19346
VALUE ADDED TAX – default surcharges – five surcharges – insufficiency of funds –liquidation of a main supplier – bad debts – late payment of invoices -  whether Appellant had a reasonable excuse for each default – no – appeal dismissed – VATA 1994 Ss 59(7)(b) and 71(1)(a)

LONDON TRIBUNAL CENTRE 

	N A C D LIMITED
		Appellant

	Appellant
	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS
Respondents

Tribunal: Dr A N Brice (Chairman)
Mrs C S de Albuquerque 

Sitting in public in London on 26 October 2005

There was no appearance by or on behalf of the Appellant 

Pauline Crinnion, of the Office of the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

The appeal
1.	NACD Limited (the Appellant) appealed against five default surcharges for the accounting periods ending on 31 December 2001, 31 March 2002, 30 June 2002, 31 March 2003 and 30 June 2003.

Appeal heard in the absence of the Appellant
2.	When the appeal was called on for hearing there was no appearance by or on behalf of the Appellant. Rule 26(2) of the Value Added Tax Tribunals Rules 1986 SI 1986 (the Rules) provides that if, when an appeal is called on for hearing, a party does not appear in person or by his representative, the Tribunal may proceed to consider the appeal in the absence of that party. 

3.	In considering whether to hear the appeal in the absence of the Appellant we bore in mind that this was the fifth time that this appeal had been listed. It was first listed to be heard on 2 February 2005 but we do not know why that hearing did not take place. It was next listed to be heard on 30 March 2005 and the notice of the hearing was sent to the parties on 8 December 2004. On 16 March 2005 the Appellant said that it had not received a copy of the notice. However, it is clear that the Appellant knew about the hearing on 16 March 2005 and so had the fourteen days’ notice of the hearing required by Rule 23(1). Subsequent notices were sent by recorded delivery. The hearing was listed for the third time to take place on 15 June 2005 and the notice of the hearing was sent on 24 March 2005. On 7 June 2005 the Appellant requested a postponement of the hearing because of the illness of its accountant. On 14 June a medical certificate was forwarded stating that the accountant should refrain from work for two weeks because of hypertension. The postponement request was allowed. On 21 June notice was given of a fourth listing to take place on 21 September 2005. On 4 July the Appellant asked for this date to be changed to any date in October or November. 

4.	On 8 July the fifth notice of hearing was sent notifying the parties that the appeal would be heard on 26 October 2005.  On 17 October the Appellant wrote to ask for this hearing to be postponed. The letter said that the accountant went on leave on 5 October 2005 and was supposed to return on 24 October. Unfortunately his return had been delayed due to health problems. As he was abroad and uncontactable no documentation could be obtained from him. A copy medical certificate was later sent by facsimile message on 25 October. This stated that the accountant had been seen by his doctor on either 4 or 5 October and that he should refrain from work for two weeks because of hypertension. The Appellant was informed that the application for a postponement had not been allowed and that the hearing on 26 October would take place. 

5.	On the morning of the hearing Mr Collis of the Appellant telephoned to ask that the appeal be postponed until later in the morning as the accountant would be attending his doctor that day. However, this appeal was the only appeal in our list and the representative of the Respondents had attended. Accordingly, we did not agree to defer the time of the hearing. At the hearing Mrs Crinnion, who appeared for the Respondents, told us that she had telephoned the Appellant the previous day and had spoken to Mr Collis about the appeal. We were of the view that, as this was the fifth occasion on which the appeal had been listed, and as the accountant’s medical condition was ongoing, the Appellant should have given consideration to arranging for someone other than the accountant to represent it at the hearing.  

6.	In considering whether to hear the appeal in the absence of the Appellant we also bore in mind that rule 26(3) provides that the Tribunal may set aside any decision given in the absence of a party if that party applies to the Tribunal centre within fourteen days after the day when the Decision is released.

7.	For these reasons we decided to hear the appeal in the absence of the Appellant. We also record that at 11.38 am on the date of the hearing the Appellant sent a facsimile copy of a medical certificate for the accountant which was dated 26 October advising him to refrain from work for two weeks. Again the reason given was hypertension. This confirmed our view that, if we had postponed the hearing, there was no certainty that the accountant would have been able to attend any future hearing.  

