19477
Value added tax – penalties – default surcharge – reasonable excuse – whether the appellant had a reasonable excuse for defaults in payment of tax – yes as to some of the defaults only
LONDON TRIBUNAL CENTRE

	CARDIFF RUGBY FOOTBALL CLUB LTD	Appellant

-	and –

	 THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS                                                  

Respondents

				Tribunal:	Dr. David Williams (Chairman)
						Miss Angela West FCA (Member) 

Sitting in public in Cardiff on 20 April and 7 December 2005

Mr Alun Doull, Finance Director, for the Appellant 

Mr J Holl and Mrs P Crinnion of the Office of the Solicitor to Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2006

DECISION

1	These are full reasons for the decision of the tribunal, announced at the conclusion of the second hearing, of the Appellant’s appeal against default surcharges imposed by the Respondents (“the Commissioners”) upon the Appellant for periods from February 2003 to September 2004. It was accepted that there had been no defaults of any kind by the Appellant  (“the Club”) since that period. The Club has retained its corporate identity throughout the period of this dispute, although during that period the Cardiff Blues has appeared. The corporate structure is that the Cardiff Blues are run by a company that is a wholly owned subsidiary of the Club. The Club is the nominated company within the group for value added tax purposes.  

2	The returns and payments in question were those due for the value added tax periods ending 31.05.2003, 31.08.2003, 30.11.2003,  28.02.2004, 31.05.2004 and 31.08.2004. At the start of the resumed hearing, Mr Doull stated that, having reviewed all the figures, the Club now accepted that it was in a position to have made its return and payment on time for 31.05.2004 and he withdrew the appeal to that extent. But he did not withdraw it for the following period.  

3	The tribunal gave an oral decision at the end of the second hearing. It indicated that it accepted that the Club had shown that it had a reasonable excuse for its default for the first quarter in question, and that this had been because of the institutional and financial positions into which the Club had been placed by a combination of factors beyond its control. The tribunal accepted that that reasonable excuse had continued into later periods. The Club had been right to acknowledge that that excuse ended by the time the Club was due to make its returns and payments for the period from February to April 2004. And the tribunal did not accept that there was any further reasonable excuse to justify default after that. The tribunal’s decision was therefore that reasonable excuse had been shown up to and including the return due for the period 1 November 2003 to 31 01 2004, but not for any later periods. The Commissioners were therefore entitled to impose default surcharges for the returns and payments due to be made on 31.05. 2004 and 31.08.2004. In both cases returns had been made by the correct date but payment had not been made by that date.

4	The tribunal outlined both its decision and the key reasons for it at the end of the hearing. Mrs Crinnion asked for full reasons on behalf of the Commissioners. The tribunal indicated that it would give a full decision.

The facts

5	The tribunal is satisfied that the application by the Club arises from the financial effects of a most unusual set of circumstances. They arose because of the structural and financial position in which the Club found itself during the period when the Welsh Rugby Football Union (“WRU”) set about reorganising the structure of professional rugby football in Wales in 2003 and 2004.  

6	At the end of the first hearing the tribunal indicated that it accepted (and it was also accepted for the Commissioners) that the Club was confronted with a highly unusual set of circumstances during the period. But the tribunal felt it needed more information to have a better total picture of the Club’s situation before reaching a final decision on the question of reasonable excuse. The tribunal therefore adjourned the hearing to allow the Club to produce further information. It was directed to produce its full accounts for the years 2002, 2003 and 2004 and also details of the specific invoices that gave rise to the value added tax liabilities in question. The Club fully complied with this direction ahead of the second hearing. 

7	The tribunal acknowledged that, at least in Wales, part of the background to the Club’s application was in the public record. The WRU had made it plain and public that it wished to see a fundamental reorganisation of Welsh rugby. It had brought in an outsider to advise it in 2002 and in January 2003 it announced that it wanted major structural reforms to the main Welsh rugby clubs, including the Club. Various plans were mooted to reduce the number of Welsh clubs. These threatened the existence of all the major clubs in their existing form, including the Club. Clubs were asked or directed to merge with other clubs to form a regional structure. These plans included the Club, which could on some versions of the plan have ceased to exist as a separate entity. 

