Freeley Inns Ltd v Revenue & Customs [2006] UKVAT V19737 (24 August 2006)

19737
VAT – PENALTIES  -  default surcharge  -  reliance on others to ensure compliance with requirements to lodge VAT returns and to pay tax by the due dates  -  cash-flow difficulties leading to insufficiency of funds to pay tax  -  lack of reasonable excuse  -  appeal dismissed 

MANCHESTER TRIBUNAL CENTRE

FREELEY INNS LTD	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Michael Johnson (Chairman)
Roland Presho

Sitting in public in York on 19 July 2006

The Appellant was not represented

Richard Mansell of the Solicitors’s office of  HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006

DECISION

1.	Ms Susan Pedley and Mr Scott Freeman were registered for VAT under Registration No 806 6647 14 as business partners, up to and including their quarterly accounting period for VAT ending 28 February 2005.  Thereafter the Appellant Freeley Inns Limited has been registered for VAT under that same registration number.  Ms Pedley and Mr Freeman became and remain the directors of the Appellant. 

2.	This appeal relates to the eleven quarterly VAT accounting periods of the Appellant and its predecessors Ms Pedley and Mr Freeman, commencing on 24 February 2003 and ending on 30 November 2005.  The appeal is against all the default surcharges imposed by reference to those periods.  The default surcharges in dispute total £12,752.36.

3.	The Appellant’s business, formerly that of Ms Pedley and Mr Freeman, is that of running a public house called the “New Inn”.

4.	During all eleven of the accounting periods mentioned, there have been defaults, consisting of not having lodged VAT returns by the due dates and/or not having paid the tax owed by the due dates. 

5.	The appeal has been brought pursuant to section 59(7)(b) of the Value Added Tax Act 1994 (“the Act”), whereunder in order to succeed in the appeal, the Appellant must satisfy the tribunal that there is a reasonable excuse for the VAT returns, or as the case may be, the tax owed, not having been despatched in time.

6.	The tribunal has not been addressed by anyone on behalf of the Appellant.      

7.	We are satisfied that notice of the hearing was given to the Appellant.  The Appellant has not been in touch with the Tribunal Centre to indicate any difficulty in attending the hearing on 19 July 2006.  

8.	Seeing that the hearing has taken place in York, and that the “New Inn” is situated in North Thoresby, near Grimsby, we allowed a period of time after the scheduled start of the hearing for a representative of the Appellant to arrive, in case he or she might have been delayed.  But no-one arrived to represent the Appellant, and no message was received to say anyone might be on their way.  

9.	Having received no explanation of the Appellant’s non-attendance, we decided that there was no good reason to postpone the hearing of the appeal.  We accordingly proceeded to hear the appeal, pursuant to rule 26(2) of the Value Added Tax Tribunals Rules 1986 (as amended).

10.	Mr Richard Mansell of the Solicitor’s office of H M Revenue and Customs attended the hearing on behalf of the Respondents (“Customs”).  He passed to the tribunal a bundle containing copies of documents relevant to the appeal.

11.	The last document in the bundle is a copy of a letter to Mr Freeman from Mr R E Davies of Customs dated 5 July 2006.  There does not appear to have been a reply to that letter.

12.	The following matters appear from that letter, and from the Schedule of Defaults to be found at the beginning of the bundle, also produced by Mr Davies.

13.	Customs operated a National Advice Service.  It appears that Ms Pedley spoke to a member of that service on 17 July 2003, to discuss the surcharge liability notice received by the partners a short time before.  It seems that it was explained to Ms Pedley why the notice had been sent: namely because neither the VAT return for the period 05/03 nor the tax owed in respect of that period had been received until a number of days after the due date.  That period was the first of the eleven with which we are concerned.

14.	At that point, therefore, Ms Pedley became aware of the importance, from the point of view of liability to surcharges, of having lodged VAT returns and having paid the VAT owed by the due date.

15.	Unfortunately, this does not appear to have prevented defaults in respect of the next period with which we are concerned, namely 08/03.  When the VAT owed in respect of that period was not paid by the due date, Customs issued a tax assessment.  That was on 17 October 2003.  That assessment was withdrawn when Ms Pedley and Mr Freeman lodged their VAT return for that period, but they did not do this until March 2004. 

