[2011] UKFTT 109 (TC)

TC00985            

  Appeal number TC 2010/03944

VAT – default surcharge – no reasonable excuse – Appeal dismissed.

FIRST-TIER TRIBUNAL

VAT 

	BRIDGES CLEANING & HYGIENE SERVICES LIMITED
                                                                                                             Appellants	                                                                                   

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: JOHN M BARTON
						PETER SHEPPARD	

Sitting in public in Edinburgh on Tuesday 24 August 2010

F. B. Ashcroft, a Director, for the Appellants

Ros Shields, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	The Tribunal dismisses the appeal by Bridges Cleaning & Hygiene Services Limited (“Bridges”) against surcharges of £578.91 and £711.85 issued by Her Majesty’s Revenue and Customs (“HMRC”) in respect of Bridges’ failure to file VAT returns and pay the outstanding VAT on 30 November 2009 and 31 December 2009 respectively.
2.	On 22 February 2010, Bridges intimated their intention to appeal against the total surcharge of £1,290.76 (the aggregate of £578.91 and £711.85).  A formal Notice of Appeal was lodged by Bridges on 28 April 2010.
Material facts

3.	Bridges had chosen to complete its VAT returns on a monthly basis. 
4.	In respect of the month to 30 April 2009, Bridges were required to file a VAT return and to pay the outstanding VAT to HMRC not later than 31 May 2009.   The return was lodged on 5 June 2009 and payment was received by HMRC on 19 June 2009.  Bridges were accordingly in default and HMRC served a Surcharge Liability Notice on Bridges to take effect for a period to 30 April 2010.
5.	In respect of the month to 30 June 2009, Bridges were required to file a VAT return and to pay the outstanding VAT not later than 31 July 2009.   The return was lodged on 7 August 2009 and payment was received by HMRC on the same day.  In terms of s 59(4) and s 59(5) of the Value Added Tax Act 1994 (“the VAT Act”) Bridges were liable to a surcharge of 2% of the tax due but as the amount of the surcharge was less than £400, it was reduced to nil.  The effect of this further default was to continue the surcharge liability period to 30 June 2010 and to increase the percentage of the surcharge on a further default to 5%.
6.	 In respect of the month to 31 July 2009, Bridges were required to file a VAT return and to pay the outstanding VAT not later than 31 August 2009.   The return was lodged on 1 September 2009 and payment was received by HMRC on the same day.   In terms of the said legislation, Bridges were liable to a surcharge of 5% of the tax due but as the amount of the surcharge was less than £400, it was reduced to nil.  The effect of this further default was to continue the surcharge liability period to 31 July 2010 and to increase the percentage of the surcharge on a further default to 10%.
7.	In respect of the month to 31 October 2009, Bridges were required to file a VAT return and to pay the outstanding VAT not later than 30 November 2009.   The return was lodged on 7 December 2009 and payment was received by HMRC on the same day.     In terms of the said legislation, Bridges were liable to a surcharge of 10% of the tax due amounting to a surcharge of £578.91.  The effect of this further default was to continue the surcharge liability period to 31 October 2010 and to increase the percentage of the surcharge on a further default to 15%.
8.	In respect of the month to 31 December 2009, Bridges were required to file a VAT return and to pay the outstanding VAT not later than 31 January 2010.   The return was lodged on 5 February 2010 and payment was received by HMRC on the same day.     In terms of the said legislation, Bridges were liable to a surcharge of 15% of the tax due amounting to a surcharge of £711.85.  The effect of this further default was to continue the surcharge liability period to 31 December 2010 and to continue the percentage of the surcharge at 15% on a further default.
Submissions
9.	The grounds of appeal set out by Bridges in their notice of appeal were stated as follows –
As stated in our original appeal we have only been trading for 2 years and the business have built up our customer base slowly over those 2 years. We made a significant loss in the first year and turned that into a small profit in our 2nd year and hope to see continual improvement going forward.
As a result of our trading performance cash flow has been very tight and closely monitored on a day to day basis. Our customers pay us at the end of the month following invoice although frequently this drifts over into the early part of the next month. As such we have not always had the funds to pay our VAT return on the due date but have always managed to make payment within 10 days of the end of the month.
Following a conversation recently with your NI office we have now found out that if we had notified yourselves before the due date and advised them of the delay in payment no surcharges would have been levied.  We have been doing this now for the last couple of months.
The surcharge notice which has been raised is nearly £1,300. The company would struggle to pay this level of charge and continue to make the VAT monthly payments. Our cash flow position would be severely stretched at a time when we are still growing the business.
We ask you to take into account that we are a new business employing over 30 local staff. In due course as the business continues to make profits we will ensure all payments are made on time as we become less reliant on our customers paying on time.
