First-tier Tribunal (Tax)

[2010] UKFTT 446 (TC)

TC00711

Appeal number: TC/2010/03137

Five default surcharges – insufficiency of funds following Foot and Mouth outbreak – Reliance on incorrect advice from HMRC – Whether reasonable excuse – Yes in respect of four default surcharges – appeal allowed in part

FIRST-TIER TRIBUNAL

TAX

GILDERS TRANSPORT LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JOHN BROOKS (TRIBUNAL JUDGE)

PAUL ADAMS FCA (MEMBER)

Sitting in public at Vintry House, Wine Street, Bristol on 11 August 2010

Anthony Middleton of Ormerod Rutter Chartered Accountants for the Appellant

Darren Bradley of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       Gilders Transport Limited (“Gilders”) appeals against the default surcharges detailed below issued in respect of the late payment of VAT:

(1)   a surcharge of £1,144,67 calculated at 2% of the VAT outstanding at the due date which was issued on 16 May 2008 in respect of the period ended 31 March 2008;

(2)   a surcharge of £4,865.92 calculated at 5% of the VAT outstanding at the due date which was issued on 14 November 2008 in respect of the period ended 30 September 2008;

(3)   a surcharge of £6,440.03 calculated at 10% of the VAT outstanding at the due date which was issued on 15 May 2009 in respect of the period ended 31  March 2009;

(4)   a surcharge of £7,518.99 calculated at 15% of the VAT outstanding at the due date which was issued on 14 August 2009 in respect of the period ended 30 June 2009; and

(5)   a surcharge of £10,088.53 calculated at 15% of the VAT outstanding at the due date which was issued on 13 November 2009 in respect of the period ended 30 September 2009.

Facts

2.       Having heard oral evidence on behalf of Gilders from its director Mr Gordon Gilder and Mr Graham Kear its management accountant and considered the information contained in the documents provided by the parties we make the following findings of fact.

3.       Gilders is a family company whose primary business is the transportation of livestock but which also includes the export of English meat to Europe in its fleet of refrigerated vehicles.

4.       In August 2007, following an outbreak of Foot and Mouth Disease in the South East of England, Mr Gilder received a telephone call from the Department for Environment Food and Rural Affairs (“DEFRA”) requesting Gilders assistance with the slaughter and removal of animal carcasses from farms within the infected area. Movement restrictions, placed on all animals susceptible to Foot and Mouth Disease and the prohibition of the export of meat to Europe, both of which continued until 31 December 2007, meant that the rest of Gilders business came to an immediate halt with vehicles standing idle.

5.       Although turnover remained high as a result of the DEFRA work Gilders cash flow suffered as DEFRA, seemingly in response to criticism it received following the 2001 Foot and Mouth outbreak, did not make any payment for the services provided until absolutely satisfied it was due.

6.       Before payment was authorised forensic accountants employed by DEFRA examined every invoice submitted and required Gilders to provide details of such matters as the movement of every animal, who gave the orders for its slaughter and which vet had been in attendance. Indeed so thorough was the examination, by the forensic accountants, of the work done for DEFRA by Gilders that an additional £2,000 over and above the sum invoiced was found. As a result although Gilders had only worked from DEFRA from the outbreak of Foot and Mouth in August 2007 it had to wait for payment until February 2008 when it received £176,000 from DEFRA and a further three months before receiving a further £201,791 in May 2008.

