19955

Reasonable Excuse - section 59 VATA - delay in recovery of major debt - whether reasonable excuse - held no

LONDON TRIBUNAL CENTRE

	SCARCE SKILLS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	Charles Hellier (Chairman)
					Angela West F.C.A.

Sitting in public in Cardiff on 12 September 2006 

Alan Thomas, Director of the Appellant, for the Appellant

Pauline Crinnion for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	Scarce Skills appeals against three default surcharges being:
£	5,181.30	in respect of the period 11/05	
£	1,892.84	in respect of the period 02/06	
£	2,311.87	in respect of the period 05/06	
			
2.	Following the oral hearing the Appellant was asked to provide the tribunal and the Commissioners with accounts for the years ending  December 2004 and 2005 and bank statements for the period August 2005 to July 2006. The Commissioners were asked to provide any submissions on those documents. These documents and submissions were received by the tribunal and, together with a letter to the tribunal from the Appellant in response to the Commissioners’ submission, have been taken into account by the tribunal in this decision.
The Issues
3.	Mr Thomas’ case as presented before us was that VAT had been paid late in these periods as the result of a failure by a major customer to make payment to the Appellant: in other words that there was a reasonable excuse for the late payments.
4.	In the course of the hearing it became apparent to us that there was a technical concern over the rate of the default surcharges. We start our decision by addressing that technical issue and then turn to the issue of whether the Appellant had a reasonable excuse for any of the late payments.
The relevant rate of default surcharge
5.	Each surcharge was made at the rate of 15% of the late paid VAT for the relevant period. For all relevant periods the Appellant’s VAT return was delivered on time but the VAT due paid late. There is no dispute about the amount of VAT due or its late payment.
6.	Before a default surcharge can be imposed, the Commissioners must serve a default surcharge liability notice specifying a period, starting from the end of a period in which there was a default, of one year in which any subsequent default will be potentially subject to a default surcharge (or a notice extending such period by reason of a default arising during any such previously notified period) (section 59(2) and (3) VATA 1994). There is no dispute that such notices were served.
7.	The amount of the surcharge is 2%, 5%, 10% or 15% of the outstanding VAT for the period of default according to whether the default is the first, second, third or fourth or subsequent default in the period notified or extended by the notice described above (section 59(5)).
8.	There is no dispute that the Appellant was late in paying its VAT in respect of the period 11/03 (ending on 30 November 2003). It appears that it had also been late in paying its VAT in previous periods too. As a result of those late payments, on 11 October 2002 a default surcharge liability notice had been served specifying a period ending on 31 August 2003. It appears that the Commissioners had thought in July 2003 that the Appellant had defaulted again in respect of the period 05/03, a period which fell within the previously notified period ending on 31 August 2003, and had therefore served a further extension notice specifying the period ending on 31 May 2004. However it subsequently appeared that in fact the VAT had been received on time for 05/03 so that there was no default in respect of that period. As a result, that extension surcharge liability notice was not properly served, and consequently the Appellant’s default in the period 11/03 was not a default which arose within the compass of a notified default surcharge liability period.
9.	The consequence of this is that the taxpayer’s default in the period 11/03 triggered the beginning of a new default surcharge period rather than the extension of an old one. The surcharge liability notice issued by the Commissioners on 16 January 2004 purports to extend the previously notified period; it is therefore ineffective in that respect. But it also makes clear that it is a surcharge liability notice: it bears the legend “If no surcharge period has been notified to you previously, the period [set out] is hereby specified as a surcharge period.” In our judgment, that is sufficient to constitute if a sufficient notice to comply with section 59(3) and accordingly to commence a twelve month surcharge liability period.
10.	The taxpayer defaulted again in the periods 08/04 and 11/04, and in each case surcharge liability extension notices were served extending the period eventually to end on 31 November 2005. The taxpayer’s late payment for 11/05 fell within that properly extended period.
11.	However, since the relevant surcharge period embracing 11/05 commenced on 1 December 2005 rather than at any earlier time, the taxpayer’s defaults for 08/04 and 11/04 were the first and second defaults in respect of the surcharge period, and the late payment for 11/05 (the first period under appeal) would (if found by us to be a default) be the third default only, and hence subject only to a 10% rather than a 15% surcharge.
12.	The Commissioners issued a surcharge liability extension notice on 13 January 2006 in respect of the 11/05 period. If the late payment for 11/05 was a default, then this would have the effect of extending the surcharge period to 31 November 2006, with the result that if the late payments for 02/06 and 05/06 are defaults the correct rate of surcharge is 15%.
13.	For the purposes of section 59 a late payment is not a default if the taxpayer has a reasonable excuse for the VAT not having been paid. We now therefore turn to that issue.
Reasonable Excuse
14.	We find the following facts.
15.	The Appellant’s brochure describes it as a “software focussed recruitment management company”. It provides assistance to others in managing recruitment. Its systems enable an employer to automate the recruitment advertising and application process and the selection of candidates. It is a relatively young business - having been started in 2000, and in the relevant periods had a small number of fairly large corporate clients.
16.	The Appellant provides its clients with access to its specialist software and with the services of its staff in assisting with the use of that software. Its staff will normally provide that assistance at the offices of the client. The Appellant bills the client for the use of the software and the time spent by its staff.
17.	From January 2000 the business has grown, and for the year ending 31 December 2005 it had a turnover of some £760,000. The company was profit making in 2003, 2004 and 2005. Its profit is determined after the capitalisation (and depreciation) of substantial software development costs. Its balance sheets for those years show net current liabilities (of between £34k and £894k), and a bank overdraft of up to £20k.
18.	Mr Thomas was at relevant times the only director of the company. He has provided guarantees for its bank overdraft and, at times, loans to the company. His focus has been on developing the business of the company rather than on the administration of its business.
19.	The availability of cash resources has been a restricting factor on the development of its business. In the relevant periods the company factored its debts with HSBC - receiving between 75% and 85% of the face value of non-disputed invoices following issue of the invoice.
20.	Between 2001 and 2005 the Appellant provided its services to MBDA (UK) Ltd. It provided both its specialist software and the services of its staff. MBDA was invoiced monthly, and paid the invoices, for the provision of the software. Before March 2003 MBDA was also invoiced for and paid for the provision of the Appellant’s staff.
21.	However, the Appellant did not continue regularly to invoice MBDA for the provision of its staff between April 2003 and June 2005 even though the staff were provided to MBDA. This omission was spotted in July 2005 when invoices were sent to MBDA for some  £105k. Mr Thomas, whose focus was principally upon developing the business of the company,  had failed to pick up this omission.
22.	The MBDA invoices for the £105k were assigned to HSBC as part of the factoring programme. But when MBDA received the invoices it disputed them. As a result, HSBC did not make a factoring payment to MBDA. The dispute over the invoices reduced the percentage of the face value of invoices paid by HSBC under other invoice factoring.
23.	Because the MBDA invoices were formally assigned to HSBC proceedings for their collection could be taken only by HSBC, and the Appellant and its solicitors had little ability to speed the process of the dispute. In December 2005 the invoices remained unpaid.
24.	(The Appellant we note has since changed its invoicing and cash collection method to avoid the costs and potential delays associated with factoring and the difficulties it can give rise to in a business with a small number of customers).
25.	In the period November 2005 to June 2006, the Appellant had an overdraft limit of £30,000 with HSBC. In that period in most weeks it made fairly full use of that limit, although its balance fluctuated substantially occasionally being (for a day or so) up to £10k in credit. Mr Thomas also made temporary loans to the company of £40,000 in aggregate.
26.	In 2005 the company acquired vehicles to the value of £89,122 under hire purchase contracts.
The Respondents’ arguments
27.	Mrs Crinnion notes that the bank statements and VAT returns show:
Period	Invoices Sales
(Incl. VAT)
£	Bank Receipts

