19278

Default Surcharge – Time to pay arrangements – Whether reasonable excuse – S.71(1)(a) VATA 1994 – Appeal dismissed

LONDON TRIBUNAL CENTRE

	SURREY SCAFFOLDING LIMITED	Appellant

-	and –

	THE COMMISSIONERS FOR REVENUE AND CUSTOMS 	Respondents

				Tribunal:	DR KAMEEL KHAN (Chairman)

Sitting in public in London on 11 May 2005

Mr J Arthur, Company Secretary, for the Appellant 

Mr R Smith for the Respondents

© CROWN COPYRIGHT 2005

DECISION

INTRODUCTION

Surrey Scaffolding  Limited (“the Appellant”) is a scaffolding contractor based in Maidstone, Kent.  Its principal business is the erection and hiring out of scaffolding.  It is a small company with a turnover of approximately £1.7m (net invoiced sales of goods excluding VAT) which made a profit before tax of £650,000 approximately.  It has retained profits of approximately £430,000 which is being carried forward.  Throughout the relevant period for the purposes of this case, the Appellant had an overdraft facility which was increased to deal with the Company’s liabilities.  

APPEAL

This Appeal is against a default surcharge for the period 1 November 2003 to 31 January 2004.  The due date for payment of the VAT was the 29 February 2004.  The Appellant wrote to H.M. Customs and Excise (HMCE) (Debt Management) on 9 March 2004 with a proposal to pay the outstanding value added tax of £46,761.89 in three equal instalments of £15,587.30.  The cheques to pay these amounts were to be dated 31 March, 23 April and 14 May 2004 respectively.  The reason given by the Appellant for requesting instalment payment was stated in their letter of 23 February 2004:-

“Due to an extremely difficult period being experience in trading and debt collection and a current increase in the insurance premium to the building trade of 70%”.

The Company explained that:-

“They have secured an extension to our overdraft facility with our bank to £250,000 and they have negotiated with various institutions over repayment of hire purchase agreements”.

The Debt Management Unit found the instalment payment proposal acceptable and stated:

“Acceptance of the arrangement does not prevent or cancel surcharge default”.

APPELLANT’S CASE

The points made by the Appellant in appealing against the default surcharge are as follows:-

1.	They were not made aware or understood that the default surcharge would be rendered if time to pay arrangements were in place.

2.	In January 2004, the Company was faced with an increase in insurance cost from an annual fee of £40,000 per annum to £120,000 per annum.

3.	During the period before and after this increase in insurance premium, the Company had difficult trading conditions with orders decreasing and suffered a bad debt with a major client.  Oral evidence was given by the representatives of the Appellant that the debt was for £50,000 over a two month period.

4.	Trading conditions were made worse by the managing director’s enforced absence due to serious family illness.

5.	There were significant increases in hire purchase debt.

6.	In an effort to deal with the cashflow difficulties which the Company was experiencing at the time, the following measures were undertaken by the Appellant.  These are:-

i)	Salary decreases and redundancies were made and the Company vehicles were returned.

ii)	Finance houses were approached and extensions given to payment period.  

iii)	Financial assistance was given via directors’ loans which were raised and reinvested into the Company.

iv)	Bank assistance was sought and agreed by way of longer term loans.  The Company strategy for obtaining orders was reviewed with the result that the trading position was improved for the year going forward in 2005/2006.

v)	Financial restructuring was undertaken throughout the Company.

CUSTOMS & EXCISE POSITION

1.	The Customs and Excise laid out their case very briefly.  They made the following points:

i)	Payment was not received in full on or before the 29 February 2004 and therefore the defaulted surcharge had accrued before the time to pay arrangements had been asked for or arranged.

ii)	Acceptance of a time to pay arrangement does not prevent or cancel the default surcharge and this was stated in the Debt Management Unit letter of 10 March 2004.

iii)	The Surcharge Liability Notice was still in force at the time of the default.

DECISION

An Appellant will not incur a surcharge if they satisfy the Tribunal that there is a reasonable excuse for their conduct.  The term reasonable excuse is not a defined term in the legislation.  However, an insufficiency of funds to pay the value added tax is not considered a reasonable excuse (s.71(1)(a) VATA 1994).  

It is possible to have a reasonable excuse if the reason for the insufficiency of funds is unforeseen which is to say not due to the normal vicissitudes of trading or has arisen because of exceptional circumstances.  In this sense, one has to look to see if the circumstances giving rise to the insufficiency of funds were reasonably foreseeable and whether the situation was avoidable.  

In the present case, the non payment of value added tax was in part due to circumstances which were not foreseeable. The increase in the insurance premium from £40,000 per annum to £120,000 per annum or from approximately £3,300 per month to £10,000 per month was significant and appeared without warning.  However, the payment of an insurance premium is normally something which can be made over a period of time.  In the case of the Appellant, an increase of £7,000 per month is not significant when looked at in terms of the size and turnover of the Company.  In other words, the Appellant should be able to absorb such an increase in premium or at least be able to make an arrangement with the insurance company or the Bank to pay such sum over time.  

We were given oral evidence by the Appellant’s representative (Mr J Arthur) that the Company had bad debts of £50,000 in the relevant accounting period, November 2003 to January 2004 and which related to a single normally reliable customer.  Such bad debt according to the evidence given was not foreseeable.  If we look at the overdraft facility in the relevant period which was increased to £250,000 in the period to the end of January 2004, it is apparent that in January 2004, the Appellant was actually overdrawn to the tune of £292,279 which meant that even with a payment by the one client of the amount due, the Company would still have had difficulties meeting its value added tax liability. The bad debt contributed to the Company’s poor cashflow position, but it appears that the Company would have struggled to meet its liability to HMCE even if the customer payment had been made. We do not therefore think that the cash crisis which existed within the Company was, while unexpected, did not give rise to an exceptional circumstance and a reasonable excuse.

The directors must be commended for the financial restructuring which they undertook to keep the Company afloat. They made all reasonable efforts to communicate with HMCE to meet their financial obligations and were open and transparent in these matters. Sadly, however, the circumstances were not such as to afford a reasonable excuse according to the law, for the non payment of the outstanding VAT and this Appeal would accordingly be dismissed.

DR K KHAN
CHAIRMAN

RELEASED: 6 October 2005

LON/04/1161