20144

VAT – Appeal Against Default Surcharge Liability Notices On The Grounds Of Reasonable Excuse Section 71(1) VATA 1994 – Appeal Dismissed

BELFAST TRIBUNAL CENTRE

	JOSEPH BAIRD TRANSPORT	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	IAN W HUDDLESTON (Chairman)
						A F HENNESSEY

Sitting in public in Belfast on 1 December 2007

Ms Pauline McGimpsey for the Appellant 

Mr James Puzey, counsel, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	The Appeal

This is an appeal by a trading partnership, Joseph Baird Transport (“the Appellant”) against a default surcharge liability notice served on the Appellant in the amount of £10,816.98. 

2.	Background

The Appellant operates a haulage business from 10 Old Mill Road, Scarva, Portadown, County Armagh, BT63 6NL, from which it provides freight transport, mainly in the United Kingdom and the Republic of Ireland.  The Appellant is a trading partnership which is registered for VAT under VAT number 254 9311 57.

The Appellant was subject to a number of default surcharges for the periods 06/02; 09/02; 12/02 and 03/03, but it is only the latter one (ie.default surcharge notice for the period 03/03) which is the subject of this appeal.  The Appellant’s grounds for this appeal are that it had a reasonable excuse for the late payment of the VAT return.  Mr. Keith Baird, one of the partners within the Appellant, gave evidence as to the following grounds and upon which the Appellant’s appeal was based.

The first ground on which evidence was adduced was the loss of customers due to increased competition.

As to the second ground, Mr. Baird gave evidence of the alteration in terms and conditions of a number of its major suppliers, namely shipping companies who reduced credit terms from 60 to 30 days.  This obviously had a considerable impact upon the haulage business.

The third item which was raised by way of an explanation of the company’s limited cash resources was the banking facilities which were available to it.  Evidence was given to the effect that the Appellant business (which had a turnover of approximately £5m per annum at the relevant time) was attempting to operate within an overdraft facility of some £350,000.  Letters between the partners within the Appellant and the Ulster Bank Limited (“its Bankers” / “the Bank”) were produced to the Tribunal, which clearly showed that the Bank, during the relevant period, had increasing concerns about the ability of the business to meet its liabilities.  In fact, this culminated in the Bank requiring the partners to appoint PricewaterhouseCooper (“PWC”) to undertake a review of the business activities which, in turn, culminated in the disposal of one aspect of the business in order to reduce the company’s overall indebtedness and provide liquidity.

Those three grounds were put forward but, in the main, the Appellant’s argument concentrated on the following two grounds, namely:

•	cash flow difficulties arising out of a Revenue Commissioner’s investigation into claims for the repayment of VAT in Southern Ireland; and
•	the increased burden placed upon the Appellant arising from the “time to pay” arrangements which the Appellant had already entered into with the Respondents, under which payments of VAT were allocated to the earliest debts of the Appellant.

In relation to the former of these, it was clear that Joseph Baird Transport was engaged in cross border transport and, as a consequence, purchased a substantial amount of diesel for its vehicles whilst in the Republic of Ireland.  In order to recover VAT incurred on this diesel, Eighth Directive claims were submitted to the Revenue Commissioners in the Republic of Ireland.  The Revenue Commissioners commenced an investigation into the Eighth Directive claims which were submitted by the Appellant, but the verification procedure took a number of months and VAT repayments were withheld for the period between July 2002 and September 2003.  These were eventually paid in late 2003.  That repayment was in the region of £100,000.  By contrast, the Appellant pointed out that the VAT return for the period 03/03 listed a payment due to the Respondents in an amount of £108,169, and that, as a consequence, there was a direct correlation between the withholding of VAT in Southern Ireland and the inability of the Company to make the VAT payment which it was due to make in the United Kingdom for the period 03/03.

As to the re-appropriation of credits, it appeared that time to pay arrangements were in place pursuant to letters issued on the 6th February 2002, 4th June 2003 and 9th December 2003, under the terms of which outstanding VAT was to be paid by instalments.  The terms of those letters indicated that “all unassigned sums credited to your [the Appellant’s] account may be used to reduce your earliest outstanding debt”.  It appeared to the Tribunal from the papers before it that there were principally two payments of £10,000 which could have been applied directly to the Appellant’s 03/03 VAT return, which would have had the effect of reducing the surcharge from £10,816.98 to £8,816.98.  That much had been conceded already in a letter which the Respondents had written to the Appellant’s tax advisors, PWC, on the 8th February 2006.  Within that letter the Respondents had invited the Appellant to ask for this reduction to be made, but it appeared to the Tribunal never to have been actioned, as the full amount of £10,816.98 was still the amount of the default surcharge in appeal.

