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You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Benchwark Distribution Ltd v Customs and Excise [2004] UKVAT V18574 (23 April 2004)
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Cite as: [2004] UKVAT V18574

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Benchwark Distribution Ltd v Customs and Excise [2004] UK V18574 (23 April 2004)

VAT – default surcharge – trading difficulties – insufficiency of funds – whether underlying reasons for insufficiency amounted to reasonable excuse – no – appeal dismissed

VAT – procedure – full decision requested after expiry of 14-day time limit – whether appellant prejudiced by time limit – decision issued despite substantial delay

LONDON TRIBUNAL CENTRE

BENCHMARK DISTRIBUTION LTD Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: JOHN CLARK (Chairman)

SHAHWAR SADEQUE MBCS

Sitting in public in London on 5 March 2003

Dr R Stock for the Appellant

Jonathan Holl, Solicitor's Office, HM Customs and Excise for the Respondents

© CROWN COPYRIGHT 2004

DECISION

This decision is being issued in unusual circumstances. The hearing in March 2003 was a reasonable excuse appeal as defined by rule 2 of the Value Added Tax Rules 1986. We announced our decision and asked the parties whether they wished to have it recorded in a written document in accordance with Rule 30(1). As they did not, we dealt with the matter by a Direction under Rule 30(8). This was released on 13 March 2003. Unfortunately, it does not appear to have reached the Appellant. After a gap of three months, Dr Stock, the Director of the Appellant who had represented the Appellant at the hearing, wrote on behalf of the Appellant to ask for a copy of the decision. There was an unexplained delay in dealing with the correspondence. Eventually a copy of the Direction was sent to the Appellant in November 2003. When this was received, Dr Stock wrote to the Tribunal requesting a full Decision. (There is an option to request a full decision where one of the parties requests this within fourteen days of the release of the Direction.) This request was referred to the Chairman. At that stage it appeared from the Tribunal's records that the Direction had been sent to the parties, and that accordingly the fourteen days should be counted as from the release date of 13 March 2003, so that the request was out of time. At that point it was assumed that no further action was necessary. However, at a later stage the file was referred again to the Chairman. On further review, it appeared to the Chairman that the failure to make the request within the time limit had been the result of the non-receipt by the Appellant of the Direction. The Chairman decided that insistence on the application of the time limit would result in prejudice to the Appellant, and that the Appellant should be contacted to establish whether it still wished to have a full decision. There appear to have been difficulties in contacting the Appellant, but on 17 February 2004 Dr Stock confirmed the request for a written decision containing the facts and the reasons for the Direction.

In his letter Dr Stock requested that the decision be reconsidered. We have to point out that the Tribunal has no power to do so. Having reached our decision in relation to the appeal on 5 March 2003, the only further step available to us in accordance with the Tribunal Rules is to issue this Decision setting out the reasons for the Direction released on 13 March 2003.

The purpose of the fourteen-day time limit for requesting a full decision is to enable the Chairman and members of the Tribunal to consider and prepare a full decision while their recollection of the matters considered at the hearing is relatively recent. In the present case, the very substantial delay between the hearing and the production of this Decision has made it much more difficult than usual to deal with the matters considered at the hearing; we hope that in the circumstances the parties will accept this Decision in the light of such difficulties.

Appellants in reasonable excuse cases may not be aware of the difficulty in establishing a reasonable excuse. Without necessarily wishing to comment on the conclusions in the article concerned, we think that it may be useful for appellants and potential appellants to consider the views of the author in "Reasonable Excuse" by Neil Warren (Taxation, 12 February 2004). This refers to some of the difficulties encountered in practice.

The facts

The evidence consisted of a bundle of documents, and the oral evidence of Dr Stock. From this evidence we find the following facts. The Appellant was established in 1979. Having started in the kitchen of Dr Stock's home, it now employed over 150 people at 10 locations. The business related to the distribution of motor parts. During the period under consideration, the Appellant's account invoices were factored, up to a maximum of 75 per cent of the ledger. In practice the percentage was 70 per cent, less a proportion of invoices that were disallowed, meaning that in real terms the factoring was about 60 per cent. The Appellant had been using the factoring facility for just over two years, from the end of 1999 or the beginning of 2000.

