United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2003] UKVAT V18114

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SRT Services London Ltd v Customs and Excise [2003] UKVAT V18114 (01 May 2003)

Default surcharges – Reasonable excuse – Proportionality; held that while shortage of funds was no excuse, the Tribunal could look behind such a shortage to establish whenever the true cause of the default showed a reasonable excuse – Held no excuse and that the progressive nature of the penalty showed that it was not disproportionate – Appeal dismissed

LONDON TRIBUNAL CENTRE

SRT SERVICES LONDON LTD Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MR PAUL HEIM CMG (Chairman)

MRS S EDMONDSON FCA

Sitting in public in London on 8 January 2003

Mr D Relf, company representative, for the Appellant

Mr C Wright, senior officer of the Solicitor's Office of HM Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

SRT Services London Ltd appeals against two default surcharges, the first in relation to the period 1 August 2001 to 31 October 2001, and the second to the period 1 November 2001 to 31 January 2002.

At the hearing of this appeal the Appellant was represented by Mr D Relf, and the Commissioners by Mr C Wright, senior officer.

At the outset of the hearing the Appellant made clear that the appeal for the first period related to a surcharge of £16,398, and for the second period of £37,130.

The facts of the matter are not in dispute. The Appellant was at the material times registered for value added tax. It was an organisation set up by a firm of solicitors to employ the firm's legal and support staff. The Appellant accounted for value added tax on the supplies it made to the firm. The Appellant was owned by the firm of solicitors and had no other source of revenue than the amounts which it received from that firm. The banking arrangements were made between the Appellant and the firm. The Appellant had no separate line of credit. The firm however had an overdraft arrangement with its bankers. In 2001, because of the trading position of the firm the overdraft crept up. The bank therefore moved the overdraft to its special lending services division, and inaugurated discussions to reduce the deficit. At the same time the firm was holding merger discussions which caused the bank to be concerned that partners in the firm might leave. The bank raised the question of security or of a cash injection from the partners in the firm. The bank asked the partners to fill in a personal financial form. Not all the partners returned this form. The bank assessed its risk, and imposed conditions. It also froze the existing accounts and set up a new account. This created a disruption. It was no longer possible for the Appellant to obtain instantaneous electronic information from the bank. The bank's attitude was evident from two letters, respectively of 14 November 2001 and 30 November 2001. In the first of these the bank confirmed that a cheque for £165,068 apparently for national insurance, was not honoured as it exceeded the overdraft limit. The bank acknowledged that moving to the new office account had created problems, and that it had been impossible to obtain updates on the stopped account. In the second letter the bank expressed both dissatisfaction about the financial information which it had received from the partners, and some criticism. It sets out its conditions for continuing overdraft facilities.

The Appellant says that it were paying value added tax by the Clearing House Automatic Payment System (CHAPS), and that the use of this electronic payment system allowed a further seven days for payment after the due date. Thus for the period from 1 August 2001 to 31 October 2001 a payment was due seven days after the due date of 30 November, that is to say on 7 December 2001. On that day, allowing for two PAYE cheques which were due to clear on that day and based on information received from the bank, the overdraft facility only allowed the Appellant to pay £90,000 to the Commissioners against the value added tax due. In fact the Appellant was notified on the following working day that a substantial sum had in fact been paid into the account on 7 December. The Appellant says that the only reason it did not pay in full in time was a lack of timely notification from the bank. In the result the balance unpaid on 7 December was paid on the next working day, that is to say the Monday immediately following.

With regard to the surcharge of £37,130 in relation to the default for the period 1 November 2001 to 31 January 2002 the Appellant calculated the bank balance to be such that the facility open to it did not allow payment of the value added tax. Efforts were made, with the assistance of the bank to allow payment to be made. The credit committee of the bank only gave approval on 7 March 2002, that is to say the day on which the payment was due to be made, and the e-mail confirming this did not arrive until 16.16pm on that very day. The Appellant tried at once to transmit the value added tax due but it was too late and the Commissioners' bankers would not accept the payment, because the bank day ended at 4.00pm.

