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	First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Lever Street Properties Ltd v Her Majesty's Revenue & Customs [2009] UKFTT 46 (TC) (08 April 2009) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00024.html Cite as: [2009] UKFTT 46 (TC), [2009] UKFTT 00024 (TC)

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TC00024

Default surcharges- over a period of years - claim that insufficiency of funds and business factors impacted on VAT payments - appeal dismissed

FIRST-TIER TRIBUNAL

TAX

LEVER STREET PROPERTIES LTD. Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

(VAT)

Tribunal: Elsie Gilliland (Judge)

Sitting in public in Manchester on 11 February 2009

Nathan Ezair, director, for the Appellant

Fred Phillips, Advocate, of the Solicitor's office of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009
 


DECISION

1. The appeal heard by the tribunal was that of Lever Street Properties Ltd. (the Appellant) against default surcharge assessments raised by Customs in respect of 9 accounting periods namely 08/05, 11/05, 02/06, 08/06, 11/06, 02/07,11/07, 02/08 and 05/08. The total amount was £17,323.22. Periods where no default surcharge was raised were excluded from the schedule of defaults being 05/06, 05/07and 08/07. The period before the tribunal ended on 31 May 2008.
2. The Appellant submitted a Notice of Appeal on 4 November 2008 and in it referred to a number of factors set out in a letter of 10 October 2008 as establishing a reasonable excuse for the defaults. In addition to insufficiency of funds these were changes in key members of staff, changes in accounting systems, change to auditors, changes in accounting software, changes in property management software and loss of key customers.
3. Mr Nathan Ezair, director, presented the Appellant's case and gave evidence to the tribunal. The company had been trading for over 25 years. It was a commercial property business which in 2002 had opened also into commercial offices with shorter leases for such as start-off businesses. He explained that since 2003 the Appellant had been waiting for a final grant payment of £24000.00 from the North West Development Agency and that at the date of the hearing this had still not been received though he was more hopeful that headway was being made. Staff turnover had constituted a problem particularly with accounting staff as each new member had to learn the business's invoicing and computing systems. There had been a change in auditors to a larger firm to produce published accounts in a more satisfactory form for banks and customers. A great deal of the time of the head accountant of the Appellant, Ann Taylor, had been taken up in working with the new team. The Appellant had changed its computer software. Having two systems property management and accounting running which required reconciliation had impacted on VAT liability. All was however now in place and invoices and VAT calculations were being properly done. There had been tenancy issues with the new business centre and tenants leaving without paying and the loss of a significant tenant from the Lever Street premises. Mr. Ezair said that historically the Appellant had a good payment record but in the current economic circumstances it was difficult for the business to keep its head above water because of the extra burden imposed by the default surcharge penalties.
4. The scope of what can constitute a reasonable excuse is restricted by s71 (1) of the Value Added Tax Act 1994 (the Act) which provides: (a) an insufficiency of funds to pay any VAT due is not a reasonable excuse and (b) when any reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse".
5. With regard to (a) a tribunal may look at the underlying cause for an insufficiency of funds and there may be a reasonable excuse if the taxpayer has suffered an 'unforeseeable or inescapable misfortune' or unexpected or late payment of bills by a a major customer. See C&E Commissioners v JB Steptoe CA [1992] STC 757. The tribunal was told that the grant moneys of £24,000.00 had been expected from 2003 that is before the periods the subject of the appeal. No details of negotiations or reasons for the delay during this length of time have been put to me but the non-release of the funds cannot be seen as constituting an unforeseen or unexpected set of circumstances over such a long time scale.
6. Reference was also made to a continuing and unexpected non-payment of rent by a number of clients. An invoicing system of rent collection was used by the Appellant. The extent of the loss over each period was not identified nor the steps taken by the Appellant as a prudent business operation to pursue claims for unpaid rent or to re-let the premises. As the representative for Customs pointed out any non-income producing property would not be subject to tax.
7. Mr. Ezair recounted staff problems in the recruiting and keeping of suitable staff especially in the accounts department; when an employee left it was necessary to replace that staff member and train someone new which could take time. It appeared that this happened on more than one occasion. In my opinion this was a recurring problem for office management attention and did not constitute an immediate loss of funds. There was nothing to show that invoices had not been sent out .
8. A decision was taken by the Appellant to change auditor. The move was made in 2006. The tribunal was told that there had been no gap in the audit process. It was to be expected that the Appellant's head accountant would be actively involved in liaising with the new auditors and that time would be spent on this. However this was a planned operation and not one that would cause a sudden substantial loss of income.
9. In his evidence Mr.Ezair referred also to problems arising in connection with a changeover to new software. Even if there were teething troubles there is no indication that there was a sudden problem rather that for an interim period two systems were run in tandem which would no doubt have required monitoring but as an event was nevertheless planned in advance. It is not clear how this could lead to an unexpected lack of funds presumably from rental income. Again there was nothing to show that invoices had not been sent out.
10. The submissions made to the tribunal on behalf of the Appellant were merely a general overview of the trading pattern of the Appellant over a period of some years. No bank statements or rent accounts were produced to show the financial position or any loss of income attributable to the various factors. It was stated that the Appellant had exercised 'reasonable foresight and due diligence' to make the payments by the due dates but because of exceptional circumstances payments were not made on time. In my view it has not been established that the difficulties described were other than normal hazards of trade applying equally to similar businesses within the same sector with the same obligation to make tax payment.s. In connection with each of the issues raised it would be reasonable to expect the Appellant to have put in place transitional arrangements whether for the introduction of new staff, new software or new auditors.
11. The exercise of reasonable foresight and due diligence has to be associated with a proper regard for the fact that VAT is due and payable on a particular date. In view of the legislative provisions there are only limited circumstances where a lack of funds or cash flow difficulties or reliance on the actions of others can constitute a reasonable excuse in the penalty regime. None have arisen in the present case and I so find.
12. The appeal is dismissed.
13. There is no direction on costs.

MAN/ 08/1404

ELSIE GILLILAND

TRIBUNAL JUDGE

Release date: 8 April 2009