First-tier Tribunal (Tax)

[2009] UKFTT 306 (TC)

TC00250  

     Appeal number TC/2009/10214

Default Surcharge – insufficient cash to pay VAT by due date – Whether reasonable excuse – Yes – Appeal allowed – Value Added Tax Act 1994 sections 59 and 71

FIRST-TIER TRIBUNAL

TAX

                                         MEDIACLASH LIMITED                        Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)          Respondents

                                                TRIBUNAL: John Brooks (Judge)

                                                                        Dr Michael James (Member)

Sitting in public in Bristol on 2 8 October 2009

Mr G Ingham (Chief Executive of the Appellant Company) and Miss M Roderick (Head of Finance of the Appellant Company) for the Appellant

Mr S Chambers of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.     Having orally given our decision at the conclusion of the hearing to allow this appeal, Mr Chambers requested full written findings of fact and reasons for the decision.

2.     This is an appeal against a default surcharge assessment in the sum of £5,801.17 arising as a result of the late payment of VAT for the period 12/08 on the grounds that, as a result of the “exceptional tough economic times” and the VAT period to 31 December 2008 being “an exceptionally tough period” for its cash flow and business resources, the Appellant, although it was able to submit its VAT return by 31 January 2008 did not have sufficient funds to pay the amount of VAT shown on the return on time.

Facts

3.     Having heard Mr Ingham and Miss Roderick we find the following facts:

(1)  MediaClash Limited (the “Company”) was established in 2006 by Mr Ingham and his wife to provide media services, produce websites and publish local magazines financed by selling advertising and services to clients. It has a turnover of approximately £1.4 million.

(2)  The “City” magazines e.g. for Bath, were heavily dependent on property advertising and the decline in the property market had an adverse effect on business.

(3)  Miss Roderick joined the Company as Head of Finance in August 2008.

(4)  Although the Company had previously been in the VAT default regime, in the periods 09/07 and 12/07, Mr Ingham and Miss Roderick, were unaware of this.

(5)  During the summer of 2008 the Company lost a major client, “Design Objectives”, and much time and energy was spent, to the detriment of the business, in attempts to retain this client.

(6)  In November 2008 Mr and Mrs Ingham, neither of whom are now paid for their services by the Company (although Mrs Ingham did previously have a salary of £20,000), made a cash injection of £40,000 into the Company.

(7)  Subsequent trading continued to be below expectation and between 1 November and 6 December 2008 the Company needed to make redundancies losing 8 of its 42 employees. This required the Company to carry out consultations with its workforce to comply with its employment law obligations and meet the redundancy payments.

(8)  In addition to the adverse effect on the business of low staff morale during this period, sales were lost as a result of the concentration by the directors on the redundancy process.

(9)  Salaries were paid to employees on 22 December 2008, before the Christmas shutdown instead the usual date of 28 December 2008.

(10)   The Company met its PAYE and NIC obligations, as required, by 19 December 2008.

(11)   Suppliers, such as printers (for the magazines), required the Company to make prompt payment of their goods and services to enable it to continue in business.

(12)   Clients and customers of the Company, who themselves were suffering the effect of the recession especially post Christmas, frequently delayed payment resulting in what was described by Mr Ingham as a “significantly difficult period”.

(13)   There was no debtors figure as at 31 January 2009, when the VAT was due, but on 6 May 2009 the Company’s debtors over three months stood at £138,813.23. The equivalent figure in October 2008 was approximately £65,000.

(14)   It was realised in January 2009 that the Company was unable to meet its VAT payment but, although an overdraft has subsequently been arranged, the bank were not helpful at that time.

(15)   The VAT return for the period 12/08 (the “Return”) showing VAT payable of £116,023.51 was sent by the Company without payment of VAT on 28 January 2008 and received by HM Revenue and Customs (“HMRC”) on 30 January 2009.

(16)   A ‘Surcharge Liability Notice Extension’ and ‘Notice of Assessment of Surcharge’ in the sum of £5,801.17, calculated at 5% of the VAT of £116.023/51 outstanding as at 31 December 2008, was issued to the Company by HMRC on 13 February 2009.

(17)   £30,000 of the VAT shown as payable on the Return was paid by the on 12 March 2009 with the balance of £86,023.51 being paid on 18 March 2009.

(18)   The surcharge was paid on 12 March 2009.

Law

4.     Section 59(1) Value Added Tax Act 1994 (“VATA”) provides that where HMRC have received a return but “have not received the amount of VAT shown on the return as payable … in respect of that period ” a taxable person “shall be regarded … as being in default in respect of that period.”

5.     Where such a person is in default and has, like the Company in the present case, been served a ‘surcharge liability notice’ that person “shall be liable to a surcharge equal to …the specified percentage of his outstanding VAT for that prescribed accounting period” (s 59(4) VATA).