After 20 years of growth and success, problems for the Appellant began in 2000. Its largest customer, Montinex and Charlie Browns Ltd, which provided approximately £1 million of the Appellants' sales turnover, went into receivership in August 2000 owing the Appellant in excess of £200,000. In 2001 Finelist Group, a major distributor within the industry, went into receivership with debts of over £600 million. This massively disrupted the Appellant's business and other similar businesses in the same sector. Profit margins were significantly affected as a result of Finelist as a major competitor seeking business in the final months of its operations. As these problems severely disrupted the Appellant's financial planning, the Appellant, in order to inject extra capital into its business, entered into a contract in July 2001 with GE Capital Finance to refinance the Appellant's business. GE Capital Finance "defaulted" on the agreement in August 2001, placing the Appellant in an invidious position. The extra capital that GE Capital had been due to provide to the Appellant would have been more than enough to cover the second quarter VAT payment of approximately £185,000 that the Appellant was due to pay the Commissioners at the beginning of August 2001.

The Appellant agreed a deferred payment scheme with the Commissioners for this payment. A Surcharge Liability Notice was issued in August 2001. The Notes attached to this Form VAT 160 included the words: "An agreement with your local Debt Management Unit to defer payment does not prevent you from being surcharged for defaulting." Payment of the VAT was spread over the period from February to July 2002. From August 2001 to April 2002 the Appellant sought to restructure its business financially following the failure of the GE Capital deal. An attempt was made to sell the freehold of the Farnborough distribution premises, reaching the point of contracts being drawn up, but the sale agreed with a purchaser in the aircraft manufacturing sector fell through following the tragic events in New York on 9 September 2001.

Despite the difficulties, the Appellant succeeded in making its VAT payments on time for the third and fourth quarters of 2001, as well as meeting the instalments for the second quarter. A surcharge was raised for the period 9/01, but cancelled by the Commissioners on 24 January 2002, the notice having been issued in error. The Commissioners had not received a cheque sent by Recorded Delivery until later. The Commissioners accepted that the letter relating to this default had caused confusion. In 2002 the directors of the Appellant injected £460,000 additional capital into the business in order to keep it afloat, this sum being raised by re-mortgaging their homes. This sum was not enough to enable the Appellant in addition to make its first quarter 2002 VAT payment on time. On 17 May 2002 the Appellant became liable to a surcharge of £4,358.12, which it paid immediately without dispute. At the end of May 2002 the Appellant reached an agreement to restructure its finances with Bibby Invoice Finance, although with a lesser cash injection than under the GE Capital arrangement.

The Appellant suffered continuing difficult trading conditions in 2002. However, there was a completely unexpected downturn in sales in June 2002, as a result of weak trading due to the Golden Jubilee and the Football World Cup Finals; the drop in sales was almost 33 per cent. As the Appellant's cash flow was dependent on an invoice finance facility, this substantial decrease in sales proportionately restricted the cash available to the business. The Appellant had not planned for this eventuality, which it described as "unique".

Following the difficulties in June 2002, the Appellant made a loss in excess of the VAT payment due to the Commissioners. The Appellant did receive cash from its customers for the sales made, but did not have the cash flow to send in the VAT payment; Dr Stock accepted that a proportion of the Appellant's cash flow belonged to the Crown. The Appellant had suffered a drop in its sales ledger by losing 70 per cent of £300,000 sales, more than £185,000. The approach to GE Capital had been made following the sudden downturn in 2000, with the general difficulties in the industry. There were many other reasons for the cash problems. The Appellant's gross profit margin proved not to be adequate in the circumstances. Turnover had increased in 2001 following vigorous efforts by the Appellant to make up business. 90 per cent of the Appellant's business was with motor fitting centres; this was now down to 40 per cent. Dr Stock did recall the Surcharge Liability Notice in August 2001. He accepted that the Notice contained the words quoted at paragraph 7 above. He said that he had put to the Commissioners the point that the Appellant did not wish to suffer a surcharge. The Appellant had accepted liability in respect of the first surcharge because at that time it had had no prospect of escaping it. In relation to the second surcharge, it would have been foolhardy to pay a 5 per cent surcharge when the property was in the course of being sold. The Appellant had been expecting to sell the property in September 2001, but this was frustrated by a global event. It had entered into the "time to pay" agreement on the basis that the sale proceeds were expected.

