20339

Value Added Tax  -  Default Surcharge  -  Payment difficulties involving the debtor for virtually the entirety of the Appellant’s turnover for the relevant VAT period - every effort to obtain payment and to pay the VAT on time  -  Appeal allowed

LONDON TRIBUNAL CENTRE

	RENOFURN LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M. NOWLAN (Chairman)
						SHEILA EDMONDSON F.C.A.

Sitting in public in London on 5 September 2007

R.A. Franklin, director of Renofurn Limited, on behalf of the Appellant
Gloria Orimoloye of HMRC’s Solicitors’ Department, on behalf of the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.     This was a default surcharge case  in which the Appellant, a firm of skilled carpenters which regularly did remedial work on listed buildings and often worked for English Heritage, was seven days late in paying its VAT for the VAT period 10/06.       Since this was the firm’s third default, the rate of surcharge was 15%, and the amount involved in cash, £1,490.25.

2.     Only one of the earlier defaults had involved any cash payment of surcharge, and that of only £159.58.       We were told that the earlier defaults had resulted from delays and failures on the part of several of its customers to pay their bills.   For those earlier periods and also for the period 10/06 the company had been accounting for its VAT on an accruals basis, but we were told that following the acute problem that the company suffered in the period 10/06, it had changed over to a cash basis so that customer defaults and delays should no longer lead to VAT being due in respect of bills that customers had not paid by the end of the relevant VAT period. 

3.    Virtually the whole of the Appellant’s work in the period July to September/October 2006 was work on a prestigious contract for a client for whom the firm had done work before, and with which the firm had a very good relationship, namely Notre Dame School in Cobham , Surrey.    The work involved the manufacture and fitting of numerous individually designed window frames to replace rotten ones in the listed buildings owned by the school. 

4.     When the contract was signed, in about June 2006, it was envisaged that the total contract price, including VAT would be about £45,000, and the school paid a deposit of approximately £13,500 at the outset, being roughly 25% of the total contract price.         Approximately the same sum would be due six weeks after work had commenced; and the balance would be due on completion.        The Appellant, and in particular Mr. Franklin, one of its Directors, had confidence that payments would be made on time because the firm was held in high regard by the school and there was an excellent relationship between them. 

5.     Two things changed.    Once work had started, it emerged that more windows would need to be replaced than had originally been assumed, so that the contract price went up to approximately £70,000 from £45,000.     Far more relevantly, however, the school realised that because considerable other work needed to be done, it needed to appoint another firm to oversee all the work, including the carpentry work and to attend to the various other works that needed to be done.     The general firm of builders that was appointed then agreed or insisted that they should be the principal contractor, over-seeing everything, and that the Appellant should become a sub-contractor.       We assume that the Appellant formally agreed to this contractual change, but we also accept Mr. Franklin’s statements that he naively assumed (on account of his good relationship with the school) that the formal change would have little affect in practice.

6.      The change of role to becoming a sub-contractor caused the Appellant numerous problems.   Whilst Mr. Franklin conceded that he should not have been so trusting and so confident that the formal change would have little affect on the way in which the Appellant billed, and would be paid for its work, he found that because he had not presented monthly valuations of work to the principal contractor (all in a way that he had never envisaged would be necessary) the Appellant had received no further payments at all by 21 November, by which time the whole of the expanded work programme had virtually been completed. 

7.      On 21 November Mr. Franklin was panicking that he had no funds with which to pay his workers at month end, and no funds to pay the Appellant’s VAT liability.     We understood that the Appellant’s main bank (with which Mr. Franklin had very good relations) had reduced the firm’s overdraft facilities on account of one of Mr. Franklin’s former colleagues having embezzled approximately  £25,000 about a year before from the Appellant’s accounts.      As a result of this Mr. Franklin convened a meeting on 21 November, going behind the principal contractor and convening the meeting with one of his good contacts at the school, a Mr. Munro, in order to obtain money directly from the school so that he could pay both his workers and the school by the end of the month.    The deal that was apparently struck was that the school would pay the Appellant £12,500 directly and that the principal contractor would also release a similar sum from monies that the school had already paid it.    All that Mr. Franklin had to do was to provide an invoice to the school.

8.     Mr. Franklin sent one of his assistants to the school with the invoice but because Mr. Munro was in a meeting, the invoice was left with a groundsman with an instruction that it was urgent that it be delivered immediately to Mr. Munro.   The invoice was left in a tray and not delivered with any urgency.    By 27 November, a further invoice had been supplied by which time the first one had been found and delivered.    Mr. Franklin then arranged for the cheque from the school to be collected on 29 November, as soon as it was available, but it was not credited to the Appellant’s bank account until 30 November.    The relevant bank manager had arranged in advance that he would meet a cheque or BACS payment from the account once cheques had been delivered to the bank from the school and the principal contractor, regardless of the fact that the cheques had not been cleared.      However by 30 November the only cheque that had been presented to the Appellant’s bank was the one from the school, the equivalent cheque from the principal contractors being delayed for a few more days.    Mr. Franklin arranged for his employees to be paid out of the only monies that the Appellant had in hand (“or they would have walked”), and sent a cheque or BACS payment on 5 December to pay the VAT, immediately the payment from the principal contractor had been received. 

9.      By this point, the Appellant had received still only approximately £37,000, notwithstanding that it was then due virtually the whole balance of the contract price of £70,000.       And it had taken enormous efforts by Mr. Franklin to obtain the £25,000.       We accept that he devoted very considerable attention to obtaining these payments from the date of the meeting on 21 November, and we also accept that Mr. Franklin’s position was made very much worse by the intervention of the principal contractors.   We have not troubled to summarise the poor relations that existed between the principal contractors and the Appellant, and the high regard in which the Appellant was still held by the school, and we note that some of the problems stemmed from Mr. Franklin’s naiave assumption that he did not need to understand the full implications of the contractual change that modified his original deal.    We are convinced however that had the contract with the Appellant remained with the trusted school, none of the delays and problems would have arisen. 

10.      We decide that the Appellant did have a reasonable excuse for its slightly late payment of VAT. The failure to receive payment was geared not just to general and average late payment by customers generally, but to great difficulties in obtaining payment in respect of the one contract that constituted virtually the only work and turnover undertaken by the firm in the relevant VAT period.    Insofar as Mr. Franklin admitted that he should have not been so trusting when the contractual changes were made, we fully understand that Mr.Franklin was a first rate craftsman who had a deserved relationship of trust with an established customer, and we can well understand how he would have failed to note the possible and potential implications of the insertion of the principal contractor.    He has subsequently arranged for the Appellant’s VAT returns to be dealt with on a cash basis, and in this particular period we accept that he made every effort to obtain payment.    We realise that Mr. Franklin arranged for his employees to be paid on time, whilst it was the VAT that was paid late, but we nevertheless accept that the Appellant had a clear responsibility to its key workers, and we cannot criticise Mr. Franklin for having settled the wages bill on the due date, out of the only monies that were then in hand. 

11.      We would finally like to add that Mr. Franklin presented his case well on behalf of the Appellant and entirely convinced us of his honesty, and his grasp of the facts.     We also add that the advocate for the Respondents accepted that in presenting his case, further facts had emerged that had not been known when the Respondents considered the Appellant’s “reasonable excuse” claim. 

12.      No request for costs was made and since Mr. Franklin appeared in person, no costs are awarded. 

HOWARD M. NOWLAN
CHAIRMAN

RELEASED: 12 September 2007

LON/2007/0878