6.     The ‘specified percentage’ in this case is 5% as it relates to the second default of the Company within the default period, the first being in the period 12/07 (s 59(5)(a) VATA).

7.     However, if a person who would otherwise be liable to surcharge “satisfies … a tribunal that … there is a reasonable excuse for the VAT not having been so despatched,” s 59(7) VATA provides, “he shall not be liable to the surcharge … and shall be treated as not having been in default in respect of the accounting period in question (and, accordingly, any surcharge liability notice the service of which depended upon that default shall be deemed not to have been served).

8.     Section 71(1)(a) VATA provides that “an insufficiency of funds to pay any VAT due is not a reasonable excuse”. However, in the light of the decision of the Court of Appeal in Customs and Excise Commissioners v Steptoe [1992] STC 757, it is necessary to consider the underlying causes of the insufficiency of funds to determine whether there is a reasonable excuse for the default.    

Contentions of the Parties

9.     Mr Ingham and Miss Roderick, for the Company, relied on the decline in the Company’s business as a result of the recession which was unexpected and unforeseen, the loss of a major customer, the effect that redundancies had on the business lowering staff morale and diverting attention from seeking new customers, the early payment of salaries before the Christmas 2008 shutdown, the late payment by customers and the necessity of the Company to pay its suppliers on time to remain in business.  They argued that all of these factors caused the insufficiency of funds and, when considered together, amounted to a reasonable excuse for the failure of the Company to pay its VAT on time.

10.  Mr Chambers, for HMRC, referred us to the following passage from the judgement of Scott LJ in Customs and Excise Commissioners v Steptoe (at 765):

It is the statutory duty of traders to make value added tax returns and pay value added tax on time. They are not relieved of that duty by the unprofitable or barely unprofitable nature of their businesses. If the conditions of business produce cash flow problems it is their duty none the less to make financial arrangements that will enable their value added tax to be paid in time. Absent some ‘unforeseeable or inescapable’ event cash flow problems are, in my opinion, barred by s [71(1)(a)] from constituting a ‘reasonable excuse’. 

11.  He contended that the matters relied upon by the Company were neither unforeseeable or inescapable and financial arrangements should have been made to make the payment on time especially as the Company had previously been within the default regime.

12.  Mr Chambers also pointed out that the VAT element of the Company’s receipts in January 2009 exceeded its VAT liability and it should therefore have had sufficient funds to make payment and distinguished Steptoe from the present appeal in that the debtors in that case amounted to 95% of turnover whereas in this case the debtors of £178,000 was 15% of the Company’s turnover.

Discussion and Conclusion

13.  It should be noted that Scott LJ gave the dissenting judgment in Steptoe and his view that the underlying cause of the insufficiency of funds must be an ‘unforeseeable or inescapable’ event was considered by Lord Donaldson MR (at 770) as “being too narrow in that (a) it gives insufficient weight to the concept of reasonableness and (b) it treats ‘foreseeability’ as relevant in its own right.”

14.  The task of the Tribunal in applying the approach of the majority of the Court of Appeal in Steptoe was helpfully set out by the President of the Tax Chamber, Sir Stephen Oliver QC, in Stephen Mutch v HMRC (Trans 09/14 unreported) where he said [4]:

To decide whether a reasonable excuse exists, when insufficiency of funds causes the failure [or as in this case the default], the Tribunal should take for comparison a person in a similar situation to that of the actual taxpayer 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 and of due diligence and a proper regard for the fact that the tax would become payable on the particular dates, those factors would not have avoided the insufficiency of funds which led to the failures. That was the approach taken by the court of appeal in a VAT context where the taxpayer, on account of insufficient funds, had failed to make periodic payments of tax. See C and EC v Salevon [1989] STC 907 per Nolan LJ and C and EC v Steptoe [1992] STC 757 at 770 per Donaldson MR.

15.  Having considered the Company’s circumstances in the light of our findings of fact we find that that the underlying cause of the default was a combination of the loss of a major client, the effect of the redundancies and the late payment by the Company’s customers as a result of the current recession coupled with the necessity for prompt payment of its suppliers.

16.  In deciding whether these reasons amount to a reasonable excuse we must consider what the reasonable competent businessman (taken for comparison purposes) exercising due diligence and a proper regard to his tax obligations, who must be taken to have exercised reasonable foresight, would have done in a similar situation.

17.  We are of the view that such a businessman, in circumstances similar to that of the Company, would not have avoided the insufficiency of funds that led to the default.

18.  As such we find that the Company had a reasonable excuse for the late payment of its VAT and allow its appeal.

19.  The Respondents have a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules.   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 Brooks

TRIBUNAL JUDGE

RELEASE DATE: 16 November 2009