3.	Decision

It was clear to the Tribunal that the surcharge liability notices had been correctly calculated and served pursuant to Section 59 of the VAT Act 1994.  That point was not in dispute.  What was the subject of appeal was the surcharge notice which was raised for the period 03/03 in the sum of £10,816.98.  In essence the Appellant argued (on the basis of the evidence and reasoning set out above) that the Tribunal should exercise its discretion to mitigate the penalties (given to it pursuant to Section 70(1) of the VATA 1994) to reduce or cancel the penalty applied, on the grounds that there was a “reasonable excuse”.  That “reasonable excuse” it was argued centred, in the main, on the withholding of VAT as a direct consequence of the investigations being undertaken by the Revenue Commissioners in the Republic of Ireland arising on foot of the company’s claims for a VAT refund.  Certainly, on the face of it, the withholding of €150,000 (approximately £100,000) would certainly have put the company into a position where it could have paid the £108,000 (approximately) due on foot of the VAT return for 03/03.

Section 71(1)(a) VATA 1994 states that “insufficiency of funds to pay any VAT due is not a reasonable excuse”.  The Respondents acknowledged that in certain cases such an insufficiency may be reasonable, but only if the insufficiency of funds is both “unforeseeable” and “inescapable” (the case of HMRC –v- Salevon [1989] stc 907 applied). 

As to the first and second reasons given for the insufficiency of funds (namely the change in supplier terms and loss of a customer base) the Tribunal found that these were simply in the incidence of normal trading activity and, whilst clearly they would have had an impact on the liquidity of the Appellant’s business, they could not, of themselves, have constituted a reasonable excuse.

As regards the third ground which was argued before the Tribunal (the tightening of banking facilities) again, the Tribunal found that this was simply an incidence of the Appellant’s business and its relationship with its Bankers.

As regards the withholding of VAT by the Revenue Commissioners, the Tribunal was of the view that whilst this clearly was regrettable in the particular circumstances of the Appellant, it was not something, of itself which was “unforeseeable” and whilst a reason for the Company’s poor cash position it did not constitute a “reasonable excuse”.  In the first place, the investigations related to a number of claims lodged with the Revenue Commissioners.  The Appellant gave evidence that if it had chosen to purchase diesel in the United Kingdom, then it would have been able to off-set that VAT against its VAT returns for the relevant period.  That was obviously true and, therefore, by extension the Appellant, faced with the possibility of continued (and delayed) investigations into its VAT affairs in the Republic of Ireland, could have opted to purchase greater quantities of diesel in Northern Ireland where the input and output VAT would have been off-set against one and other.  Equally, faced with cash flow difficulties of this type one could have expected the Appellant to seek funding elsewhere, presumably from its Bankers.   As regards the difficulty in the relationship with its Bankers, that was not something that should concern the Respondents – as s.71(1)(a) makes clear.  

In furtherance of that point, the Respondents referred the Tribunal to a letter written by the Ulster Bank on the 18th August 2003. That letter discussed the Bank’s concerns regarding the overall profitability of the Company but, whilst acknowledging the impact of slow debtor collection, also pointed out that the level of drawings of the partners concerned in the business had largely dissipated any profits.  That point had been put to Mr. Baird in the course of cross examination and he had given the response that there had been no increase in drawings throughout that period, but that the reality was that there were four families working in the business and that the profitability of the business was declining.  Whilst that may have been the case, the Tribunal was of the view that if the partners’ drawings had been curtailed to a greater extent, the Bank may have been more inclined to increase its facility, thereby allowing the business to meet the VAT debt which accrued for the 03/03 period. 

Having considered all of these factors, the Tribunal did not feel that the ground of reasonable excuse had been established, and accordingly dismissed the Appeal.
 
The Tribunal left open the issue as to whether the offer made by the Respondent’s in their letter of 8th February 2006 was still available to the Appellant.  Whilst not directing on the point, it did seem to be something that the Respondents had accepted in principle.

Appeal dismissed.

IAN HUDDLESTON
CHAIRMAN

RELEASED: 15 May 2007

LON/2006/369