First-tier Tribunal (Tax)

[2010] UKFTT 220 (TC)

TC00521

Appeal number: LON/2009/0079

VAT – Default surcharge – Reasonable excuse – Effect of reasonable excuse for earlier default on surcharge under appeal – Aardvark Excavations Ltd [2007] UKVAT V20468 applied – Appeal allowed in part – Section 59 VAT Act 1994

FIRST-TIER TRIBUNAL

TAX

                                     R P GRIFFIN & D M GRIFFIN                  Appellants

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

                        TRIBUNAL: JOHN BROOKS (TRIBUNAL JUDGE)

                                                MICHAEL JAMES (MEMBER)                                                                                                    

Sitting in public at Vintry House, Bristol on 23 April 2010

R P Griffin for the Appellants

J Holl of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This is an appeal, by Mr R P and Mrs D M Griffin, against a default surcharge issued under s. 59 VAT Act 1994 (“VATA”) on 17 October 2008 in the sum of £665.62 for the accounting period ending 31 August 2008 (“08/08”) as the return and payment of the VAT which should have been received by HM Revenue and Customs (“HMRC”) on 30 September 2008 was, in fact, received by them on 7 October 2008.

2.       As Mr and Mrs Griffin have defaulted in previous accounting periods, where the rate of the surcharge would have been 2% and 5%, this default gave rise to a surcharge at the rate of 10%. However, as HMRC do not issue a penalty at a lower rate if the amount is less than £400, this was the first occasion on which they have been subject to a surcharge as opposed to a surcharge liability extension notice.

3.       If the Tribunal is satisfied that Mr and Mrs Griffin have a reasonable excuse for the return or VAT not having been despatched within the appropriate time limit, s. 59(7)(b) VATA provides that, they “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).”

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

5.       Mr Griffin told us how he and Mrs Griffin run the “Lamb & Lark”, a small country public house in Limington, Somerset, which they acquired in February 2006 with the assistance of financing and a substantial mortgage on their home arranged through the Yorkshire Bank. This included a £25,000 overdraft facility which they fully utilised from “day one” of running the pub business as trading conditions were difficult and not helped by the smoking ban and down turn in the economy.

6.       They had thought their position would improve when they sold their home, in May 2008, and repaid two thirds of the outstanding mortgage but the Yorkshire Bank did not reduce their monthly mortgage repayments of £3,680 despite the reduction in the debt. Also, about this time, following the appointment of new bank manager, their overdraft facility was removed leaving Mr and Mrs Griffin with £17,000 of “unauthorised borrowing” which was repaid by the sale of a cottage. However, since changing banks it would seem that these difficulties have been somewhat alleviated

7.       With regard to the 08/08 return, Mr Griffin accepts that it was not dispatched by the due date and that the VAT was paid late but explained that this was due to the financial pressure caused as a result of the difficulties experienced with the Yorkshire Bank, the pressure of work and the responsibility of running the business.

8.       He said that they did not want to pay the VAT unless it was certain that the cheque would clear and that they “didn’t send a cheque until there were sufficient funds in the bank to cover it” and told us how, when there were insufficient funds to pay the VAT liability for the period to 29 February 2008 (“02/08”), they had entered into and fully complied with the terms of a ‘Time to Pay’ arrangement with the Debt Management Unit of HMRC.

9.       Mr Holl, for HMRC, contended that despite their financial difficulties Mr and Mrs Griffin did not have a reasonable excuse for the late submission of the 08/08 return and late payment of the VAT.

10.    He submitted that they could not rely on an insufficiency of funds as a reasonable excuse as they operated a cash business and were therefore in an advantageous position having already received the VAT from their customers. In support of his argument we were referred to the following passage of the judgment of Nolan LJ (as he then was) in Steptoe where he said, at [768]:

“If I may quote again from my judgment in Salevon [1989] STC 907 (at 911)—

'... the cases in which a trader with insufficient funds to pay the tax can successfully invoke the defence of “reasonable excuse” must be rare. That is because the scheme of collection which I have outlined involves at the outset the trader receiving (or at least being entitled to receive) from his customers the amount of tax which he must subsequently pay over to the commissioners. There is nothing in law to prevent him from mixing this money with the rest of the funds of his business and using it for normal business expenses (including the payment of input tax), and no doubt he has every commercial incentive to do so. The tax which he has collected represents, in substance, an interest-free loan from the commissioners. But by using it in his business he puts it at risk. If by doing so he loses it, and so cannot hand it over to the commissioners when the date of payment arrives, he will normally be hard put to it to invoke [s. 59(7)(b)]. In other words he will be hard put to it to persuade the commissioners or the tribunal that he had a reasonable excuse for venturing and thus losing money destined for the Exchequer of which he was the temporary custodian.'

11.    We accept Mr Holl’s submission and find that Mr and Mrs Griffin did not have a reasonable excuse for the late submission of the 08/08 return and the late payment of VAT for that period.

12.    However, we consider that by entering into and fully complying with a Time to Pay agreement Mr and Mrs Griffin had a reasonable excuse that would have enabled them to have successfully appealed against a liability to a surcharge arising as a result of the late submission of the 02/08 return and late payment of VAT for that period.

13.    The effect of a reasonable excuse for an earlier period for which no appeal was made on the amount of a surcharge under appeal and whether s. 59(7) and (8) VATA prevents a tribunal from considering defaults other than the one directly occasioning the surcharge under appeal or one within s. 59(8)(b) VATA as regards the appealed surcharge was considered by the VAT and Duties Tribunal (Chairman Charles Hellier) in Aardvark Excavations Ltd v HMRC [2007] UKVAT V20468 (“Aardvark”) which concluded at [58] that:

“the tribunal is entitled to have regard in the application of section 59(7) to a prima facie default other than that directly giving rise to the surcharge under appeal for the purpose of determining whether such a default whose existence may affect the amount or existence of the default under appeal, may be ignored.” 

14.    Mr Holl explained that, although there had not been an appeal, HMRC regarded the decision of the Tribunal in Aardvark as misconceived and submitted that it should not be followed in the present case.

15.    However, given the careful, detailed and thorough consideration of the relevant legislation in Aardvark (at [32–58]), we accept the “wider approach” to the construction of s. 59 VATA and agree with the conclusion of the Tribunal.

16.    As such we consider that Aardvark should be applied in the present appeal.

17.    Having found that, by entering into and complying with a Time to Pay arrangement agreed with the Debt Management Unit of HMRC, Mr and Mrs Griffin had a reasonable excuse for the late submission of the 02/08 return and late payment of VAT the effect is that because they had a reasonable excuse for the 02/08 default the 08/08 default is to be computed as if the 02/08 default had never happened. Accordingly the rate for the 08/08 default is 5% and not 10%.

18.    We therefore allow the appeal to the extent that the surcharge for the period 08/08 be reduced from £665.62 to £332.81.

19.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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: 13 May 2010