[2013] UKFTT 629 (TC)
TC03016
Appeal number:
TC/2012/09625
VAT default surcharge - insufficiency of funds -
appellant erroneously thought a time to pay arrangement was in place - whether
reasonable excuse - no - appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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CHARLES EVANS
GROUP LIMITED
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE MICHAEL S CONNELL
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PETER WHITEHEAD
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Sitting in public at the Civil
and Family Court, 35 Vernon Street, Liverpool on 2 August 2013
Mr. G Thompson director of the
Appellant Company
Mr. P Jones Officer of HM
Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2013
DECISION
The Appeal
1.
Charles Evans Group Limited (“the Appellant”) appeals against a default
surcharge of £3,385.43, for its failure to submit in respect of its VAT period
ended 30 June 2012, by the due date, payment of the VAT due. The surcharge was
calculated at 2% of the VAT due of £169,271.67.
2.
The point at issue is whether or not the Appellant has a reasonable
excuse for making late payment.
Background
3.
The Appellant’s principle business activity is the provision of
specialist joinery, manufacturing and shop fitting services. Customers include
national supermarkets, retail stores and smaller organisations such as hotels
and restaurants.
4.
The Appellant had previously defaulted on VAT payments in period 06/11
when a VAT surcharge liability notice was issued.
5.
A time to pay arrangement was in place in respect of earlier outstanding
tax and VAT, under which the sum of £225,000 was due to be paid by instalments
between October 2012 and July 2013.
6.
The Appellant paid VAT on a quarterly basis. Section 59 of the VAT Act
1994 requires a VAT return and payment of VAT due, on or before the end of the
month following the relevant calendar quarter. [Reg 25(1) and Reg 40(1) VAT
Regulations 1995]. The due date for the 06/12 period was 31 July 2012. The
Appellant’s return was received by HMRC on time. The amount due was
£169,271.67. Payment was made in part only (£41,000) by cheques on 12 September
2012, 11 October 2012 and 14 November 2012.
7.
Section 59 Value Added Tax Act 1994 (“VATA”) sets out the provisions in
relation to the default surcharge regime. Under s 59(1) a taxable person is
regarded as being in default if he fails to make his return for a VAT quarterly
period by the due date or if he makes his return by that due date but does not
pay by that due date the amount of VAT shown on the return. The Commissioners
may then serve a surcharge liability notice on the defaulting taxable person,
which brings him within the default surcharge regime, so that any subsequent
defaults within a specified period result in assessment to default surcharges at
the prescribed percentage rates. The specified percentage rates are determined
by reference to the number of periods in respect of which the taxable person is
in default during the surcharge liability period. In relation to the first
default after the issue of a surcharge liability notice the specified
percentage is 2%. The percentage ascends to 5%, 10% and 15% for the second,
third and fourth default.
8.
A taxable person who is otherwise liable to a default surcharge may
nevertheless escape that liability if he can establish that he has a reasonable
excuse for the late payment which gave rise to the default surcharge(s).
Section 59 (7) VATA 1994 sets out the relevant provisions : -
‘(7) If a person who apart from this sub-section
would be liable to a surcharge under sub-section (4) above satisfies the
Commissioners or, on appeal, a Tribunal that in the case of a default which is
material to the surcharge –
(a) the return or as the case may be, the VAT shown
on the return was despatched at such a time and in such a manner that it was
reasonable to expect that it would be received by the commissioners within the
appropriate time limit, or
(b) there is a reasonable excuse for the return or
VAT not having been so despatched then he shall not be liable to the surcharge
and for the purposes of the preceding provisions of this section he shall be
treated as not having been in default in respect of the prescribed accounting
period in question ..’
9.
Section 59(7) must be applied subject to the limitation contained in s
71(1) VATA 1994 which provides as follows : -
‘(1)
For the purposes of any provision of section 59 which refers to a reasonable
excuse for any conduct -
any insufficiency of funds to pay any VAT due is not
a reasonable excuse.’
10.
Although an insufficiency of funds to pay any VAT due is not a
reasonable excuse, case law has established the principle that the underlying
cause of any insufficiency of funds may constitute a reasonable excuse.
11.
The initial onus of proof rests with HMRC to show that a surcharge has
been correctly imposed. If so established, the onus then rests with the
Appellant to demonstrate that there was a reasonable excuse for late payment of
the tax. The standard of proof is the ordinary civil standard on a balance of
probabilities.
Appellant’s Case
12.
The Appellant does not dispute that its VAT payment for the period 06/12
was due on 30 July 2012 or that it was late making payment. It is also agreed
that the payment, if made by cheque, was due on 31 July 2012. The Appellant
also acknowledges that the VAT was paid late and in part only.
13.
The Appellant’s main ground of appeal is that an insufficiency of
funds was created by circumstances outside its control which in turn impacted
upon its ability to discharge VAT on time. Its problems have been caused by
adverse trading conditions brought about by the economic recession and a number
of other factors.
14.
Mr Thompson for the company said that only a year ago the company was
close to going into administration. The Appellant employed Duff and Phelps who negotiated
with HMRC and agreed an instalment arrangement with regard to the company’s
PAYE/NI and Corporation tax arrears whereby the sum of £225,000 was to be
repaid between 15 October 2012 and 15 July 2013.
