20098

DEFAULT SURCHARGE – Reasonable excuse –– insufficiency of funds – whether reason for insufficiency afforded a reasonable excuse – held it did – appeal allowed

LONDON TRIBUNAL CENTRE

	AFFACT LIMITED
	trading as RENAULT RESOURCING CENTRE	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	JOHN WALTERS QC (Chairman)
					MRS. R. S. JOHNSON

Sitting in public in London on 31 January 2007

K. Lewis, Director, for the Appellant

J. Holl, Advocate, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	The Appellant, Affact Limited, carries on business as a recruiting and resourcing agent for Renault dealerships.  It has only one customer, Renault UK.  It appeals against a default surcharge for the VAT return period 05/06, which is calculated as 15% of the self-assessed VAT (per the Appellant’s return) of £18,949.16, that is, a surcharge of £2,842.37.
2.	The surcharge at 15% for the period 05/06 followed periods when the Appellant was in default, namely, 05/04, 08/04, 05/05 and 08/05.  In the last two of these periods default surcharges were made (at 5% and 10% respectively).  No appeal is made against these surcharges.
3.	There was a bundle of documents before the Tribunal, and Mr. Lewis, director of the Appellant, who also represented it before the Tribunal gave oral evidence.  From the evidence before the Tribunal, we find the facts as follows.
4.	The Appellant’s VAT return for the period 05/06, showing VAT due of £18,949.16 was signed on the Appellant’s behalf by Malcolm Owen Neale on 28 June 2006 and posted (first class post) that day, together with cheque number 100395 in that amount, payable to the Commissioners.
5.	The cheque appears in the Appellant’s bank account at Barclays Bank as having been debited on 10 July 2006 and there is a cancelling credit item in the same amount to show that the cheque was dishonoured.  (A £35 bank charge for an unpaid cheque was also debited to the Appellant’s bank account.)
6.	The return and the cheque were received by the Commissioners on 6 July 2006. 
7.	Barclays wrote to the Appellant on 11 July 2006 informing it about the unpaid cheque.  The cheque was not paid because there were insufficient funds in the account.
8.	On 12 July 2006 an on-line transfer of £18,949.16 was made to the Commissioners.  It was received by them on 14 July 2006.
9.	The Appellant complained to Barclays about their action in returning the cheque without referring to Mr. Lewis, the director concerned, because he could have arranged a transfer of funds into the account (from private sources) to ensure the cheque was cleared.  This did not happen, because the Appellant’s relationship manager at Barclays, Graham Powell, was away from the office on sick leave on 10 July.  In his absence there were no procedures to contact the Appellant if a cheque could not be paid.
10.	The reason why there were insufficient funds in the account to pay the cheque on 10 July was that the Appellant’s only customer, Renault UK Limited made payment against the Appellant’s outstanding invoices due for payment in July 2006, not on the first Tuesday of the month (as was usual) but one week later, on Tuesday 11 July 2006. The reason was late processing of the Appellant’s invoices at Renault UK Limited.
11.	The Appellant, through Mr. Lewis, was not aware at the time that Renault UK Limited had not paid the Appellant’s invoices as normal, so that funds were not received on 4 July, was not aware at the time that Barclays had refused to pay the cheque in favour of the Commissioners, and was not aware at the time that the cheque posted to the Commissioners by first class post on 28 July 2006 did not reach the Commissioners until 6 July 2006.
12.	Mr. Holl for the Commissioners, in resisting the appeal, referred the Tribunal to section 59 VAT Act 1994 (default surcharge) and particularly to section 59(7)(b) establishing the Appellant’s right to appeal against a default surcharge on the basis that it can show that there is a reasonable excuse for the return or the VAT not having been despatched on time.  The Tribunal also has in mind the terms of section 71(1) VAT Act 1994 to the effect that for these purposes neither an insufficiency of funds to pay any VAT, nor reliance on any other person to perform a task, or any dilatoriness or inaccuracy on the part of such a person, can be accepted as a reasonable excuse.  Mr. Holl cited Profile Security Services Ltd. v Customs and Excise Commissioners [1996] STC 808 as authority for the proposition that “any other person” for these purposes includes an employee of the Appellant.  He made the point that even if Renault UK Limited had paid the Appellant one week earlier (ie. on July 4, 2006), that still would not have put the Appellant in funds to pay its VAT on time, that is, on 30 June 2006. 