£	
11/05	276,606	278,374	
02/06	303,884	247,511	
05/06	244,165	295,172	

and that in each period VAT payments were received late. She submits that the Appellant received monies but chose to apply them otherwise than in the timeous payment of its VAT liabilities.
The Appellant’s arguments
28.	Mr Thomas submits that the MBDA invoices totalling £105k represented some 15% of the Appellant’s annual turnover, and its failure to pay its VAT on time was as a result of circumstances beyond its control - namely the failure to collect, or to be able to compel the prompt payment of, the debt due from MBDA on those invoices.
Discussion - Reasonable Excuse
29.	section 71 provides that:
(a)	an insufficiency of funds to pay any VAT due is not a reasonable excuse; and
(b)	where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness on the part of the persons relied upon is a reasonable excuse.
30.	These provisions do not mean that where other circumstances have given rise to the insufficiently, or the failure of a person to perform a task,  there cannot be a reasonable excuse. The tribunal instead has to determine whether the reason for the insufficiency or the reason why the person relied upon failed to perform constitutes a reasonable excuse for the failure to pay VAT in time. In the case of an insufficiency of funds the tribunal should consider whether the reason is such that 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, or would not, have avoided the insufficiency (see Lord Donaldson in Customs and Excise Commissioners v Steptoe [1992] STC 757 at 770).
31.	It seems to us that the delay in the receipt of funds in respect of the MBDA invoices contributed significantly to the Appellant’s cash flow difficulties. But the reason for that delay lay principally in the failure of the Appellant to invoice MBDA promptly. It failed so to do because a person in its accounts department overlooked the issue and because Mr Thomas had not spotted the omission.
32.	In our view, this does not amount to a reasonable excuse for the company’s failure to pay its VAT on time. We accept that it is quite understandable that Mr Thomas’ attention would be engaged on matters other than invoicing, and that he might not therefore notice the omission of the income which would otherwise have been expected from MBDA, but that is not enough to constitute a reasonable excuse. Neither would the failure by the accounts department to invoice on time of its own constitute such an excuse. We can see that it might, if there had been some catastrophic loss of records or personnel which had that effect but there was no evidence of that in the Appellant’s case.
33.	Had the invoices related to the work of two months within the VAT quarter in which they were rendered, then the failure to achieve payment in respect of those invoices might, in respect of that quarter, have been a reasonable excuse for a late payment of VAT for the quarter. That is because they would have represented a substantial proportion of the invoiced turnover for the quarter and is on the assumption that there would not have been any reason for the company to suppose that payment would not have been made. But that was not the case: the invoices related to a long period in which expenditure had been incurred and met in relation to the services provided, and the lack of invoicing had gone unnoticed. The delayed presentation of an invoice will normally give grounds to suspect that payment will be delayed.
34.	We therefore do not find that the Appellant has a reasonable excuse for the delay in payment of VAT for any of the three quarters under appeal.
Conclusion
35.	We find that there were defaults in each of the three periods for which there was no reasonable excuse.
36.	However, the default surcharge for the period 11/05 should be 10% of the late paid tax, i.e. 10% of £34,542.02 = £3,454.20, and to the extent only of a reduction in the surcharge for that period from £5,181.30 to £3,454.20 we allow the appeal.
37.	Our decision was unanimous. No application was made for costs and we make no order in this respect.

Charles Hellier
CHAIRMAN
RELEASE DATE: 13 December 2006

LON/2006/269
LON/2006/862