8	The Club was strongly against the initial plans. It stood out against going into liquidation or receivership while other major clubs – such as Swansea and Ebbw Vale – did so. It considered that it was in a special position because of the rights of the Cardiff Athletics Club (which controls the Club at the corporate level) to use the historic Arms Park ground in the city centre of Cardiff, and because of the value of the “Cardiff” label. It also had many small shareholders for whom it was concerned. It was additionally concerned that it might lose the services of some of its best players if it was unable to keep them in contract. As with any major sporting club, its players were its major assets both individually and jointly. The Club therefore stood its ground and maintained its independence. Only one other club stood its ground in this way: Llanelli. All the other clubs in the region went into receivership or liquidation.  The tribunal accepts from this that the threat to the independent existence of the Club at that time was genuine and sustained. Further, it was reflected in the finances that the Club obtained at the time from the WRU. 

9	The Club, together with the other major clubs, received significant sums for television rights. These were brokered through the WRU. In 2003, the Club was told by the WRU that there was now less money than in previous years to be shared between the clubs and also that the Club, as a club that had not merged as requested with other clubs, would receive lower funds. The Club also received other funds from the WRU. But the WRU had its own financial problems. In the summer of 2003, in addition to the deliberate changes to the Club’s finances by the WRU, the Club was faced with a further problem in its dealing with the WRU. Its practice was to invoice the WRU monthly for the sums agreed to be due to it. It is the VAT on those invoices that lies at the heart of the current appeals.  Without notice, the invoices came to be paid late and, for a time, at only half the amount invoiced. The Club gave the tribunal a full schedule of the individual receipts and amounts and the relevant dates and the tribunal accepts that evidence. This radically affected the Club’s cash flow. Specifically, it involved the Club not receiving the VAT shown on the invoices, and therefore returnable to the Commissioners, in significant amounts and at the appropriate times on a number of occasions.  

10	The Club met further problems towards the end of 2003. Its main bankers were the same main bankers as the bankers to the WRU. The bankers’ exposure to the WRU increased at that time. As a result, the Club was asked by its bankers to reduce its overdraft. This reflected the bankers’ concern at overall exposure to the game of rugby in Wales. The request was to reduce the total overdraft available to the Club from £250,000 to £140,000 – a substantial reduction at a time when cash flow was still uncertain. The Club sought to respond by changing its bankers. But it suffered from the problem of its unusual structure (including the links to the Cardiff Athletics Club) and that as a result it did not have the assets that might be expected of a similar club.  It was obliged to accept the banking constraints. And when, as a result of the Welsh reorganisation, the Club took over Pontypridd Rugby Club, it did so without any of that club’s facilities. That did not assist its capital position either. 

11	  The other uncertainty during this period was the status of the formal agreement between the Club and the WRU. This had been thrown into question by the WRU’s plans to reorganise Welsh rugby. The WRU’s contracts are annual, seasonal contracts under which the WRU dispensed funds to the clubs in exchange for the clubs meeting the obligations on the clubs placed by the WRU. These contracts lay down the mechanisms under which the Club invoiced the WRU for monthly payments. The Club only concluded a new five year full Operating Agreement with the WRU in October 2004. Until then, the new agreement was not “bankable”. 

12	These pressures were reflected in the cash flow of funds to and through the Club. At the beginning of 2003 it was receiving monthly sums of over £100,000 from TV income and the WRU contribution. It recorded these receipts as part of its fixed turnover. But in April 2003 it received nothing from those sources, and in the following four months the sums received were substantially down on the previous, and expected, amounts. Full monthly sums started being paid again only in September 2003. The Club’s monthly total receipts from all sources were in the region of £300,000 to £600,000 during that period (depending in part of the stage at which the playing season had reached). But in April 2003, as a direct result of the events recounted above, total receipts were below £150,000. This reduction was not reflected at all in the outward cash flow. The main item – wages – was at the same level in April 2003 as in the previous months. And the tribunal accepts that there was nothing that the Club could sensibly do at that time to affect that wage structure in the short or medium term without considerable risk to its long term future. As a result, there was a net cash outflow from the Club in April 2003 of over £200,000. And this figure was only achieved after the Club clearly stalled a number of other outgoings, including for example PAYE for the month. While it would be expected that there would be seasonal variations in the cash flows into and out of organisations such as the Club this variation was, the tribunal accepts, unpredicted, unpredictable and largely uncontrollable when it was recognised as occurring. 