13.	Notwithstanding the terms of section 71(1) VAT Act 1994, however, there are circumstances where the cause of an insufficiency of funds, the underlying cause of a taxable person’s default, may give rise to a reasonable excuse within section 59(7)(b) VATA – see: Customs and Excise Commissioners v Steptoe [1992] STC 757, a decision of the Court of Appeal.
14.	In Steptoe, the Court of Appeal decided that (in the words of Lord Donaldson of Lymington MR) “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 on which such foresight, diligence and regard would have overcome the insufficiency of funds” (ibid. at p.770d/e).
15.	On the facts of Steptoe, a trader whose only real customer was persistently late in paying his bills, was able to show a reasonable excuse, in particular because the chairman of the tribunal had found as a fact that if he (the trader) had brought pressure to bear on his customer, he would probably have received no further orders and the bulk of his livelihood would have disappeared (see: ibid. at p.769d/e).  This was the decision of the majority of the Court of Appeal (Lord Donaldson and Nolan LJ).
16.	Scott LJ (the dissenting Lord Justice) preferred a more restrictive approach to the application of the reasonable excuse provision.  He would have dismissed the appeal because: “if the normal hazards of a taxpayer’s particular business include the late payment of bills, then the taxpayer should make arrangements to finance his cash flow on that footing.” (ibid. at p.765f/g).
17.	In a case such as this, the question for the Tribunal is whether in all the circumstances the failure to pay the VAT on time was “reasonably avoidable” – per Lord Donaldson in Steptoe at ibid. p.770f.
18.	That question is to be answered by looking at the reality of the business situation in which the trader in question found itself.  The Commissioners and, on appeal, the Tribunal, is to “distinguish between the trader who lacks the money to pay his tax by reason of culpable default and the trader who lacks the money by reason of unforeseeable and inescapable misfortune” (see: per Nolan LJ in Customs and Excise Commissioners v Salevon Ltd. [1989] STC 907, cited by him in Steptoe, ibid. at p.767h/i).  Whether there is in any case “unforeseeable and inescapable misfortune” is to be approached on the basis that what is meant is not reasonably foreseeable and not reasonably avoidable (see; per Lord Donaldson MR ibid. at p.770e/f.
19.	In this context, the Tribunal considers that it was reasonable for the Appellant to assume that the Commissioners would receive both return and cheque by 30 June 2006.  If the cheque had been presented on 30 June 2006, there would not, as a matter of fact, have been sufficient funds in the Appellant’s bank account to meet it.  However we accept that it was reasonable for the Appellant to assume that its relationship manager at Barclays would telephone to warn that there was a cheque which could not be paid, and that, if he had done so, Mr. Lewis would have arranged bridging funds to enable the cheque to be paid.  Therefore there would have been no default.
20.	Looking at the reality of the business situation in which the Appellant found itself, the Tribunal considers that the delay in the VAT return and the cheque for VAT reaching the Commissioners, and the fact that the relationship manager was sick on the day when the cheque was presented for payment and so could not make the call to alert Mr. Lewis, both fall into the category of “unforeseeable and inescapable misfortune” as that phrase was used by Nolan LJ.  The Tribunal notes that the Appellant successfully arranged payment of the VAT in full on 12 July 2006, one day after being informed of the unpaid cheque by Barclays.  In these circumstances and for these reasons, the Tribunal’s decision is that the Appellant has made out a reasonable excuse for the default and the appeal succeeds.

JOHN WALTERS QC

CHAIRMAN
RELEASE DATE: 5  April  2007

LON/2006/1087