7.       These delayed payments by DEFRA created a severe strain on Gilders cash flow and it was for this reason that it found itself unable to meet its VAT payment of £104,183.91 for the period ended 31 December 2007 which was due on 31 January 2008. Even though Gilders had agreed a time to pay arrangement with HM Revenue and Customs (“HMRC”) the late settlement of its VAT liability took it into the default surcharge regime. The ‘Surcharge Liability Notice’ sent to Gilders on 29 February 2008 contained the following warning:

IF YOU EXPECT TO HAVE DIFFICULTIES CONTACT EITHER YOUR LOCAL CUSTOMS AND EXCISE DEBT MANAGEMENT UNIT OR ADVICE OFFICE FOR VAT AS SOON AS POSSIBLE. AN AGREEMENT WITH YOUR LOCAL DEBT MANAGEMENT UNIT TO DEFER PAYMENT DOES NOT PREVENT YOU BEING SURCHARGED FOR DEFAULTING. (emphasis added)

8.       When it became apparent that it was unable to meet its payment of £114,467.96 due on 30 April 2008 in respect of the VAT period to 31 March 2008 Gilders contacted HMRC by telephone with a request for more time to pay. This was followed up by a letter dated 30 April 2008 stating:

As per telephone conversation, please find cheque for half of vat owed £57,233.98. the second half will be sent on 11 June 2008.

9.       Although the VAT Return was not actually received by HMRC until 2 May 2008 it is clear from the subsequent Default Surcharge Notice, issued on 16 May 2008, that it, and the payment of £57,233.98, was treated as having been received on time as the penalty of £1,144.67 is calculated at 2% of £57,233.98 the amount outstanding at that time which was sent to HMRC, as stated in the letter, on 11 June 2008.

10.    On 31 October 2008 Gilders wrote to HMRC enclosing its VAT return for the period ending 30 September 2008 showing £157,318.83 as being due together with a cheque for £60,000 and offering to make further payments of £48,695.26 on 30 November 2008 and the balance of £48,659.26 on 31 December 2008. As they had previously HMRC treated the return and the payment of £60,000 as having been received on time and, as can be seen from the Default Surcharge Notice issued on 14 November 2008, calculated the surcharge at 5% of £97,318.83 (i.e. £157,318.83 less £60,000).

11.    Gilders found itself in a similar position in the period to 31 December 2008 and wrote to HMRC on 31 January 2009 offering to meet its liability of £159,026.09 in three instalments, £60,000 enclosed with the letter and further payments of 49,513.04 to be made on 28 February 2009 and 31 March 2009. On receiving a further Default Surcharge Notice Mr Gilder telephoned HMRC’s enquiry centre on 27 February 2009 and, according to the HMRC officer’s ‘Notepad Text/Enquiry Notes’ was advised that the surcharge for 12/08 will be removed if Gilders meets with the terms of the time to pay arrangement. Gilders did keep to those terms and the surcharge was removed. However, it was not told that the advice it had received was incorrect and should not have been given.

12.    As its financial position had not improved Gilders wrote to HMRC on 30 April 2009, the date on which its VAT return for the period ended 31 March 2009 was due. The return, showing VAT due of £104,400.34 was enclosed with the letter along with a cheque for £40,000 and an offer to pay the outstanding balance in two instalments of £32,200.17 on 31 May and 30 June 2009. HMRC treated the VAT return and £40,000 as having been received on time and issued a Default Surcharge Notice on 15 May 2009 calculating the surcharge at 10% of £64,400.34.

13.    A similar situation arose in the next VAT period, to 30 June 2009, in which the VAT liability was £80,126.66. Again Gilders sent a letter on the date that the return and payment were due (31 July 2009) enclosing a cheque for £30,000 and offering to pay the balance in two further instalments of £25,063.33 at the end of August and September 2009. The return and £30,000 were treated by HMRC as having been received on time and calculated the surcharge at 15% of the outstanding balance.

14.    On 31 October 2009, when its VAT return for the period to 30 September 2009 was due, Gilders wrote to HMRC enclosing its return, a cheque for £50,000 and an offer to pay the balance of its £117,256.90 liability in two instalments of £33,628.45 on 30 November and 31 December 2009. Once again HMRC treated the return and £50,000 as having been received on time and issued a Default Surcharge Notice on 13 November 2009 at 15% of £67,256.90 the outstanding balance.

Law

15.    Section 59(1) of the 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.”  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) which, as in the present case, increases with each default from 2% to 5% then 10% and finally 15%. (s. 59(5)(a)-(d) VATA).

