20048

Value Added Tax – default surcharge – cash flow problem whilst awaiting due day for a large tax repayment – Appeal dismissed

LONDON TRIBUNAL CENTRE

	Q N HOTELS LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M NOWLAN (Chairman)
						CAROLINE S de ALBUQUERQUE

Sitting in public in London on 28 February 2007

Qamar Ahmed, director of Q N Hotels Limited for the Appellant
Mr. J. Holl, of HMRC, for the Respondents

©CROWN COPYRIGHT 2007

DECISION

1.     This was a default surcharge appeal by Q N Hotels Limited against the default surcharge imposed on it for the VAT period 05/06.

2.     The ground on which it was suggested that it had suffered hardship so as to eliminate the liability for surcharge was that when the company’s VAT was due for the period 05/06, the company was experiencing cash flow difficulties because the company had had (as a results of a court judgment) to pay approximately £160,000 taxation (that had been due since February) in respect of loans made to companies controlled by directors.   

3.     We were informed that in earlier periods the company had made other loans to directors, occasioning other similar liabilities to taxation which had all been met, and we were also informed that in February 2006 all of these loans had been re-paid, the taxation implication of which was that tax already paid in respect of the loans, and the tax that should have been paid in February which was in fact paid in June and July would all fall to be repaid at the end of November 2006.     We were told that the total amount due to be repaid on 30 November was in excess of £300,000.      Whilst this point was of no relevance to the company’s position as at 30 June 2006 when it should have paid its Value Added Tax for the period 05/06, we were told that the taxation due to be repaid on 30 November 2006 had still not been repaid at the date of the hearing before us, thought it was understood that it was about to be repaid and there appeared to be no dispute that the relevant sum was indeed due to be re-paid. 

4.     We were also told that when the default surcharge had been imposed for the period 05/06, the company had sought advice from its accountants who had suggested that the company would be able to borrow funds to pay its VAT and other liabilities in the light of the substantial tax repayment due to the company at the end of November, and the company did then incur borrowings, as suggested. 

5.    The decision that we gave orally at the end of the hearing was that the company did not establish that it had suffered hardship in the requisite manner, and therefore the appeal was dismissed.

6.    Section 71 Value Added Tax Act 1994 provides that an insufficiency of funds to pay any VAT due is not a reasonable excuse for late payment, and not thus a factor that will eliminate liability for default surcharge.   Case law has established that the underlying cause of shortage of funds can in certain circumstances occasion such a reasonable excuse, but none of these circumstances was present in this case.  The sort of factors that can provide a reasonable excuse are a major and unexpected default on the part of a customer whose payments normally constitute a substantial portion of the trader’s gross turnover, and a sudden and unexpected, but hopefully reversible down turn in receipts at a time when costs and overheads cannot be reduced to match the downturn. 

7.      We note that in the present case the officer dealing with the company’s VAT affairs mistakenly thought that the company was wrong in its assertion that Corporation Tax was due to be refunded to it, when the company initially requested phased payment of its VAT for the period 05/06 and when the company disputed its liability for surcharge.    This misunderstanding was later clarified.    We also note that the company requested the officers of HMRC dealing with the company’s direct tax liabilities that the November repayment be advanced, albeit that the company appreciated that it would have to pay interest to HMRC from the advanced date of repayment until the 30 November date when repayment was actually due.   This request was turned down.

8.    Notwithstanding the points mentioned in 7. above, we considered that the company had not established any exceptional factors occasioning the shortage of funds that led to its cash flow problem in June 2006.     No reference was made to any down turn in trading or other such factor.   The company had merely had to meet taxation liabilities (notably some months after their due date) of which it was well aware, and the company also knew that it was due a substantial repayment at the end of November which would have enabled it, and in the event did enable it, to borrow to meet its current tax and other liabilities.   

9.     We observed, by way of contrast, that we might have been inclined to take a different view if the company’s cash flow problem had resulted from a failure on the part of HMRC actually to repay the sum of more than £300,000 on the due date for its repayment.      Where the situation was merely that HMRC had refused to give the company special accommodation by repaying early, the company could not complain of that and merely had to arrange its various liabilities to make payments in the light of the dates when monies were actually due to it, and not by earlier dates at which the company hoped to secure early repayment.    Where however HMRC are actually, for some unexplained reason, 3 months late in repaying over £300,000 tax, the situation may well be different, quite apart from the obvious embarrassment to HMRC of penalising the company for late payment of one liability when HMRC are 3 months late in discharging another liability.   

10.    For the reasons given above, we confirm that this appeal was dismissed. 

HOWARD M NOWLAN
CHAIRMAN

RELEASED:  8  March  2007

LON/2006/1132