The return for the period 6/02 was signed by Mr Turner on behalf of the Appellant. He was told to send cheques to Croydon. Mr Turner was aware of the seven-day extension for VAT payments sent by BACS. The Appellant could not telephone the Commissioners until contracts for the sale of the property had been exchanged, probably about the end of July 2002. Dr Stock accepted that the Appellant had an obligation both to render the return and to make payment; that was why the Appellant had contacted the Commissioners' Debt Management Unit. In a conversation on 7 August with Ms Muneef of the Debt Management Unit, a message was left by the Appellant to indicate that it would be contacting the caseworker the following week. (7 August was the due date for the BACS payment.) The money for the property was to come in after the due date, so the default had occurred by the time of Mr Turner's conversation with the Commissioners on 12 August 2002. The Commissioners told Mr Turner that a "time to pay" agreement with a date of 1 September 2002 would not be acceptable, because a previous agreement had been granted and agreement had been made to settle the Appellant's liability for 3/02 in two payments on condition that all future returns would be settled in full on presentation. No "time to pay" agreement was made in respect of the 6/02 payment, although when the Appellant indicated that it would be appealing against the imposition of the default surcharge, the Commissioners indicated to the Appellant that it would allow time to pay on the default surcharge only, in order to assist the Appellant to "get back on its feet".

The first quarter VAT payment of £217,906.29 reached the Commissioners on 1 July 2002. The Appellant agreed a sale of the Farnborough premises, and received the proceeds on 29 August 2002. Payment of the second quarter VAT payment of £181,862.76 was made that day, reaching the Commissioners on 30 August 2002. The Appellant had contacted the Commissioners' Debt Management Unit to explain that the payment would be delayed until the end of August. The Appellant's understanding was that this period of delay had been accepted and that the Appellant would not be penalised for it. A surcharge of 5 per cent was raised on 16 August 2002, amounting to £9,093.13. The Appellant wrote to the Commissioners on 29 August 2002 to appeal against the imposition of this surcharge, but on 9 October 2002 the Commissioners responded that they did not accept that the Appellant had a reasonable excuse for the default. On 18 October 2002 the Appellant wrote to ask for further reconsideration of the surcharge, and on 3 December 2002 the Commissioners replied that as the main reason for the delay in payment was the lack of funds, which was not considered to be a reasonable excuse, the surcharge could not be withdrawn.

Arguments for the Appellant

Dr Stock explained the history of the Appellant's financial position and its dealings with the Commissioners. He explained the effect of invoice financing; if there was a reduction of say £100,000 in invoices, this would lose £ 70,000 of cash flow. He stressed that if the Appellant had understood that an onerous surcharge would be applied, and that immediate payment was required by the Commissioners at the beginning of August 2002, the Appellant could have taken alternative action. Having exchanged contracts on the sale of the property, the Appellant could have sought a bridging loan from a bank to cover the cash deficit pending receipt of the sale proceeds; the bank charges would have been much lower than the amount of the surcharge. He emphasised the record of the Appellant's co-operation with the Commissioners, and explained that the Appellant's VAT affairs were now up to date. The Appellant remained keen to fulfil totally its commitments to the Commissioners; he hoped that the Tribunal would take this into account. He referred to the need to wait for the property sale. Everything had been done as quickly as possible and the Appellant had communicated with the Debt Management Unit; the Appellant had been fully committed. He did not have the precise date of the exchange of contracts for the sale of the property. The condition was to have funds. It could have been on 1 or 2 August 2002, in time for a BACS or CHAPS payment. In relation to the conversation with the Debt Management Unit on 12 August 2002, the Appellant had paid the 2 per cent default surcharge. The reason for requesting time to pay until September had been that there had been queries about the condition of the premises. The Appellant's solicitor had insisted on delaying the transaction to deal with this question. Dr Stock said that he had previously had several attempts to speak to Mr Elvin of the Debt Management Unit. He had to have various plans to deal with the Appellant's finances. He had had a productive relationship with Mr Elvin, but queried whether the Commissioners' file record of the conversations was a full record.