13	The schedule of invoices to, and receipts from, the WRU produced in evidence emphasises how the regular flow of invoices out and payments in became disrupted in and from April 2003. Significant sums invoiced for the end of the 2002-2003 season in May 2003 were not received until August (in one case only during the following January). Sums invoiced to the WRU at the beginning of each of May, June and July 2003 – each for £123,000 – were not paid in full until mid October. The situation then settled down. However, there were again delays in paying sums invoiced for the monthly distributions for June, July and August 2004.  The Appellant accepted that things returned to normal after that.  

14	The tribunal also examined the published annual report and accounts of the Club for 2002, 2003 and 2004.  The Club recorded that at the end of the 2002-3 accounting year (31 May 2003), it was owed £267,000 by the WRU. As a result its net debt at the end of the year had increased by £100,000 from the end of the previous year. It reported that, but for that debt, its net debt would have fallen for the third year in succession. It recorded a net operating profit before amortisation of ticket rights and goodwill of £82,000 – a similar figure to that of the year before. The equivalent figure for 2003-2004 was a loss of over £700,000. The tribunal also noted that the aggregate fees paid to directors reduced noticeably in 2003 from 2002, and again in 2004 from 2003. No dividends were paid to shareholders in the periods. So there was no question that funds were being diverted in those ways.   

15	The tribunal accepts that the Club had to respond in May 2003 to a totally exceptional situation, and it had to do so against a number of important background factors. It was the end of the season.  If it did not pay its players at that time, it might lose them (as one rival club did when it allowed its players to go out of contract by non-payment). But its other revenues were down precisely because it was the end of the season. And the Club was determined to remain in existence when most of its rivals were – for a variety of reasons – going into liquidation or administration. There were strong reasons – not least the availability of the Arms Park and local loyalties – why it did not wish to follow those courses of action. On top of that it had to confront the combined effects of the actual withholding of funds by the WRU and the uncertainty of future funds from that source. Those factors all came to bear in combination with a tightening of its credit lines as noted above. Its debts totalled over £1 million. And it was asked by its bankers to reduce this – for good reasons of the bankers’ own – at just the time it would otherwise need to increase it. Taking all these factors together the tribunal finds that the Club had a reasonable excuse to defer its creditors – including the Commissioners – in May 2003.   For these reasons the tribunal accepts a reasonable excuse in the default in May 2003.

16	When could the Club get itself back from that position? The overall cash position of the Club was in excess of £1,000,000 in deficit at the start of 2003. the deficit increased in March 2003 and then significantly in April (for the reasons just stated). And it remained over £1,000,000 in deficit until refunding took place in May 2004. The Club’s future was assured by then, and it was able to bring in substantial new loans. As a result, the closing cash balance reduced to almost zero in May 2004 and by July 2004 was positive. The tribunal is satisfied that the flows of funds were fully monitored and documented in a professional manner, and that the Club was taking what steps it reasonably could to draw itself back from the position in which it was placed in April 2003 whilst protecting its long term interests.  

17	Taking all this into account, the tribunal considers that the reasonable excuse it found for the delay in May 2003 continued while both the structural uncertainty and erratic payments continued to affect the core business and financing of the Club. The Club itself now accepts that this was ended by May 2004. The cash flow figures it produced at the tribunal’s direction make this entirely clear. Some of the patterns of erratic payments appear again later in 2004. The Club asked the tribunal to accept that as a recurrence of the reasonable excuse it previously had for late payment. The tribunal does not accept that. Much of the overall uncertainty had been removed. The Club was able to achieve refinancing in May 2004, although its agreement with the WRU did not come fully into effect until October 2004. Both in cash flow terms and credit terms the Club was by then far removed from the problems that threatened its very existence in mid 2003.  The tribunal does not therefore find that once the problems starting in May 2003 were resolved in May 2004, there was further excuse to justify default.	

18	The tribunal therefore discharges the default surcharges for the periods ending 31.05.2003, 31.08.2003, 30.11.2003, and 28.02.2004. But it confirms that the Appellant has shown no reasonable excuse for the defaults in the quarters ending 31.05.2004 and 31.08.2004. It is therefore liable to any default surcharge that arises under the legislation for those periods. 

19	The tribunal makes no order as to costs. 	 

DAVID WILLIAMS
CHAIRMAN

RELEASED: 28 February 2006

LON/04/2362