20093

Value Added Tax  -  Default Surcharge  -  Cash flow problems not sufficient to constitute a reasonable excuse for late payment  -  Appeal dismissed

LONDON TRIBUNAL CENTRE

	COMMERCE CONNECTIONS LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M NOWLAN (Chairman)
						ELIZABETH M MACLEOD, CIPM

Sitting in public in London on 21 March 2007

Phillip Webb of the Solicitors’ Office of HMRC, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.     This was a default surcharge appeal in which the Appellant was not represented and no-one within the Appellant company appeared in person either.

2.     The Appellant had been approximately one month late in paying its VAT for the period 06/06 which initially resulted in the imposition (on account of earlier defaults) of a default surcharge of £899.89 at the 10% rate.

3.     In the course of correspondence, officers of Her Majesty’s Revenue & Customs  (“HMRC”) agreed to waive one earlier default with the result that the rate of surcharge was reduced to 5% so that the amount of the charge was reduced to £499.

4.     The Appellant’s stated grounds of appeal were not particularly clear, but it appears that the main ground advanced related to an alleged reasonable excuse for late payment of VAT in respect of an earlier period, that ended 06/05.       Were we to accept that that earlier default should be struck out, it would have followed that the rate of surcharge for the period 06/06 would have been further reduced to 2%.        In correspondence, arguments had also been advanced that there was a reasonable excuse for the late payment of VAT in the period 06/06 itself, and therefore in the absence of the Appellant we considered the arguments in relation to both periods. 

5.     As regards the earlier period, it appears that the Appellant was 1 day late in the payment of part of its VAT.      It was said that the Appellant could only draw cheques or make electronic payments out of its account for, at most, £10,000 in any one day so that on one day approximately £6,000 was paid on time in part satisfaction of the Appellant’s VAT liability.      It was not clear whether the Appellant had drawn other cheques for the balance of its £10,000 limit in that period but in any event it was only on the following day that it paid the £10,000 balance of its VAT liability by BACS transfer which was not received by HMRC in time.     Had the Appellant paid the small fee for this payment to have been made by a CHAPS transfer, the payment would have been received in time.

6.     We agree with officers of HMRC that there was no reasonable excuse for the late payment of this element of its VAT liability for the period 06/05.      It cannot be claimed that there was a shortage of funds to pay its VAT liability of the sort that can justify the contention that there was a reasonable excuse because plainly the funds were available, and it was simply through the failure to operate within its somewhat strange banking terms, and its failure to pay the balance of the VAT liability by a CHAPS transfer that the payment was in fact late.   

7.     As regards the later period, namely the period 06/06 it was claimed that in that period the Appellant experienced bad debt problems which resulted in its VAT being paid approximately one month late.       It was reported that the particular debt that was said to be bad had in fact been discharged on 17 May (in other words well before the due date for the payment of the Appellant’s VAT liability for the period), and that bad debts were of slightly less significance for this trader, accounting for its VAT on a cash basis rather than an invoice basis.   The decisive factor however is that cash flow problems will generally not provide a reasonable excuse for the late payment of VAT.      The relevant legislation deems shortage of funds not to be a reasonable excuse and although case law establishes that the factor that occasions the shortage of funds can in extreme circumstances provide a “reasonable excuse”, this is plainly not so in the present case. 

8.     The sort of factors contemplated by the relevant case law are of a major unexpected default on the part of a key customer that generally provides a high percentage of the trader’s turnover.   In the present case the debt that was at one point bad was not of such a percentage, and since it appears that the debt was anyway discharged on 17 May, within the relevant VAT period, this temporary delay in receiving payment cannot provide a reasonable excuse.  

9.     The Appeal was accordingly dismissed.

HOWARD M NOWLAN
CHAIRMAN

RELEASED:  2  April 2007

LON/2006/1301