The Appellant says that it did all it possibly could to pay the VAT due on time in both cases. In both cases it was confounded by working practices within the bank. In both cases payments were overdue by no more than two working days. The Appellant submits that it has reasonable excuse for both defaults, that it has not been given reasons for the levy of the surcharge, and questioned the validity of the amount of the penalty as being disproportionate to the offence committed.

The Appellant further says that it was making efforts to improve its cashflow situation. The system was that the Appellant was only a service company. It had no credit. It was the partnership which had the resources, and the credit with the bank. Thus the partnership was responsible for the payment of the VAT.

Mr Morgan, a partner in the firm, and director of the Appellant, said in evidence that he made efforts to prioritise payments by the partnership. Preferred creditors and salaries were paid first. He was reviewing the financial situation on a daily basis. He felt that he had done all he could, everything that was reasonably possible to ensure that payments were made on the due date, within the circumstances at the time. In reply to questions in cross-examination he said that income had not reached the projected levels, and that debtors had been paying more slowly. Credit control practices were introduced. The partnership was in profit, and there was sufficient to pay out to the partners. It depended on what the partners took out. In September 2001 measures were taken to reduce overheads. It was put to him that steps were taken too late to ensure that funds were available to pay the tax due. He replied that there was no margin of error. It was a question of fine judgment. He agreed that there had been three previous late payments. He was reliant on the partners calling for payments and clients paying promptly. It was suggested that the attitude of the partners, criticised by the bank, meant that they were the architects of their own downfall, and he replied that they had in fact been reducing overheads and taking other measures. It was suggested that the partners had been taking money out of the partnership which the partnership could not afford having regard to its commitments to pay value added tax. He replied that there were also events outside the partners control. With regard to the second default it was suggested that the question of payment of tax had been left to the last moment and indeed beyond the last moment. It was similarly suggested that the remedial measures were not started early enough. Mr Morgan said that with the benefit of hindsight this was so.

On these facts the Commissioners say that there is no reasonable excuse for either of the two defaults and that while it was clear that measures were necessary, the measures that were taken could be described as too little and too late. This was a question of insufficiency of funds at the relevant time. Even looking behind the insufficiency of funds, it was clear that measures could and should have been taken earlier so that in the Commissioners' submission reasonable excuse had not been established for either of the two defaults.

On the other hand the Appellant submits that it was prudent in this approach in that it would not write cheques which would not be met. It relied on the cases of Salevon v Customs and Excise Commissioners (1989) STC 907 and Steptoe v Customs and Excise Commissioners (1992) STC 757 for the proposition that the reasons for the default had to be sought. There had been difficulties forced on the Appellant, and, in the case of the first default the belief that there was a shortage of funds when in fact there had not been such a shortage, yet the partnership could not risk writing a cheque without the confirmation that there was no shortage. The Appellant argued from the appeal of Steptoe that it was not at fault in that its financial affairs were at the centre of its preoccupations.

The Appellant says that its arguments are not displaced by the provisions of section 71(1)(b) of the Value Added Tax 1994 as it was not relying on any other person to perform the task. It was relying on its bank, but that was a perfectly reasonable thing to do.

The Appellant suggested that while section 84(6) of the Value Added Tax Act 1994 specified that "nothing in section 83(q) shall be taken to confer on the Tribunal any power to vary an amount assessed by way of penalty, interest or surcharge except insofar as is necessary to reduce it to the amount which is appropriate under section 59-70; …", there was, according to the Appellant, an inherent jurisdiction in the Tribunal to mitigate any amount of surcharge.

With regard to the facts, it is not disputed that in regard to both surcharge periods under appeal the tax due was paid late, albeit by a matter of days. On the first occasion it was thought by those responsible for paying that the state of the overdraft would not allow for a cheque for the whole amount due to be issued and met, because the overdraft was close to its limits, although in fact an amount which would have allowed a cheque for the whole amount to be issued and met had been paid into the account on the last day for payment of the tax due. On the second occasion the overdraft limit was similarly close so that a cheque could not be issued in payment of the value added tax; an arrangement was sought to be created to allow it to be paid but the bank's consent to that arrangement arrived after the end of the banking day so that the electronic transfer of funds could not take place before the expiry of the seven days after the due date allowed for in the case of the use of the electronic transfer system.

