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United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Roberts (t/a Languages Direct) v Customs and Excise [2003] UKVAT V18146 (16 May 2003)
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Cite as: [2003] UKVAT V18146
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Roberts (t/a Languages Direct) v Customs and Excise [2003] UKVAT V18146 (16 May 2003)
    DEFAULT SURCHARGE – Reasonable excuse – Insufficiency of funds – Appellant's customers included foreign embassies, NHS trusts, local government, Immigration Advisory Service – Invoices paid months or as much as year overdue – Serious effect on cash flow causing insufficiency of funds – Whether reasonable excuse – appeal allowed in part – VATA 1994, ss 59(7)(b), 71(1)(a)

    LONDON TRIBUNAL CENTRE

    JOHN B ROBERTS T/A LANGUAGES DIRECT Appellant

    - and -

    THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

    Tribunal: ANGUS NICOL (Chairman)

    GEORGE MILES

    Sitting in public in Cardiff on 13 February 2003

    The Appellant in person

    The Respondents were not represented

    © CROWN COPYRIGHT 2003

     
    DECISION
  1. This is an appeal by Mr John Roberts, who carries on business in the field of foreign language training, English language school, translation and interpreter services, and company development. He appeals against default surcharges in respect of a number of accounting periods in 1999, 2000 and 2001. The surcharges come to a total of £1,582.82. At the hearing of the appeal the Commissioners were not represented, and the hearing went ahead under rule 26(2) of the Value Added Tax Tribunals Rules 1986 in their absence.

  2. The defaults started in the period 6/99. The due date for that period was 31 July 1999, and the return was received by the Commissioners on 28 September 1999. The amount of tax declared due was £2,138.31. Being the first default, a surcharge liability notice was issued, on 20 August 1999, and no surcharge was imposed. There were defaults after that in the periods 9/99, 3/00, 6/00, 12/00, 3/01 and 6/01. For the first two of those no surcharge was imposed, but the surcharge liability period was extended. Thereafter surcharges at the rate of 10 per cent for 6/00 and 15 per cent thereafter were imposed. The returns varied between 8 days and over 3 months after the due date. The Appellant's taxable receipts varied between £25,035 for the period 6/99 at the lowest, and £87,680 at the highest in 6/01. It was apparent from his returns that the value of purchases exceeded the total sales in all the periods for which the returns were before me except 6/01.

  3. The Appellant provided extended grounds of appeal, dated 7 October 2001, supplemented by a more recent statement. He said that the reason for his poor payment record was that a number of organisations to which he made supplies took many months, and sometimes more than a year, to settle their accounts. This, he said, has a disastrous effect upon cash flow, as well as adding to his work load. The principal offenders included local health trusts, South Wales Police, legal services provided for asylum seekers including the Immigration Advisory Service, solicitors, local authorities and others, for which the Appellant provided interpreting and translation services. These in turn made excuses for slow payment, including the slow payment of government grants, departmental reorganisation, mislaid invoices. It was, the Appellant said, no solution to the problem to claim interest on overdue payments when what was needed was cash.

  4. The Appellant observed that a system which permitted Customs and Excise to impose punitive penalties on organisations which work on behalf of services linked to the national Government, which then use their position to delay payment, was unfair, and threatened the existence of the organisation which was assisting those services.

  5. The Appellant also provides English language services for students supported by the Libyan Embassy. He is frequently told that the Embassy has no money. He has no means of forcing a foreign government to pay for the services it has received. Although services supplied to the Libyan Embassy were not taxable supplies, and therefore no VAT was involved, payment still formed a vital part of the Appellant's cash flow. At times the Embassy was between £10,000 and £20,000 in arrear.

  6. The Appellant said that in the last 24 months his turnover had increased, but in spite of that unpaid accounts reached a total of some £60,000. This represented some 30 per cent of his turnover. On one occasion the Algerian Embassy issued a cheque payable to the Appellant for more than £80,000, and immediately stopped payment, a month or so later issuing another cheque for a smaller amount. From the third quarter of 1999, the Appellant's bank reduced his overdraft facility from £7,500 to zero at the rate of £500 a month. The Appellant produced schedules shewing aged debts between 1 July 2000 and 1 December 2001. This shews that over the whole of that period there remained £47, 521 unpaid. Between July 2000 and June 2001 there were debts outstanding for up to twelve months. Of the total turnover for that whole period of £289,538, a total of £193,383 was paid during the first three months and between three and twelve months, and including unpaid invoices, the total was £102,046. The Appellant also produced a schedule shewing the late payments made by certain students, between May 2000 and November 2001. Of the total fees for that whole period, of £23,850, only £4,086 had been paid by 29 August 2001, and a further £10,530 by 16 October 2001. Some of the payments were as much as seven months after the date of the invoice.

  7. At the date of the hearing, the Appellant said, his VAT was up to date, and all that was outstanding were penalties, which, he said, were in the region of £4,000. This was a very large amount for a company with a turnover of £250,000.