16.    If the Tribunal is satisfied that Gilders have a reasonable excuse for a return or VAT not having been despatched within the appropriate time limit, s. 59(7)(b) VATA provides that, it “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).”

17.    Section 71(1)(a) VATA provides that “an insufficiency of funds to pay any VAT due is not a reasonable excuse”. However, 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.

18.    Therefore the issue before us is whether Gilders had reasonable excuse for each of the periods in which there was a late payment of VAT.

Submissions

19.    Mr Middleton, for Gilders, submitted that it had reasonable excuse in respect of all the defaults as in each case there had been a time to pay arrangement in force. He also referred to the advice from HMRC in the telephone call on 27 February 2009 that the surcharge for the period ended December 2008 would be removed if Gilders complied with the agreement and contended that as the surcharge was removed for that period it was reasonable Gilders to follow the same procedure in the absence of any warning that this was incorrect and as such it had a reasonable excuse for subsequent defaults.

20.    For HMRC, Mr Bradley contended that although it was accepted that there were time to pay arrangements these were not entered into before the default occurred and as is clear from the warning on the Default Notice (to which we have referred in paragraph 7, above) such an agreement was not in itself enough to prevent a surcharge from arising. He explained that he was somewhat taken by surprise by the evidence relating to Foot and Mouth and the difficulties suffered as a result as this had only become apparent when he, like the Tribunal, was provided with documents on behalf of Gilders immediately before the hearing.

21.    With regard to the withdrawal of the default surcharge for the period to December 2008 Mr Bradley accepted that Mr Gilder had been advised that the surcharge would be withdrawn if the time to pay arrangement was adhered to but submitted that the advice given was incorrect and although the surcharge as been withdrawn as a result of the wrong advice for that period as no such advice had been given in respect of the other surcharges they should be upheld.

Conclusions

22.    We have adopted the same approach as HMRC to the calculation of the surcharges and have treated the returns and payment sent with them as having been received on time with only the balance outstanding, after taking account the initial payment, as being the amount of VAT in default.

23.    Having carefully considered the evidence and the submissions made on behalf of the parties in relation to each of the surcharges we find as follows:

(1)   The default for the period ended 31 March 2008 arose as a result of an insufficiency of funds the underlying cause of which was the late payment by DEFRA for the work carried out by Gilders in relation to the 2007 Foot and Mouth outbreak. We therefore find that Gilders had a reasonable excuse and its appeal against the default surcharge for this period succeeds.

(2)   With regard to the default for the period ended 30 September 2008, Gilders had been paid £176,000 by DEFRA in February 2008 and a further £202,791 in May 2008. Although it still may have faced cash flow difficulties we do not find that the underlying cause can be solely attributed to the Foot and Mouth outbreak. Also, given that there is a warning on the Default Notice that an agreement to defer payment does not prevent the imposition of a surcharge, we do not consider that Gilders has a reasonable excuse and the appeal against the default surcharge for this period fails.

(3)   With regard to the default surcharges for the periods ended 31 March 2009, 30 June 2009 and 30 September 2009 we find that in view of the incorrect advice given to Mr Gilder in the telephone call of 27 February 2009, in which he was told that if Gilders adhered to the time to pay arrangement for the period ended 31 December 2008 the surcharge would be withdrawn, and in the light of that surcharge having been withdrawn, and in the absence of being informed that the advice was incorrect it was reasonable for Gilders to continue offer to meet its VAT liability for these periods in instalments and in doing so it has a reasonable excuse for the late payments. We therefore allow the appeals against the default surcharges for these periods.

24.    The effect of our decision is that the default for the period to 30 September 2008 is the first default and as such the “specified percentage” is 2% not 5% (s. 59 (5) VATA). As £60,000 of the VAT liability of £157,318.33 for this period has been treated by HMRC as having been received on time the default surcharge should therefore be calculated at 2% of £97,318.33 which is £1,946.36. 

25.    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: 22 September 2010