First-tier Tribunal (Tax)

[2010] UKFTT 438 (TC)

TC00703

Appeal number: TC/2010/01351

FIRST-TIER TRIBUNAL

TAX

-and-

Sitting in public in Bristol on 16 July 2010

Mr Terry Skinner and Mrs Julie Skinner, partners in the Appellant

Mr Darren Bradley, Higher Officer, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.                This is an appeal against a VAT default surcharge (and associated surcharge liability notice extension) imposed on the Appellant partnership (“TGS”) by a Notice of Assessment of Surcharge and Surcharge Liability Notice Extension dated 12 June 2009 (“the Notice”).

2.                After previous defaults (which were not disputed), TGS were late in paying their VAT liability of £10,440.49 as shown on their VAT return for the VAT accounting period ended 30 April 2009 and, as a result of those previous defaults, a default surcharge at the rate of 15% of the VAT paid late was imposed by the Respondents (“HMRC”).  The VAT was due to be paid by 31 May 2009 and it was paid in two instalments, one of £5,000 on 26 June 2009 and one of £5,440.49 on 30 July 2009.  TGS’s VAT return had been submitted on time.

3.                The Notice advised TGS that a default surcharge of £1,566.07 had been imposed, and warned that any further default in respect of a VAT accounting period ending up to 30 April 2010 would give rise to a further default surcharge at the 15% rate.

4.                TGS appealed against the Notice.  They claimed first that Ms Skinner had contacted HMRC before the due date for payment of the VAT and agreed a “time to pay” arrangement which had been honoured.  We found however that any conversation between Ms Skinner and HMRC took place after the due date for payment of the VAT and therefore could not be relied on to cancel the Notice under HMRC’s published “time to pay” policy.

5.                TGS also claimed they were unable to pay the VAT on the due date because they simply did not have the money to do so.  TGS were in the building trade and over the previous two years many of their customers (contractors for whom they worked) were arbitrarily withholding, reducing and delaying payments that were due to TGS.

6.                At the hearing, more specific detail was provided of the particular difficulties suffered by TGS around the end of May 2009 (the due date for payment of the relevant VAT).  Whilst we considered that the general problems previously identified by TGS in obtaining payment had become part of the normal hazards of their trade over the preceding two years, Mr & Ms Skinner gave more detailed evidence at the hearing as to a particular problem which arose unexpectedly at the relevant time.  We found them to be serious and responsible business people who were diligent in their dealings with HMRC, maintaining regular communication and trying their best to plan for and satisfy their liabilities while coping with an extremely difficult trading environment.  We had no hesitation in accepting their evidence as to the events underlying the problems they experienced in May 2009.

7.                TGS had a bank overdraft at the time of £25,000.  They were regularly exceeding their overdraft limit.  All payments made to their bank account were swallowed up in reducing the overdraft.  The bank instructed them not to issue a payment to HMRC in respect of the VAT without the necessary funds being in the account. 

8.                TGS had a longstanding customer called Midas who owed them approximately £47,000 for a job which had been completed some time ago.  This was a very large amount in the context of TGS’s business and was well overdue for payment.  Mr Skinner had been chasing payment of this debt vigorously and had finally met with the local director of Midas on Wednesday 27 May 2009 and obtained his specific assurance that the debt would be paid in full so that it was received in TGS’s bank account by Friday 29 May 2009.  Previous commitments of this nature from Midas had been made and honoured, so TGS had good reason to believe the money would be received.  There was no dispute by Midas that the money was due and owing, they were simply withholding payment either through lack of funds or through cautious management of their own cash against the overall background of the recession in the building sector.

9.                Ms Skinner kept an active eye on TGS’s bank account online during Friday 29 May, with a view to paying HMRC the outstanding VAT by same day transfer as soon as the money was received from Midas.  However, the money never did arrive – indeed it had still not arrived at the date of the hearing and legal proceedings had been commenced to recover it.

10.            This meant that TGS were simply unable to pay HMRC on the due date.

11.            Under the applicable legislation (s 59 Value Added Tax Act 1994 (“VATA”)) there was no dispute that the Notice was properly issued unless the provisions of subs 59(7) VATA apply.  S 59(7) reads as follows:

“(7)  If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above satisfies the Commissioners or, on appeal, a tribunal that, in the case of a default which is material to the surcharge –

(a) the return or, as the case may be, the VAT shown on the return was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit, or

(b) there is a reasonable excuse for the return or VAT not having been so despatched,

he shall not be liable to the surcharge and for the purposes of the preceding provisions of this section he shall be treated as not having been in default in respect of the prescribed 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).”

12.            S 71(1)(a) VATA provides that “an insufficiency of funds to pay any VAT due is not a reasonable excuse”.  However, the case of C&E Commissioners v Steptoe [1992] STC 757 makes it clear that the underlying cause of such an insufficiency of funds might, of itself, give rise to a reasonable excuse within s 71(1)(a).

13.            In the particular circumstances of this case, we are satisfied that TGS’s inability to pay their VAT on time was directly caused by Midas’s failure to pay its outstanding debt due to TGS.  We further find TGS could not have avoided the insufficiency of funds leading to their default by the exercise of reasonable foresight and due diligence, having proper regard for the due payment date of the relevant amount of VAT.  Accordingly we find that TGS had a reasonable excuse for the late payment of their VAT due on 31 May 2009 in respect of their VAT accounting period ended 30 April 2009.  The appeal is therefore allowed and the Notice (including the default surcharge comprised in it) must be set aside.

14.            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.

TRIBUNAL JUDGE

RELEASE DATE: 16 September 2010