10.	In response to Bridges’ Notice of Appeal, HMRC wrote on 30 March 2010 as follows –
There is a legal obligation on every registered trader to render a VAT return and pay any tax due by the due date, which is normally the last day of the month following the tax period concerned.
After passing through the normal Parliamentary process the Finance Act of 1985 was given the Royal Assent on 25 July 1985. Default Surcharge was introduced by Section 19 of that Act subsequently amended by Value Added Tax Act 1994 Section 59.
The Surcharge is imposed when subject to the provisions of Section 59 a trader fails to render a return or pay the tax due by the due date. The law grants neither this Department nor the VAT Tribunal any discretion to mitigate any surcharge. The lateness of a return or payment is largely a question of fact and once it occurs a surcharge accrues.
The only time that such a liability can be cancelled is where a trader can satisfy the Commissioners or, on appeal, a VAT Tribunal that the return and payment was dispatched at such a time and in such a manner that it was reasonable to expect it would be received by the due date or that there is a reasonable excuse for the return or tax not having been sent in on time.  
After careful consideration I must inform you that the Commissioners do not accept that the grounds given in your letter constitute a reasonable excuse for being in default for period 10/09 or 12/09.
I note the comments made in your letter and in particular the fact that the delay in payment occurred due to cash flow problems in periods 10/09 or 12/09.
After considering the content of your fetter, I must inform you that the default surcharge assessment will, on this occasion, be maintained as the law excludes lack of funds from being a reasonable excuse for late payment VAT act 1994 Section 71 {a}.
11.	In addressing the Tribunal, Mr Ashcroft did not dispute that his company had failed to file the said monthly returns and to make the above payments on the due dates.   He explained that his company’s cash flow problem at the end of each month resulted from his customers paying on a “30 day” basis.    He employed a factoring company to manage his invoices to his public customers, but he had about 20 to 25 private customers who did not pay until the due date.   Mr Ashcroft had been aware that he could have had an additional seven days in which to pay his VAT each month if he had paid electronically but he had always hoped to be in funds to pay on the due date.
12.	 Mr Ashcroft claimed that for three to four months towards the end of 2009, including in relation to the months of October and December 2009, he had telephoned HMRC to seek an extension of time for making payment. He did not make a record of such telephone calls.  
13.	On referring to her file, Ms Shields noted that Mr Ashcroft had made such a request on 24 February 2010 and again on 31 March 2010 and 29 April 2010, but she had no record of any earlier request having been made by Bridges.   
Reasons
14.	There is no reference in the grounds of appeal or the preceding correspondence to any telephone calls having been made in 2009.  However, it is stated in the grounds of appeal (dated 28 April 2010) that  -
Following a conversation recently with your NI office we have now found out that if we had notified yourselves before the due date and advised them of the delay in payment no surcharges would have been levied.   We have been doing this now for the last couple of months.
This would appear to confirm the telephone calls noted by Ms Shields, and also indicates that Mr Ashcroft was previously unaware of the possibility of approaching HMRC to obtain an extension of time in relation to a particular payment.      The Tribunal concludes that the telephone calls referred to by Mr Ashcroft were not made in 2009 but were indeed those noted by Ms Shields as having taken place in early 2010.  
15.	It is evident that Bridges had a monthly cash flow problem and that this was the material cause of the late payments which have given rise to the surcharges now under appeal.   The question is whether the cash flow problem constituted a “reasonable excuse” for the purposes of s59(7) of the VAT Act.   The expression “reasonable excuse” is not defined except that s71(1)(a) declares that an “insufficiency of funds to pay any VAT due is not a reasonable excuse”.
16.	This is not a case where 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, such as a major client failing to pay or delaying payment. Mr Ashcroft was aware of Bridges’ financial position for some considerable time prior to November 2009, and he was aware of the VAT payment falling due at that time and again in January 2010. The cash flow problem was an incident of business activity, which as a general rule cannot form the basis of a reasonable excuse for failure to account for tax on the due date, and the Tribunal finds that it was not a reasonable excuse in this case.   The Tribunal also had in mind that the company had chosen to complete its VAT returns monthly rather than quarterly, and was aware of the additional 7 days to pay that was potentially available to it if payment was made electronically but had decided not to use this facility.
17.	The appeal against the total surcharge of £1,290.76 is accordingly dismissed.
18.	 This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN M BARTON

TRIBUNAL JUDGE
RELEASE DATE: 7 FEBRUARY 2011