15.
The business had been family-owned until June 2002 when it was acquired
through a management buyout, and then in 2005 was acquired by the current
owner. The two buyouts resulted in the introduction of debt from both the
Appellant’s bank and venture capital funds. The business is highly geared as a
result of the two buyouts with high levels of amortisation interest and capital
commitments which undermined trading performance and absorbed cash resources.
16.
Additionally large contracts had created significant losses (£179,000).
There were also numerous doubtful debts adding to the company’s cash flow
problem.
17.
The company implemented a number of cost-cutting and efficiency measures
including redundancies and pay cuts of between 5% and 15% for all staff
members.
18.
The Appellant mistakenly thought that the VAT due for the default period
under appeal was included in the time to pay arrangement.
HMRC’s Case
19.
The Period 06/12 had a due date of 31 July 2012 for a non-electronic VAT
payment. The VAT payment was received in part by HMRC in three instalments.
£41,000 was paid. The amount due on the tax return was £169,271.67.
20.
HMRC say that the potential financial consequences attached to the risk
of further defaults would have been known to the Appellant after issue of the
Surcharge Liability Notice in July 2011 and a Surcharge Liability Extension
Notice in January 2012, particularly given the information contained in the
Notice which on the reverse states:
‘Please remember your VAT returns and any tax due
must reach HMRC by the due date. If you expect to have any difficulties contact
either your local VAT office, listed under HM Revenue & Customs in the
phone book as soon as possible, or the National Advice Service on 0845 010
9000.’
21.
The requirements for submitting timely electronic payments can also be
found -
·
In notice 700 "the VAT guide" paragraph 21.3.1 which is
issued to every trader upon registration.
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On the actual website www.hmrc,gov.uk
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On the E-VAT return acknowledgement.
22.
Also the reverse of each default notice details how surcharges are
calculated and the percentages used in determining any financial surcharge in
accordance with the VAT Act 1994 s 59(5).
23.
Therefore HMRC say that the surcharge has been correctly issued in
accordance with the VAT Act 1994 s 59(4).
24.
With regard to the Appellant’s grounds of appeal, Notice 700/50
(December 2011) s 6.3 (the notice represents HMRC's policy and understanding of
the relevant legislation), states that HMRC consider that genuine mistakes,
honesty and acting in good faith are not acceptable as reasonable excuses for
surcharge purposes, and it is specifically stated in s 71(1) VATA 1994 that any insufficiency of funds to pay any
VAT is not reasonable excuse.
Conclusion
25.
The Appellant was clearly aware of the due date for payments of its VAT
and the potential consequences of late payment.
26.
The Appellant’s main ground of appeal is that it suffered cash flow
shortages caused by a number of factors as set out above and because it
erroneously thought that the VAT due in the default period formed part of the
time to pay arrangement.
27.
In Customs & Excise Commissioners –v- Steptoe [1992] STC 757 the
tax-payer argued that although the proximate cause of his default was
insufficiency of funds, the underlying cause of that insufficiency, namely the
unexpected failure by a major customer to pay him on time, amounted to a
reasonable excuse. The Court determined on a majority that the statutory
exclusion of insufficiency of funds as an excuse did not preclude consideration
of the underlying cause of insufficiency and that a trader might have a
reasonable excuse if it were caused by an unforeseeable or inescapable event or
when, despite the exercise of reasonable forethought and due diligence, it
could not have been avoided. The Court nevertheless made it clear that the test
had to be applied strictly.
28.
To decide whether a reasonable excuse exists where insufficiency of
funds causes the failure, the Tribunal must take for comparison a person in a
similar situation to that of the actual tax-payer who is relying on the
reasonable excuse defence. The Tribunal should then ask itself, with that
comparable person in mind, whether notwithstanding that person’s exercise of
reasonable foresight, due diligence and a proper regard for the fact that the
tax would become payable on the particular dates, the tax-payer would not have
avoided the insufficiency of funds which led to the failures.
29.
Having considered the Appellant Company’s circumstances and the
background facts and circumstances leading up to the default, the Tribunal
finds that an underlying cause of the default was cash flow shortages caused by
a combination of events. However, the main cause appeared to be the Appellant’s
erroneous belief that the VAT due in the default period was subject to a time
to pay arrangement. Mr Thompson for the company accepted that the mistake was
because of a misunderstanding with Duff and Phelps. Unfortunately mistakes of
this nature do not amount to a reasonable excuse for late payment, and with
greater diligence the management would have been aware that the VAT for the
default period was not part of the time to pay arrangement.
30.
The burden of proof is on the Appellant to show that the primary cause
of its failure to meet its VAT payment obligations was unforeseen circumstances
or events beyond its control. In the Tribunal’s view, for the reasons given
above, that burden has not been discharged and there was no reasonable excuse
for the Appellant’s late payment of VAT for the 06/12 period.
31.
The appeal is accordingly dismissed and the surcharge upheld.
32.
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.
MICHAEL S
CONNELL
TRIBUNAL JUDGE
RELEASE DATE: 22 October 2013
