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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> MSD (Darlington) Ltd v Revenue & Customs [2006] UKVAT V19897 (20 November 2006) URL: http://www.bailii.org/uk/cases/UKVAT/2006/V19897.html Cite as: [2006] UKVAT V19897

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MSD (Darlington) Ltd v Revenue & Customs [2006] UKVAT V19897 (20 November 2006)

19897

VALUE ADDED TAX — default surcharge — taxpayer entering into major contract — supplier providing services to enable taxpayer to perform contract — available time-frame very short — supplier failing to provide service — taxpayer able to perform contract only at great additional cost — cash flow adversely affected — inability to meet VAT liability on time — whether reasonable excuse — yes — appeal allowed

MANCHESTER TRIBUNAL CENTRE

MSD (DARLINGTON) LIMITED

Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

Tribunal: Colin Bishopp (Chairman)

Roland Presho FCMA

Sitting in public in North Shields on 14 November 2006

Stanford Cowan, solicitor, for the Appellant

Charles Morgan, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1. The issue in this appeal is whether the Appellant, MSD (Darlington) Limited, has a reasonable excuse for the late payment of its VAT liability for its prescribed accounting period 01/06. The return itself was received on the due date of 28 February 2006, but no payment was made by that date; indeed, the Appellant later successfully sought an agreement from the Respondents that they would accept payment by instalments. The penalty in dispute amounts to £8,499.54.
2. Before us, the Appellant was represented by Stanford Cowan, solicitor, and the Respondents by Charles Morgan of counsel.
3. Mr Cowan's explanation of the factual background to the default, which the Commissioners do not challenge, was that in August 2005 the Appellant, which had been engaged as a contractor on the Wembley Stadium reconstruction project, agreed with another company for the hire of a crane which the Appellant wished to use in the construction of a footbridge over a railway line. The crane—we were told it is the only one of its kind in Europe—has a very high lifting capacity and was, or should have been, suitable for the work. The construction of the bridge necessitated the closure of the railway line for the duration of the work and a short period, a single weekend, was granted to the Appellant for the carrying out of the work. Arrangements were made to have the crane brought to the site, erected and made ready in time to undertake the lifting operation for which it had been hired in during the allotted time but unfortunately the crane was found to be defective in several respects when it arrived and, to make matters worse, an error by one of its owner's operators resulted in damage which could not be repaired immediately. The work could not be carried out at the agreed time, though it was undertaken later. Contractual penalty clauses were triggered and the penalties, as well as the additional expense of undertaking the work later, meant that the overall cost to the Appellant of constructing the bridge rose from £500,000 to about £1 million.
4. The Appellant has sought to recover its losses from the crane owners, but that is not a matter which concerns us; it is sufficient to record that reimbursement was not forthcoming immediately. We are required to consider how, in the context of the default surcharge regime, the effect of the problem on the Appellant's cash flow, and consequently on its ability to meet its VAT liabilities on time, is to be viewed.
5. We may allow the appeal if we are satisfied that the Appellant has a reasonable excuse for the default: see section 59(7) of the Value Added Tax Act 1994. Section 71(1) of the Act provides that an insufficiency of funds does not constitute a reasonable excuse. Plainly the proximate cause of the default was just that, an insufficiency of funds. However, there is a good deal of authority for the proposition that it is open to the tribunal to look behind the insufficiency in order to determine whether it is itself attributable to a cause for which the taxpayer has a reasonable excuse: see, in particular, Customs and Excise Commissioners v Steptoe [1992] STC 757. If the exercise by the taxpayer of reasonable forethought and due diligence, with a proper regard for the need to pay the tax by the due date, would not have avoided the insufficiency he might have a reasonable excuse. The normal hazards of trade will not suffice, however, and something out of the ordinary is required.
6. Mr Morgan urged us to the view that mishaps of this kind—the failure of one party to a contract to honour his side of the bargain—were not so unusual as to afford a reasonable excuse; every trader, particularly in the construction industry, must know that his counterparty might fail to perform his contract, and the Appellant's lack of a contingency plan meant it had not taken reasonable steps to guard against the adverse consequences of a breach of contract by the owner of the crane.
7. In our view that proposition sets the standard far too high. It is certainly true that breaches of contract are a common occurrence, though we suspect that more often contracts are performed in a timely and efficient manner. But is one thing to take steps to guard oneself against the normal hazards of trade—such as late payment by debtors—and quite another to enter into every contract while at the same time devising a contingency plan in case things go wrong, simply in order that VAT liabilities can be met on time. That is particularly the case where, as here, the contract itself was of an unusual nature, requiring performance in a narrowly prescribed period. It is quite unrealistic to suggest that the Appellant, mindful of its obligation to make its VAT payment on time, should have made plans to have another crane on standby, or that it should devise a method of executing the work in a different way, in case it should be let down by its chosen supplier. Nor is there any reason of which we are aware why it should be supposed that the choice of supplier was unwise—indeed, if only one crane of this kind is available in Europe, there was no real choice to be exercised.
8. We are satisfied that the Appellant was faced with circumstances which it could not reasonably have foreseen, and against which it was impracticable to take precautions. It was not disputed that the contractual breach was the cause of the insufficiency of funds, and we therefore find that there was a reasonable excuse for the insufficiency and, with it, the default.
9. The appeal is, therefore, allowed.

COLIN BISHOPP

CHAIRMAN
Release Date: 20 November 2006

MAN/06/0293