First-tier Tribunal (Tax)

[2011] UKFTT 296 (TC)

TC01158

Appeal number: TC/2010/09204

VAT surcharge – returns and VAT payments late – whether cash flow problems constituted reasonable excuse – no – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

E & P PAINTING CONTRACTORS LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: MICHAEL S CONNELL (TRIBUNAL JUDGE)

Sitting in public at Cunard Building, Liverpool, L3 1TS on 7^th February 2011

Mr A Ellis, Managing Director, and Louise Midghall, Company Secretary, of the Appellant Company for the Appellant

Mr A J O’Grady, Higher Officer of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1. This is an appeal by the Appellant against two surcharge liability notice extensions, and accompanying assessments of surcharge, firstly for the period 11/09 relating to a surcharge of £7,935.93 and secondly for the period 05/10 relating to a surcharge of £27,734.78.

2. The Appellant is a painting contractor incorporated on 21 August 2006 and having been registered for VAT purposes since 24 August 2006.

3. The Appellant defaulted on five separate occasions, on each occasion filing its VAT return late, and making payment of VAT late. This appeal only relates to the third and fifth defaults.

4. The first default which brought the Appellant into the default surcharge system occurred for the quarterly period ended 05/09. The return and the payment for this period fell due on 30 June 2009. However the return was not received until 25 July 2009. The tax was paid by instalments and finally cleared in November 2009.

5. A surcharge liability notice was issued on 17 July 2009. The surcharge liability period commenced on that date and was due to end on 31 May 2010.

6. The second default occurred for the quarterly period ended 08/09. The return and tax fell due on 30 September 2009. However the return was not received by HMRC until 10 October 2009. Again the tax was paid by instalments and was not finally cleared until 18 December 2009. As a result a surcharge liability extension notice was issued extending the surcharge period to 31 August 2010 and a surcharge of 2% of the tax due amounting to £433.43 was imposed.

7. The third default occurred for the quarterly period ended 11/09. The return and the payment for this period fell due on 31 December 2009. On 15 January 2010 in the absence of a return and any payment, a surcharge liability notice extension was issued to the Appellant. Tax was estimated in the sum of £96,049 and a 5% surcharge was imposed in the sum of £4,802.45. The return was finally received by HMRC on 20 July 2010. The surcharge liability period was extended until 30 November 2010. Again, the tax was paid in instalments, the final payment being made in May 2010. When the return was filed it showed that tax was due in the sum of £158,718.89, a sum considerably in excess of that which had been estimated. In consequence, an additional surcharge arose amounting to £3,133.48. The total surcharge was therefore £7,935.93.

8. The fourth default occurred for the quarterly period ended 02/10. The return and the payment for this period fell due on 31 March 2010. In the absence of a return and any payments, tax was estimated in the sum of £90,242 and a 10% surcharge was imposed in the sum of £8,543.95. There appears to have been an under-charge of £480.25 but HMRC could not explain why this was so. The return was finally received on 27 April 2010 showing tax due in the sum of £139,426.05 which resulted in the issue of a supplementary surcharge of £4,918.41, bringing the total surcharge to £13,462.36. Again the surcharge appears to have been under calculated by £480.25, but HMRC could not explain this.

9. The fifth default occurred for the quarterly period ended 05/10. The return and tax for this period fell due on 30 June 2010. The return was finally received by HMRC on 9 July 2010 showing tax due in the sum of £217,398.57. A payment of £32,500 had been made by the Appellant on 21 June 2010 and had been intended to be set against the tax due for the period 11/09. However the payment was misallocated to the 05/10 period which left tax due of £184,898.57. A surcharge of 15% was issued, amounting to £27,734.78.

10. No surcharge was levied in respect of the first default and the Appellant does not appeal the second and fourth default surcharges. The Appellant only appeals the third and fifth default surcharges.

11. The basis of the appeal against the third default surcharge was that the 11/09 return was actually submitted on time. Reference was made to the payment of £32,500 made on 21 June 2010 which, as stated above, was erroneously allocated against the 05/10 return. The effect was that overall, less surcharge was imposed as the surcharge eventually charged in respect of the 05/10 return (at 15%) was reduced because of the misallocated payment. The Appellant also said that it was unaware of non receipt of the return for 6 months. However it must have been clear from the surcharge liability extension notice issued to the Appellant on 15 January 2010 and tax estimated, that the return had not been filed. There was no evidence that the Appellant had contacted HMRC to query the position and notwithstanding any argument concerning the date upon which the 11/09 return was submitted, the fact remained that no payments in respect of that period were made by the due date of 31 December 2009.

12. The basis of the appeal against the fifth default surcharge was that the Appellant had filed its return on time, (which in fact was not the case), that it was suffering from acute cash flow problems and that in consequence it could not pay the tax on time. However no request was made for a time to pay arrangement prior to the due date of 30 June 2010.

13. The Appellant said that the primary reason for the late payments was that Alstom Ltd, one of its major customers represented 76% of the debtor book at the due date and that late payment by the company resulted in a completely unforeseeable shortage of available cash. The Appellant said that it had made every possible effort to remit the monies due to HMRC in a timely manner, to the detriment of other pressures on its cash flow. The Appellant said that it was “aware of case law wherein in the event of a major debtor failing to remit monies due on time, the surcharge can be withdrawn and we request that this precedent be duly considered”.

14. Whilst the Appellant did not identify the case law to which it was referring, the reference appeared to be to the case of Customs and Excise Commissioners v Steptoe 1992 STC 757. The decision in Steptoe may be summarised as follows:-

 Under the relevant statutory provisions, currently s 71(1)(a) VATA 1994, insufficiency of funds does not in itself constitute a reasonable excuse, but the underlying cause of that insufficiency of funds might of itself give rise to a reasonable excuse within s 71(1)(a). That underlying cause of the insufficiency of funds was not restricted to unforeseeable or inescapable events. If the exercise of reasonable foresight and 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 of funds which led to the taxpayers default, then the taxpayer might well have a reasonable excuse for non-payment, but that excuse would be exhausted by the date on which such foresight diligence and regard would have overcome the insufficiency of funds.

15. The Appellant says that the company directors recognised a potential shortfall in cash flow in early 2010 and endeavoured to take steps to avoid the resultant financial difficulties. It applied for a loan of £200,000 which it says would have been readily forthcoming, had it been able to secure, (as a condition of the loan), grant aid facilities of £70,000 from the Northwest Regional Development Agency. Unfortunately due to a subsequent Government moratorium on regional grant aid facilities the loan did not go ahead.

16. The Appellant said that it had also entered into a factoring arrangement with Close Invoice Finance Limited to assist with its cash flow. Under the arrangement initially 86% and thereafter 80% of its invoices were “pre-paid” by Close within 30 days of the invoice date. However the arrangement was subject to a £300,000 limit and although the Appellant received 80% of the value of invoices for completed work, it only received 60% where the customer had been sent a “application for payment” rather than an invoice. Furthermore, under the arrangement, if more than 30% of monies outstanding on its “applications ledger” was from one customer, Close would not fund it, and this had been a difficulty with Alstom Limited, one of its major customers.

17. HMRC did not accept that the late payments by Alstom Limited was the cause of the insufficiency of funds. An analysis of the company's income summary showed that the net income of the company after factoring for the three month period that ended 31 May 2010 came to £1,763,075 and that if one removed that from this figure the amount received by the company after factoring, the sum was £1,500,490. Therefore, according to HMRC over 82% of the company’s outputs from that VAT period had been recovered via the factoring arrangement by 31 May 2010. This was, according to HMRC, prima facie evidence that the company had sufficient monies to pay the VAT due on the 05/10 return on time. It could also be seen from the company's records that Alstom Limited paid monies due before the 90 day limit under the factoring agreement, which was the point at which the invoice proceeds were repayable to the factoring agent. The company's records therefore indicated that the company would never have had to repay to the factoring agent the 80% pre-payment before the full amount was received from Alstom Limited.

18. The Appellant maintained that at the due date for the VAT payment for the 05/10 return, there was insufficient funds in the company's bank account to pay the tax. However, the cash shortfall was not entirely due to the late payments made by Alstom Limited. In reality the Appellant conceded that there were probably a combination of factors which led to its cash flow problems and late VAT payments. These arose firstly from the inbuilt constraints under the factoring arrangement, secondly that the company had taken on two large contracts which had stretched its cash flow and which could not be accommodated under the factoring facility and thirdly that one of the company’s employees who had dealt with the rendering of “applications for payment” and invoices had left due to a stress related medical condition, which had led to applications for payment being unnecessarily reflected in VAT returns and late payments.

19. As evident from the consistently late VAT returns the company had not been paying due attention to the need to file its returns and make VAT payments on time. Some confusion also appears to have arisen within the company's accounts department as regards the tax point at which output VAT was chargeable and to be included in the quarterly return. It was also clear that there were significant constraints on the company’s cash flow due to the limitations of the factoring agreement. Nonetheless it was for the Appellant company to arrange its business activities in such a way that VAT could be paid on time, and there was no reasonable excuse for the late returns. The Appellant had been consistently late in filing returns and making VAT payments and although aware of the “time to pay” facility that may have been available it had made no approach to HMRC.

20. In the circumstances the Appellant’s grounds of appeal did not show a reasonable excuse for the late returns and late VAT payments and accordingly the appeal was dismissed.

21. 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.

Michael S Connell

TRIBUNAL JUDGE

RELEASE DATE: 6 May 2011