16.	Customs also operated a Debt Management Unit.  It appears that, in relation to her VAT accounting period 08/03, Ms Pedley was contacted by an officer of that unit on 3 March 2004.  Ms Pedley seemed shocked when told that the VAT return for the period 08/03 was late.  However we feel that she must have appreciated that the VAT return should long since have been in the hands of Customs, having regard to the conversation mentioned in paragraph 13 above.

17.	Customs also had to assess Ms Pedley and Mr Freeman in respect of the following quarter, 11/03.  In respect of that quarter, a default surcharge (at 5 per cent) was issued, but the surcharge was cancelled and replaced, when the VAT return was lodged and the tax actually due was established.  Again, this was not until March 2004.

18.	Another default surcharge (at 10 per cent) had to be imposed in respect of the next quarter, 02/04.  Again the VAT return and the tax owed were despatched late.

19.	Regrettably the sorry pattern continued, with a tax assessment having to be issued for the next period, 05/04.  

20.	As mentioned above, defaults continued in every single ensuing quarter.  Default surcharges at 15 per cent were imposed in relation to each of the remaining quarters with which we are concerned, having reached the top rate in respect of period 05/04.  

21.	In respect of periods 05/05 and 08/05, cheques for tax were drawn which went unpaid on presentation.  In respect of the final period with which we are concerned, 11/05, a tax assessment had to be issued.  The VAT return was lodged late.  The tax owed was not then paid.

22.	As of March 2006, the business owed £27,246.37 to Customs.  On 8 March 2006, Customs received a bank giro from the Appellant for £14,494.  The difference between these two amounts represents the value of the surcharges in dispute.

23.	The first ground of appeal is that the secretary, and later the accountants, who dealt with the VAT affairs of the business did not do so properly, and that Ms Pedley and Mr Freeman were left with difficulties that they had to sort out.  

24.	This is in our view not much of an excuse, because Ms Pedley personally was in touch with Customs, as above described, and must have known what needed to be done to avoid surcharge liability.  The responsibility to avoid such surcharges was, vis-à-vis Customs, that of the partners.  

25.	In any case, we are precluded from treating this ground as a reasonable excuse by section 71(1)(b) of the Act, which provides that where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.

26.	The second ground of appeal is that, having corrected its accounting procedures, the Appellant has experienced serious cash-flow problems, and has lacked the wherewithal to pay the tax owed from quarter to quarter.  It is however stated that the business is “thriving” and has “lots of potential” and that it can be “turned round” if given the opportunity to do so.

27.	We note that the Appellant has paid its arrears of tax.  We are moreover pleased to note that the Appellant has lodged its VAT returns and paid the VAT owed in respect of its accounting periods 02/06 and 05/06, with no default arising.  It does indeed appear that the Appellant has turned over a new leaf, so far as its VAT affairs are concerned. 

28.	The Appellant has not, however, paid the amount of the disputed surcharges.   It does not appear to be suggested that the surcharges were unjustified, having regard to the history of the case.  The second ground of appeal is apparently that the Appellant should not be liable for the surcharges, purely on the basis that that will help the Appellant in turning round its business, a process that appears to be well under way.  We do not think that this ground of appeal amounts to any kind of excuse for avoiding the surcharges.

29.	In any case, we are precluded from treating this ground also as a reasonable excuse by section 71(1)(a) of the Act, which provides that an insufficiency of funds to pay any VAT due is not a reasonable excuse.

30.	The VAT record of the Appellant, and before it Ms Pedley and Mr Freeman, is a poor one in respect of all eleven accounting periods that we have considered.  We feel that the business has been at fault in not ensuring that its VAT affairs were conducted competently.  The picture is made worse by the history of defaults over a long time.  In the circumstances we can find little sympathy for the Appellant.  

31.	Taking the view that the appeal was wholly without merit, we dismissed it orally at the conclusion of the hearing on 19 July 2006.  This written decision records the reasons for our so deciding.

32.	No application was made for costs and none are awarded.

MICHAEL JOHNSON
CHAIRMAN
Release Date: 24 August 2006
MAN/06/240