Application for leave to appeal out of time
8.	On 12 November 2004 the Respondents objected to the first three appeals (concerning the three accounting periods ending on 31 December 2001, 31 March 2002 and 30 June 2002) on the ground that the appeals were not in time. The surcharge assessments had been issued on 15 February 2002, 17 May 2002 and 16 August 2002 respectively and the appeals against these surcharges were very late. Rule 4(1) provides that a notice of appeal shall be served at the Tribunal centre before thirty days after the date of the disputed decision.  However, at the hearing Mrs Crinnion withdrew this objection and so we considered the appeals against all five surcharges.

The facts
9.	A bundle of documents was produced by the Respondents. 

10.	From the evidence before us we find the following facts.

The Appellant and its business
11.	The Appellant operates a business of access and door entry security. It has an annual turnover in excess of  £1M. The details of the five defaults the subject of the appeal are:

Accounting 	Return due	Return received	Tax due		Tax not paid 	Amount of 
period ending							on time		surcharge

31.12.01	31.01.02	31.01.02	£27,135.53	£20,135.53	£402.71
31.03.02	30.04.02	01.05.02	£26,072.21	£26.072.21	£1,303.61
30.06.02	31.07.02	05.08.02	£21,390.62	£21,390.62	£2,139.06
31.03.03	30.04.03	30.04.03	£26,069.38	£20,000.00	£2,999.99
30.06.03	31.07.03	31.07.03	£27,284.58	£27,284.58	£4,092.68

12.	Thus it will be seen that most of the returns were received on time but the payments of tax were late. The returns were signed by Mr R A Collis. 

The first default
13	On 30 April 2002 the Appellant wrote to the Respondents saying that the company had faced late payments from a substantial number of its customers and some customers had gone into liquidation owing money to the Appellant. These matters had had an impact on the Appellant’s cash flow situation. The letter asked if the Appellant could stagger its value added tax payments without incurring default surcharges. The Respondents replied on 22 May 2002 asking for additional information. The Appellant replied on 29 May to say that it was procuring all the relevant information and would send this “within the next few weeks”. However, at that time the information was not supplied.

The second default
14.	The Appellant also wrote to the Respondents on 29 May 2002 about the second surcharge for the accounting period ending on 31 March 2002. The letter said that the Appellant was faced with “tremendous cash flow problems” and the additional liability [for the surcharge] would jeopardise the cash flow situation even further. The letter concluded that future value added tax payments would be made on time. On 22 July 2002 the Respondents wrote to the Appellant and referred to their letter of 22 May; they said that they had not received the further information and the case was closed (subject to any appeal to the Tribunal). At that time no further information was supplied.

The third default
15.	On 12 September 2002 an agreement was entered into between the Appellant and the Respondents about the payment of outstanding value added tax. On 27 September 2002 the Appellant wrote again to the Respondents and said that it wanted to appeal against the surcharges on the grounds that its financial problems had been caused by the liquidation in August or September 2001 of a company called Yellowpatter Limited who was one of its main suppliers. This meant that customers with existing projects could not be supplied and many customers had withheld payments from the Appellant as compensation for delays. Also, the Appellant had had to buy products from a French supplier and had had no input tax to offset. It had taken eleven months to resolve this situation which was a “one-off”. Future value added tax payments would be made on the due date.  On 5 November 2002 the Respondents replied asking for further information. Again, the further information was not supplied at that time.

The fourth default
16.	On 29 August 2003 the Appellant wrote to the Respondents about the first four surcharges. The letter said that the Appellant was at the mercy of main contractors as to when a particular element of a project was completed and passed for payment. Manufacturers required prompt payment but in the building industry there were late payers. The letter went on to say that the Appellant had made a loss in the year ending on 31 December 2002 and could not afford any further burdens [in the form of surcharges]. The Respondents replied on 2 and 9 September 2003 asking for additional information. 

The fifth default
17.	At last, on 7 October 2003, the Appellant wrote to the Respondents with some additional information. The letter said that action had been taken to obtain outstanding payments. Most customers paid around two or three weeks after invoices were overdue so they got between sixty and seventy-five days to settle their invoices. About 35% of customers took between ninety and one hundred and twenty days. About 15 to 25% of customers were larger customers and sometimes about 60% of outstanding payments were due from these larger customers. Some paid by instalments. There had been two bad debts. One had occurred in the accounting period ending on 31 December 2001 and amounted to £1,828.31. The other had occurred in the accounting period ending on 30 June 2003 and amounted to £4,778.00. The Respondents replied on 18 November 2003 to say that the amounts involved were a small percentage of total turnover and were deemed to be a normal hazard of the business. The five surcharges would remain. 

The appeal
18.	The Appellant lodged its appeal with the London Tribunal Centre on 2 January 2004. The grounds of appeal were that during 2002 and 2003 the Appellant had difficulty in recovering debts and fell behind with its value added tax payments. It did not wish to stop trading and was trying to recover the funds owed to it. It was making every effort to pay tax when it fell due. On 22 January 2004 the Respondents wrote to the Appellant asking for some evidence to support its claims and this was supplied on 25 February 2004 when the Appellant supplied information under six headings.

19.	The first heading was sales and remittances. The Appellant sent a list of sales and remittances on a monthly basis from September 2002 to September 2003. This showed that over those four accounting periods the amounts invoiced by the Appellant and the amounts received were:

Accounting period ending 		Invoiced		Received

		31 December 2002		£243,121.38	£241,448.81
		31 March 2003			£287,369.46	£268,826.02
		30 June 2003			£308,442.94	£315,129.93
		30 September 2003		£279,665.00	£256,305.27
						---------------------------------
		Total			         £1,118,598.70	£1,081,710.03

20.	These figures showed a shortfall of £36,888.75 over the period of a year.

21.	The second heading was customer base and repeated the previous information about the larger clients. The third heading was the accounts and the document supplied was the profit and loss account for the year ending on 31 December 2001. This included a comparison with the figures for the previous year and gave the following figures:

2001		2000. 

Turnover						£884,158	£856.170
Gross profit 						£384,955	£343,906
Administrative expenses 					£376,989	£312.158 
Operating profit 						£7,966		£31,748
Interest payments and similar charges			£7,810		£10,391
Profit before tax						£156		£21,357
Profit (loss) after tax					(£667)		£21,357	. 

22.	The letter of 25 January 2004 stated that the accounts for the year ending on 31 December 2002 had not been finalised but indicated a loss of over £50,000. The fourth heading was payment delays and this repeated the information provided earlier. The fifth heading was bad debts and this repeated the information about the two bad debts mentioned earlier. 

22.	The final heading was “other information”. With this were sent “aged debtors lists” for the accounting periods ending on 31 March 2003, 30 June 2003 and 30 September 2003. These figures indicated:

Accounting 		Turnover	Paid  		Paid after	Paid after 
Period ending	  		  	after 90 days	60 days		30 days

30 March 2003		£619,813.71	£18,102.76	£9,757.28	£18,619.56
30 June 2003		£615,008.93	£21,095.01	£5,501.48	£18,905.92
30 September 2003	£620,147.51	£20,403.80	£5,082.34	£13,978.73

23.	The Appellant has paid all its outstanding tax to date.

Reasons for decision
24.	In considering whether the Appellant has a reasonable excuse for the five defaults we  start with the legislative provisions.

The legislation
25.	Section 59 of the Value Added Tax Act 1994 (the 1994 Act) provides that, if either a value added tax return, or the tax due, is not received in time the taxpayer is in default. A penalty is imposed for the second and subsequent defaults and the amount of the penalty is an increasing percentage of the tax due. Section 59(7)(b) provides that a person is not liable for a penalty if he satisfies the tribunal that there was a reasonable excuse for the delay. Section 71(1)(a) provides that an insufficiency of funds to pay any tax due is not a reasonable excuse. 
 
The legal principles
26.	The meaning of section 71(1)(a) (which was then section 33(2)(a) of the Finance Act 1985) was considered in Commissioners of Customs and Excise v Salevon [1989] STC 907 and in Commissioners of Customs and Excise v Steptoe [1992] STC 757. Those decisions established four main principles. 

27.	First, the provisions of the section make it clear that an insufficiency of funds is not a reasonable excuse for late payment.  As Nolan J said in Salevon :

	"Suppose that a trader was able to demonstrate as a matter of fact that when the time for payment came he was, at least temporarily, bereft of funds and unable to borrow what was needed; that might be regarded in the absence of s 33(2)(a) as a reasonable excuse for non-payment. The law does not as a general rule require the impossible. But s 33(2)(a) makes it plain that insufficiency of funds cannot be so regarded. Insolvency is not enough."

