United Kingdom VAT & Duties Tribunals Decisions

Houseproud Curtian Company Ltd v Customs and Excise [2003] UKVAT V18213 (25 June 2003)

DEFAULT SURCHARGE — insufficient of funds or reasonable excuse — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

HOUSEPROUD CURTAIN COMPANY LTD Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Mr R L Barlow (Chairman)

Sitting in public in Manchester on 2 June 2003

Mr S Levy, managing director of the Appellant, for the Appellant

Mr R Mansell of the Solicitor's office of HM Customs and Excise for the Respondents

© CROWN COPYRIGHT 2003


 


DECISION

1. The appellant appealed against a surcharge of £1,837.83 issued on 14 June 2002 under section 59 of the VAT Act 1994 in respect of a default in the period ending April 2002, being a surcharge of 15% of the tax declared in the return for that period. By agreement of the parties it was agreed that the appeal should be treated as an appeal in respect of all the surcharges referred to in the next paragraph and the appeal was extended to those matters and heard on that basis.
2. The appellant was admittedly in default in respect of the following periods and in the following manner:

07/00 return on time but tax of £7,998.83 not paid [surcharge liability notice issued 15 September 2000]

07/01 return 4 days late and tax of £13,501.75 not paid [2% surcharge notified]

10/01 return 28 days late and tax of £3,497.00 not paid [5% surcharge notified]

01/02 return 28 days late and tax of £2,780.33 not paid [10% surcharge notified]

04/02 return on time but tax of £12,252.25 not paid [15% surcharge notified].

3. Section 59(7) and (8) of the VAT Act 1994 gives the tribunal power to hold that an appellant has a reasonable excuse for any default that is material to a surcharge and he is then treated as not being in default in that period. The reasonable excuse may therefore relate to the original default giving rise to the issue of the surcharge liability notice or to one or more of the periods in respect of which a surcharge has been notified or a surcharge liability extension notice has been given. Depending on the circumstances and the number of defaults, if any, for which there is no reasonable excuse the result may be that a surcharge is upheld, removed altogether or the percentage is reduced.
4. In this case Mr Levy, the appellant's managing director, represented the appellant and was its only witness.
5. He put forward grounds upon which he relied as reasonable excuses in respect of all the defaults, although not all the excuses applied to all the periods.
6. With two exceptions, there are no prescribed limits upon what may be held to be a reasonable excuse and it is a question of fact and the exercise of judgment and common sense on the part of the tribunal that determines whether a state of affairs amounts to a reasonable excuse. The two exceptions are provided by section 71 of the VAT Act 1994 and are that an insufficiency of funds or reliance on a third party to carry out a task cannot be a reasonable excuse. No suggestion was made that reliance had been placed on a third party to carry out a task relevant to any default but some of what was put forward clearly amounted in part at least to insufficiency of funds.
7. In Customs and Excise Commissioners –v- Steptoe [1992] STC 757 the Court of Appeal decided that the underlying cause of an insufficiency of funds is capable of being a reasonable excuse even though the insufficiency itself is not. However, the Court also made it clear that there are limits to what types of underlying cause are capable of being reasonable excuses. Lord Donaldson of Lymington MR said this:

"…if the exercise of reasonable foresight and of 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 default, then the taxpayer may well have a reasonable excuse for non-payment, but that excuse will be exhausted by the date on which such foresight, diligence and regard would have overcome the insufficiency of funds".