It does seem to be the case, that the first cause of the delay in payment on both occasions was shortage of funds that is to say that the Appellant was close to the limit allowed on its overdraft, but they agree that it is permissible to look behind that shortage of funds to consider the true cause of the default.

It is also not in dispute that each of the defaults took place within the currency of a surcharge liability notice, so that a default would give rise, in accordance with the provisions of section 59(4) of the Value Added Tax Act 1994 to the default surcharge, subject to the possibility of exoneration provided for by section 59(7) of the same enactment, which states:

"(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 will 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 of the purposes of the proceeding 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 are the service of which dependent upon that default shall be deemed not to have been served)."

In the present case the Appellant says that there is a reasonable excuse in respect for each return and payment. The facts relevant appear to the Tribunal to be that the Appellant was having difficulty in paying its value added tax on time, and was having difficulty in satisfying the conditions which its bankers imposed with regard to overdraft facilities. The Appellant was making efforts to meet its obligations and it appears that the firm's revenues would have allowed it to do so, except for the fact that drawings reduced the funds available for the payment of commitments such as value added tax. In consequence, in the case of each of the defaults, at the last moment difficulties arose in finding the funds to pay the value added tax. In the first case, because of the conditions imposed by the bank, the last minute information which would have allowed payment on the last due day was not received, and in the second, the agreement by the bank which again at the last minute or just beyond the last minute would have allowed payment was not received in time. It does not appear to the Tribunal to be reasonable conduct, in circumstances where it is known that the overdraft limit has practically been reached, to wait until the last moment in the hope that arrangements can be made for paying the value added tax. The thirty days which are given to a taxpayer after the end of the taxation period to pay value added tax are precisely there so that arrangements for payment can be made. The Appellant also had the extra 7 days allowed for electronic transfer. It is not, in the Tribunal's view the conduct of a reasonable taxpayer to use its funds in such a way that the payment of value added tax is put off to the very last moment and then, when at the very last moment difficulties arise, to suggest that its conduct has nevertheless been that of a prudent taxpayer anxious to comply with its obligations. This is by no means the case of the taxpayer who has been deprived of the funds necessary to pay tax by the dilatoriness of its main customer, ( as in the case of Steptoe,) or indeed by a sudden unforeseeable event. The Appellant, and the partnership which was funding the tax for it were operating in a normal way of business, and were not subject to any unforeseen event or external pressure which prevented them from allocating their funds for the payment of their obligations under the value added tax regime. The practical identity between the firm and the Appellant prevent reliance on unforeseen matters or pressures between them.

It follows that the Tribunal finds that there has not been established in relation to either of the defaults that there was a reasonable excuse for the late payment of tax. The question of mitigation therefore does not arise. There are in any event no circumstances to justify mitigation.

The Appellant has submitted that there is an element of disproportion between the default and the amount of the surcharge, in that the length of the default was brief, but the amount of the penalty large.

Both these observations are correct in themselves, although it is relevant that the Appellant was using the extra seven days beyond the due date allowable for payment by electronic transfer, which in neither case came on time. The argument on the alleged disproportionately large penalty is reduced in value by the fact that the penalty is progressive, and that on the occasion of the first default no penalty is imposed, on the second penalty of 2% of the tax not paid in time and so on to the rates of respectively 10% and 15% for the repeated defaults here in issue. The Tribunal sees and the facts of this case no valid argument on the issue of proportionality.

The argument about lack of reasons is not founded; the reason for the imposition of the surcharge is the fact of default.

Accordingly, the Tribunal finds that the Appellant has not established that there is a reasonable excuse for the defaults in issue or any other ground upon which the Appellant can be exonerated from the default surcharges rightly imposed so that this appeal must be dismissed.

PAUL HEIM CMG

CHAIRMAN

RELEASED:

LON/02/782