First-tier Tribunal (Tax)

[2009] UKFTT 307 (TC)

                                                                                             TC00251

  Appeal Number: TC/2009/10244

VAT - default surcharge – insufficiency of funds not a reasonable excuse- Customs and Excise Commissioners v Steptoe (1992) considered – insufficiency of funds alleged to have been caused by Appellant awaiting funds from creditor - whether reasonable excuse principles satisfied.

FIRST-TIER TRIBUNAL

TAX

                                    YSL VIDEO WALL HIRE LTD                   Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)         Respondents

TRIBUNAL:              Michael Connell (Judge)

                                    Robert Ackroyd (Member)

Sitting in public in Leeds on 1 October 2009

Mr Paskauskas director of the Appellant company in person

Mr Richard Mansell on behalf of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1. YSL Video Wall Hire Ltd (the Appellant) appealed against a default surcharge of £1,185.80 imposed because VAT payable by them was not received by the VAT Central Unit by the due date.

The Law

2. The principle relevant legislation is:

• The Value Added Tax Act 1994 ss.59 and 71;
• HMRC Notice 700/50
• VAT Regulations 1995, Regulation 25 and Regulation 40(2)
• Customs & Excise Commissioners v Steptoe [1992] STC757, CA

3. A ‘default’ occurs if a taxable person submits a late VAT Return and/or makes late payment of VAT.  In such circumstances HMRC customarily issue a Surcharge Liability Notice specifying a surcharge period running for 12 months from the end of the tax period concerned.  If a further default is made within this period then:

• the surcharge period is extended to the first anniversary of the tax period to which the new default relates; and

• if the new default has resulted in any VAT not being paid on time, a default surcharge will be levied, calculated as the greater of £30.00 and a percentage of the tax paid late.  The surcharge percentage is 2% of the first default within the surcharge period, 5% for the second default, 10% for the third default and 15% for the fourth and any subsequent default

4. S.59 VAT A 1994 provides that a person is not liable to a default surcharge if there is a reasonable excuse for late payment of VAT.

5. VAT A 1994 s.71(1)(a) provides that an insufficiency of funds to pay any VAT due is not a reasonable excuse.

6. VAT Returns are due under Regulation 25 of the VAT Regulations 1995 by the end of the month following the accounting period.  By Regulation 40(2), payment is due when the Return is due.

The Facts

7. A default arose in respect of the VAT period 01.10.07-31.12.07.  The Appellant’s VAT Return and assessed tax was due and payable by 31.01.08.  The VAT Return was not delivered until 07.02.08 and VAT was not paid in full until 09.05.08.  A VAT Surcharge Liability Notice (VAT 160) was issued on 15.02.08.  The Notice advised the Appellant that the company would be liable to a surcharge if there was a new default in respect of a prescribed accounting period ending within the surcharge period, which ran from the date of the Notice for a 12-month period – ie to 15.02.09.

8. The Appellant company was again in default with regard to a late Return and payment of assessed tax in respect of the period 01.01.08 – 31.03.08 due on 30.04.08.  Although the VAT Return was received by HMRC on 22.04.08, the VAT was not paid until 09.07.08.  V.161 was issued which confirmed that the Appellant company would not be surcharged on that occasion but that the surcharge liability period would be extended to 31.03.09.  The Notice extension said that, if the company defaulted again in respect of a prescribed accounting period ending within that surcharge period, the period would be further extended and the company would be liable to a surcharge assessment calculated at the rate of 5%.

9. The Appellant company again defaulted in respect of the VAT quarter 01.10.08 – 31.12.08, in respect of which the VAT Return and assessed tax was payable by 31.01.09.  Although the VAT Return was delivered by 31.01.09, VAT was not paid until 27.02.09.

10. A surcharge document V.162 was issued on 13.02.09 giving notice of assessment of a surcharge and a surcharge liability extension.  The surcharge was calculated at 5% of the tax outstanding at the due date (£23,716.09) and advised that the surcharge period previously notified to the company was to be extended until 31.12.09.

11. The Appellant asked HMRC to waive the surcharge.  Mr Paskauskas, a director of the company, explained that the company had suffered a substantial drop in income and that the company’s turnover was ‘not even enough to cover … wages’.  He also explained that two of the company’s creditors had gone bankrupt and others were experiencing cash flow issues of their own.  He had done what he could on behalf of the company, including using his own personal credit cards, and emphasised that prompt payment of VAT was always the company’s first priority.  Mr Paskauskas explained that he was only prevented from paying VAT on time because of the ‘current recession’ and said that payment of VAT on time was totally out of the company’s control.  There followed an exchange of correspondence between the Appellant company and HMRC.  After reviewing the circumstances relating to the imposition of the surcharge, HMRC concluded that there had been no reasonable excuse for the company failing to pay its VAT on time.

12. The Appellant disagreed with HMRC’s decision and lodged notice of appeal with the Tribunal Service.  The grounds of the appeal were that it was unnecessary for HMRC to apply the surcharge after the company had paid the VAT due for the relevant period and that the ‘small delay in remitting payment of VAT’ was caused by two of the company’s creditors going into administration and other cash flow problems.  Mr Paskauskas said that one of the major creditors was in fact awaiting a repayment of tax from HMRC and, had they received such payment in time, the company would have been able to settle its liabilities to the Appellant company, which could then have paid its VAT promptly.

13. At the hearing Mr Paskauskas gave evidence to the Tribunal and largely reiterated the grounds of appeal notified in the company’s notice of appeal.

14. Mr Richard Mansell, presenting officer on behalf of HMRC, referred to s.71 (1)(a) VATA 1994 which specifically states that an insufficiency of funds to pay any VAT due is not a reasonable excuse.  Mr Mansell said that, although it is established case law in VAT that a shortage of funds per se cannot be a reasonable excuse, the reason for the shortage of funds can nevertheless in certain circumstances be a reasonable excuse – Customs & Excise Commissioners v Steptoe 1992 STC757, CA.  The reason for the insufficiency of funds may be a reasonable excuse ‘if the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency’.  Mr Mansell said however that, in his view, the principles and basis upon there may be a reasonable excuse (as set out in Steptoe) did not assist the Appellant in this case.

15. Mr Paskauskas produced in evidence a letter from one of the company’s creditors, The Picture Works Ltd (PW Co).  The letter explained that PW Co was awaiting a large refund (around £50,000.00) of VAT.  PW Co had made a large capital purchase in June 2008 but did not recover the VAT until April 2009.  The letter said that, had PW Co received the VAT refund on time, it would have been able to pay the Appellant company around £20,000.00.  It appears that, due to other complications (the company being investigated by HMRC and in addition HMRC changing the company’s accounting period from monthly to quarterly), delayed the VAT repayment.

16. Mr Mansell on behalf of HMRC said that the connection was too remote.  He was not aware of the background details in connection with PW Co but said there would have had to be an unqualified assurance from HMRC that the refund was to be made on a particular date and this fact notified to the Appellant company if any reliance was to be placed upon that by the Appellant company.  This had not occurred and therefore the grounds therefore did not fall within the ‘reasonable excuse’ principles set out in the Steptoe case.

Decision

17. The Tribunal considered the reasons giving rise to the late payment of VAT and concluded that the circumstances were not sufficient to amount to a reasonable excuse.  There was no evidence that the amount owed by PW Co to the Appellant company as a percentage of the Appellant company’s turnover was significantly large or that failure by PW Co to settle its liabilities promptly was not entirely unexpected.  Furthermore, there was also no evidence that reliance on promises of payment by PW Co, as opposed to a general cash flow shortage, was the reason for the default.

18. The Appellant company’s appeal is dismissed and the default surcharge of £1,185.80 confirmed.

19. The Appellant has 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.

TRIBUNAL JUDGE

                            RELEASE DATE 16 November 2009