8. Bearing in mind those principles I turn to the facts as stated by Mr Levy. I found his evidence to be convincing and truthful, though his recollection of precise dates and details of transactions was poor.
9. The appellant has been trading for 30 years or so and was an amalgamation of more than one business. Mr Levy described various partnerships which had traded but he was unable to explain the legal nature of the arrangements he was describing. He had bought his parents out of the business at some point before the dates which are relevant to this appeal, though he was still paying back a loan from his mother.
10. He referred to a partner who had worked with him (to use a neutral phrase) but was unable to say whether that person's previous business had been acquired by the appellant or whether the appellant and a company of which that person was a shareholder had traded together in partnership and if the former whether the person concerned had become a shareholder in the appellant. Whatever the precise legal form of the arrangements, in 'late 2000' Mr Levy had to buy the other person out as he wanted to go abroad and this occurred at fairly short notice. Mr Levy was unable to say whether either he or the appellant was obliged to buy the 'partner' out and it was clear that he had never looked into that question.
11. Whatever strain this transaction may have put on Mr Levy's personal finances and even if it also put a strain on the appellant company's finances it is clear that the event cannot be a reasonable excuse for any of the defaults with which this appeal is concerned. Before such an event could be a reasonable excuse it would have to be shown that it caused one or more of the defaults and that it could not have been reasonably foreseen or overcome. As the default giving rise to the original surcharge liability notice pre-dated this transaction, according to Mr Levy's evidence, it cannot be relevant to that default and the next default was at least eight months after the transaction, as the next default was not until August 2001 when the 07/01 return was due. As the appellant had traded without default in those eight months convincing evidence would be required to explain how it affected the business later at all and the evidence would also have to establish that due diligence could not have overcome the difficulty. No such evidence was given.
12. Mr Levy explained in detail the difficult trading conditions that businesses like his have suffered over recent years. He mentioned several similar businesses that had been forced to cease trading and indeed it is well known that the UK textile industry has suffered poor trade for some years. None of this amounted to the sudden and unexpected type of events that might be a reasonable excuse and indeed Mr Levy explained how he had restructured his business with a view to coping with the trading difficulties. This involved moving premises, reducing the workforce and changing the type of material the appellant deals with.
13. The appellant's overdraft was reduced 'around April 2002'. Mr Levy explained that the appellant's bank had been charging high fees for an advisor who he felt had been of little assistance. These events were no doubt part of the general difficulties encountered by the appellant but there was no evidence that the reduction of the overdraft, which occurred when the restructuring was taking place, was an event of the type described by Lord Donaldson in the Steptoe case.
14. One event which did occur and which might have been classified as such an event was a debt of £20,000 or thereabouts from a particular customer. Mr Levy explained that he had supplied goods to this customer in July or August 2001 and it 'went bankrupt' in early 2002. It appears that the customer was a limited company but again Mr Levy was unsure about the precise legal situation. Mr Levy had been given an informal guarantee by the customer's girlfriend (by customer he meant the person he dealt with whether it was a limited company or not). He considered the guarantee to be unenforceable so the appellant was left with an unenforceable debt which it might have been argued was a reasonable excuse because it was unexpected. However, the transaction in question had been entered into on the basis that the customer, which was starting up a new venture, would pay for the goods supplied as and when it could. Some representation had been made by the customer that the first payment would be within three or four months of the supply i.e. about December 2001 but it was agreed that the balance would be paid monthly and there was no firm agreement about what amounts would be paid or when they would be paid.
15. Clearly that arrangement cannot be an excuse for the period ending 10/01 because payment was not expected by then so the failure to pay is irrelevant to that period. If part payment had been made in December 2001, as Mr Levy had expected, that might have made a difference to whether the appellant could pay the tax due in respect of period 01/02 and there might have been a knock on effect in period 04/02, being the last default period. It is at least possible that the non-payment caused or materially contributed to the defaults.
16. It is a pre-requisite of there being a reasonable excuse that the event in question caused the default but, that it did so, is not sufficient in itself to constitute a reasonable excuse. The defaults were undoubtedly a result of a lack of funds and so although the customer's non-payment might have been the cause of the lack of funds it is necessary for the appellant to show that it exercised due diligence, reasonable foresight and due regard to the tax liability (to adopt Lord Donaldson's phrases whilst accepting that he meant to describe a general carefulness in trade rather than using those phrases as a precise definition of what can be expected of a taxpayer). However one puts it, the question is whether a taxpayer in the position of the appellant can really be said to have acted prudently enough to be able to say that when things went wrong it was put in a position whereby its inability to pay was not just a simple lack of funds and that it would be reasonable to excuse its default.
17. My conclusion is that the failure of the customer to pay does not amount to a reasonable excuse. The appellant had no precise expectation about when or how much at any time it would be paid and, even if it reasonably expected to be paid in full at some stage which I assume it did, it must have known that it was taking a chance that the tax would not be paid if it was relying on that payment to be able to pay the tax and the customer did not pay as soon as was hoped. If it was not relying on payment of this debt to be able to pay the tax then non-payment of the debt is irrelevant to the default and cannot be an excuse.
18. My conclusion is that the appellant, in so far as it was relying on payment by the customer to enable it to pay the tax, acted imprudently to a degree that negates any argument that it has a reasonable excuse. As no date for payment or for payment of instalments had been agreed it was unreasonable for the appellant to rely on those payments as a means of paying the tax.
19. The appeal is therefore dismissed. The respondents did not ask for an award of costs and no order is made.

RICHARD BARLOW

CHAIRMAN

RELEASE DATE: