defaults in these periods.  
16.	I would have found, had I been asked, that the Appellant had a reasonable excuse for any defaults occurring in the period of and immediately after the Foot and Mouth crisis.  I understand, however, that agreement was reached over this period with the Respondents and indeed that one default surcharge had already been cancelled.  I need only note that the first surcharge under appeal after Foot and Mouth was for 01/02, some six months after the end of the outbreak.
17.	In conceding the periods which he has, Mr Haley has covered the building work, the fuel protest and the flooding and has in effect, accepted a reasonable excuse arising out of all these events.  This leaves the New York terrorist attack and the war in Iraq.  I can see that in a hotel surrounded by large American employers and with a large corporate trade, 9/11 could well have had a quite significant impact on trade in the immediate term.  The first period after the attack which is under appeal is 01/02 and for this period, I would accept a reasonable excuse.  However, whilst appreciating that it would take a significant amount of time for trade to return to its pre 9/11 level, I do not believe that the effect of the attack can continue to justify the non-payment of VAT and I cannot accept that this event should constitute a reasonable excuse for non payment beyond 01/02.
18.	I totally discount the war in Iraq as having any significant impact on the company’s ability to pay its VAT.  It seems to me what had happened here was that by this time, the company had pared itself down financially to such a degree that any deviation, however minor, in takings, was going to impact upon its ability to meet its liabilities.  
19.	The majority of the surcharges under appeal post date all the individual events referred to above.  Throughout this entire period, from the beginning of 2003 to date, the Appellant has been trying to arrange a financial restructuring and argues that its inability to do so constitutes a reasonable excuse for non payment of its VAT.  An insufficiency of funds is specifically precluded from being a reasonable excuse for late payment but one is permitted to look at the reason for the insufficiency and this may, in very limited circumstances, constitute such an excuse.  This backward look is precisely what has permitted the Appellant to succeed in its appeal in the periods specifically referred to above.  However, the reasonable excuse cannot possibly endure for as long as it takes to overcome the financial problem.  In this case, therefore, it cannot amount to a reasonable excuse that the Appellant has been unable to conclude a restructuring deal.  This is a hazard of trading, unfortunately, often met by undercapitalised businesses.  I think, however, there is possibly one exceptional period.  I was told that in March 2003, the Appellant had been led to believe by its then bankers that a deal had been reached and capital was about to be released.  I can quite understand that the unanticipated failure of that capital to materialise would have had a serious detrimental effect in the short term and for that period, I therefore find there was a reasonable excuse.  I believe the relevant period would be 04/03.
20.	The appeal is therefore allowed in part.  In summary, I find a reasonable excuse for the periods 10/99; 01/00; 07/00; 10/00; 01/01; 01/02; 04/03 and 10/04.  For all other periods, nothing was argued in front of me which would lead me to find that there was a reasonable excuse.
21.	One point did arise at the conclusion of the hearing and that related to the allocation of the payments which the Appellant has been making over the last five years.  It appears that the payments fell into two categories.  First, the Appellant had agreed a repayment schedule with the Respondents to which it had adhered and clearly a number of its payments would fall into this category.  However, I also understand that certain other payments were submitted with and specifically allocated to individual returns.  I was told that for the last six months, the Appellant had been requesting from the Respondents a full statement of account so that they could ascertain for themselves exactly what payments they had made and how those payments had been allocated.  Unfortunately, this statement did not reach the Appellant until a week ago and the directors had not had time to check it and consider the implications.  The relevance of this is that it is possible that a payment which was intended by the Appellant to be specifically allocated to a particular return had not been so allocated by the Respondents and a default would therefore have been registered.  It appears unlikely that any such argument will arise but both representatives asked for time to consider the question of allocation and I therefore give them time so to do and give both parties liberty to apply within 28 days or the release of this decision if any dispute on the question of allocation arises.  
22.	I make no direction as to costs.

LADY MITTING
CHAIRMAN
Release Date: 22 September 2005

MAN/05/0357