28.	Secondly, it is necessary to distinguish between the reason, in the sense of the direct cause for late payment, and the underlying cause, or excuse, for late payment. The reason for the failure to pay on time may well be an insufficiency of funds, but the underlying cause for the insufficiency of funds may, depending on the facts, be a reasonable excuse. Although a trader who lacks the money to pay his tax by reason of culpable default would not have a reasonable excuse, a trader who is deprived of the means to pay the tax for some adequate reason might well have a reasonable excuse for late payment, notwithstanding that the direct cause of the default is the insufficiency of funds.
  
29	Thirdly, it is for the tribunal to decide whether the underlying cause constitutes a reasonable excuse; the wrongful act of another person, or some unforeseeable and inescapable misfortune, leading to an insufficiency of funds, could well be a reasonable excuse but there are limits on what could be regarded as a reasonable excuse. The test was outlined by Lord Donaldson in Steptoe in the following way:

	"If the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, then the taxpayer may well have a reasonable excuse for non-payment, but that excuse will be exhausted by the date upon which such foresight, diligence and regard would have overcome the insufficiency of funds."

30.	Finally, the cases in which a trader with insufficient funds to pay the tax can successfully invoke the defence of reasonable excuse are rare because traders receive from their customers the amount of tax which must be paid to the Respondents.  If they use that money in their business and lose it, and so cannot hand it over when the date for payment arrives, they will normally be hard put to it to persuade the tribunal that there is a reasonable excuse for late payment.

The application of the legal principles to this case
31.	Applying the above principles to the facts of the present case is clear that the lack of funds to pay the tax, including the arguments relating to “tremendous cash flow problems” and inadequate cash flow, cannot be a reasonable excuse. However, the underlying cause of the lack of funds could be and so we consider separately each of the Appellant’s arguments in the light of the facts we have found. 

32.	The first main argument concerned the liquidation of the supplier called Yellowpatter in August or September 2001. This liquidation and its effects could be relevant to the first accounting period the subject of this appeal, namely that ending on 31 December 2001, and could possibly be relevant to the next accounting period, namely that ending on 31 March 2002. The difficulty with this argument is that, with the exception of the accounts, none of the information supplied by the Appellant enabled us to form a view about the extent of the impact of the liquidation on the trade of the Appellant in 2001. The schedule of sales and remittances only referred to the four accounting periods from 31 December 2002 and the aged debtors lists only referred to the three accounting periods from 31 March 2003. Turning to the accounts, the profit and loss account supplied indicated that both turnover and gross profit in 2001 was higher than in 2000 and this would appear to indicate that the liquidation of Yellowpatter did not have a significantly adverse effect on the Appellant’s trade. It was the administrative expenses which were considerably higher in 2001 than in 2000 but we received no breakdown of the administrative expenses. 

33.	The Appellant’s second main argument concerned the two bad debts, one of which was of £1,828.31 and occurred in the accounting period ending on 31 December 2001 and the other was of £4,778.00 and occurred in the accounting period ending on 30 June 2003. When set against an annual turnover in the region of £1M and quarterly tax due of about £25,000, these bad debts (in two separate years) do not form a reasonable excuse for the late payment of the tax. 

34.	The Appellant’s third main argument concerned late payment of invoices. Here the information about sales and remittances were relevant. The Appellant claimed that over the period of a year it invoiced in excess of £1M but received remittances which were £36,888.75 less than the total invoiced. We calculate therefore that late receipts amounted to about 3% of turnover. In our view this value of late receipts is not sufficient to form a reasonable excuse for the late payment of tax. It is also relevant that in the accounting quarter ending on 30 June 2003 the Appellant actually received more than it invoiced and yet the Appellant was in default in that quarter. 

35.	Accordingly we conclude that, on the evidence before us, the Appellant was not deprived of the means to pay the tax either by the liquidation of Yellowpatter, or by the two bad debts or by the late payment of invoices.
 
36.	Finally, it is relevant that in this appeal the Appellant received from its customers the amount of tax which should have been paid to the Respondents each accounting quarter.   

Decision
37.	Our decision is that the Appellant did not have a reasonable excuse for any of the five defaults the subject of the appeal.

38.	That means that the appeal must be dismissed. 

DR A N BRICE

CHAIRMAN

RELEASE DATE: 22 November 2005

LON/2004/0032
18.11.05 

££NACD Ltd v Revenue and Customs [2005] UKVAT V19346 (22 November 2005)