  8. The Appellant produced copies of his bank statements and some spread-sheets shewing the incidence of payments. The latter undoubtedly shew that a substantial number of the Appellant's clients pay later than 30 days, and in some cases some weeks or months later. The bank statements shew that, until the bank insisted upon the reduction of the overdraft the Appellant's account was nearly always overdrawn by sums ranging between a few hundred up to a maximum of £4,682. There were two short periods when the account was in credit, one of these occurring a fortnight after the due date for 9/99. Interest was chargeable on unauthorised overdrawing at 29.5 per cent. It is also to be noticed that there are entries in the bank statements referring to transfers from and to a private account, which suggests that from time to time the Appellant has to supplement his business account from his own private account.

  9. Looking specifically at the state of the bank account at the several due dates, the following is revealed:

    10. At 31 July 1999, there is no bank statement available.

    At 31 October 1999, the account was £2,276.65 overdrawn, and £4,979 overdrawn ten days later. The tax declared was £2,731.87. The overdraft limit was then £4,000.

    At 30 April 2000, the account was £2,998 overdrawn, and this increased to over £4,000 ten days later. The tax declared was £2,880.26 The Appellant's overdraft limit was £3,500.

    At 31 July 2000, the overdraft was £1,427, which doubled within a week. The amount of tax declared for the period was £2,012.97.

    At 31 January 2001, the account was £3,861 in credit, and remained in credit between £2,000 and £3,000 for the ensuing ten days. The amount of tax declared was £2,286.86.

    At 30 April 2001, the account was £314 in credit, and this increased to over £4,000 by 8 May. The tax declared was £3,197.

    At 31 July 2001, the account was £3,695 in credit. This increased to over £4,000 next day, but almost at once was reduced to about £3,000. The amount of tax declared was £3,592.

  10. I accept that the Appellant's cash flow was seriously eroded by the late payments of his clients and students. It is also apparent from his bank statements and VAT returns that his business has a very high rate of outgoings: as I have already observed, usually exceeding, sometimes substantially, the amount of his taxable turnover. It has, however, to be borne in mind that section 71(1)(a) of the Value Added Tax Act 1994 provides expressly that an insufficiency of funds for paying any tax due is not a reasonable excuse for a default under section 59. However, it can happen that the cause underlying the insufficiency of funds is of such a nature that it in itself may provide the taxpayer with a reasonable excuse for a default. This was held to be so first in the case of Steptoe v Customs and Excise Commissioners [1992] STC 757. In that case the taxpayer was in the building trade and had a single large customer, a London borough, which amounted to about 90 per cent of his trade. The agreement was that bills should be paid within 30 days, but this borough never did so. Payment was delayed to anything between 60 and 120 days, with a corresponding effect upon his ability to meet his own liabilities. It was held that in that case the reason for his shortage of cash did provide him with a reasonable excuse. It is generally the case that such a cause will be such that there is nothing that the taxpayer can do to avoid it, and that it effectively renders the payment of other liabilities, including VAT, impossible. It must also be borne in mind that where a taxpayer is on cash accounting he has received the tax which he is going to have to pay and it will generally be the case that there is no excuse for delay in payment. However, it is possible for a cash flow situation to be so acute that the business may not survive if money received as tax is not paid out to meet some other liability.

  11. In the present case, the proportion of the Appellant's turnover affected by late payments is not nearly so large a proportion of the whole turnover as that of Mr Steptoe, though a substantial number of payments were delayed for much longer periods. However, the pattern which emerged from his evidence and the bank statements, coupled with the reduction of his overdraft facility over 15 months by an amount which itself was the equivalent of two to three quarterly payments of VAT, and including that period during which he was awaiting receipt of some £60,000, was such that, in my view, in the case of some of the periods under appeal there was a reasonable excuse.

  12. No particular figures were produced for the period 6/99, and in my view no reasonable excuse was shewn for that period. For the next three periods, 9/99, 3/00 and 6/00, in my view there was a reasonable excuse for the defaults. There was no explanation of why, with a bank balance greater than the tax liability, there was a reasonable excuse for non-payment by the due dates for the periods 12/00 and 6/01, and I find that there was no reasonable excuse for either of those periods. It is noticeable that during the last fortnight of April 2001 receipts only amounted to £2,357, not including transfers from an other account of £1,306. This was a very small proportion of the turnover for the period, which was £34,754, and was an illustration of the slowness of payments being made. The period comes at the end of a pair of accounting periods in which receipts were noticeably low. However, there was no specific explanation of why the return and payment were late in this period, and I am bound to find that there was no reasonable excuse.

  13. For the above reasons, this appeal is allowed in part. The default surcharges in respect of the periods 9/99, 3/00 and 6/99 are therefore discharged. The result will be that the default for the period 12/00 is outwith the surcharge liability period, and a new surcharge liability period will start in respect of that period and will affect the next two following periods.

  14. I give no direction as to the costs of this appeal.

    15. ANGUS NICOL
    CHAIRMAN
    RELEASED:

    LON/2001/1167

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