Arguments for the Commissioners

Mr Holl referred to sections 59 and 83n of the Value Added Tax Act 1994. Under section 83n, an appeal lay to the Tribunal in respect of a liability to a surcharge under section 59. Under section 59(7), if the taxable person satisfied the Tribunal that there was a reasonable excuse for the VAT payment not having been despatched in sufficient time to reach the Commissioners within the relevant time limit, he would not be liable to the surcharge, and the default for the period in question would be treated as not having occurred. He argued that Dr Stock had not made out a case to satisfy the Tribunal. Dr Stock was fully aware from the wording on the Surcharge Liability Notice that arrangements with the Debt Management Unit did not prevent the taxable person from being in default. Dr Stock's argument was not convincing; there had been two previous defaults, which the Appellant had accepted. If a taxable person was late in rendering its return, this did not cancel the default. Mr Holl accepted that Mr Elvin of the Debt Management Unit might not have been available on 12 August 2002 when the Appellant attempted to contact him. There had been a downturn in sales for the quarter 6/02, but the net tax due was similar to the previous corresponding quarter. The Appellant factored its invoices. He argued that if a taxable person had the Commissioners' money, a very good reason was needed for not paying it. Invoicing companies did not show VAT in their invoice value for factoring purposes. There was a narrow reason for this; it represented cash. If the money was in the hands of the trader, it had gone to support the business. On balance, the Appellant's case had not been made. Too little had been done too late. There had been two previous periods involving a default. There was no reason amounting to a reasonable excuse for the insufficiency of funds, and the appeal should be dismissed.

Reasons for Direction and decision

As Mr Holl indicated, the scope for appeal on the basis of reasonable excuse is limited where the reason is insufficiency of funds. He did not go in detail through the cases concerning reasonable excuse, but it may assist the Appellant if we refer to two of these. Section 71(1)(a) of the Value Added Tax Act 1994 specifically provides that an insufficiency of funds is not, by itself, a reasonable excuse for late payment. In certain cases it has been held that the reason for the insufficiency (as opposed to the insufficiency itself) was a reasonable excuse. The circumstances in which the reason has been so regarded have been very limited. One example occurred in Project Research & Evaluation Ltd v C & E Commissioners (1994) VAT Decision 13183, where conditions relating to a loan had been unexpectedly altered. This does not assist the Appellant, as the arrangements with GE Capital fell through a year before the default in question. The leading case on the reason for insufficiency of funds is Customs and Excise Commissioners v Steptoe [1992] STC 757. The trader was required to account for tax he had not received, some 95 per cent of his sales were made to one customer and that customer was slow in making payment at the material time. The Court of Appeal held that the cause of the trader's insufficiency of funds could constitute a reasonable excuse. It also held that a reasonable excuse might also exist 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. However, this excuse would become exhausted by the date on which such foresight, diligence and regard would have overcome the insufficiency of funds.

We do not consider that the Appellant's circumstances fall into the same category as in Steptoe. There was no evidence of reliance on any particular customer for a substantial proportion of the Appellant's business. As Mr Holl pointed out, there was no significant difference between the amounts due for periods 6/01 and 6/02. We accept that trading conditions were difficult for the Appellant, but the question is whether there was a reasonable excuse for the insufficiency of funds, and this depends on showing that there was something exceptional and unforeseeable about the Appellant's position as at the time of the default. The similarity between the two corresponding quarters is such that we do not consider the position to have been exceptional, even though the downturn in sales was unexpected.

The default surcharge regime is harsh in its application. (On the question of proportionality, see Greengate Furniture Ltd (2003) VAT Decision 18280.) Section 71(1)(a) of the Value Added Tax Act 1994 is based on the assumption that the trader will have received from its customers the amounts invoiced, together with the VAT, and that the amounts received in respect of VAT will have been reserved by the trader for the specific purpose of paying its VAT liability, rather than being used for the general purposes of its business. This can be harsh where the trader's customers take a long time to pay, so that liability for the quarter arises based on the invoices rendered, but the trader does not have the cash from the customers to discharge the VAT liability. However, it is clear that there can only be a reasonable excuse if the underlying reason for the insufficiency of funds is itself exceptional. This stringent test is not met in the present case. We note that one of the Commissioners' officers regarded her own refusal on the grounds of "lack of funds" to be very harsh, in the light of the Appellant's attempts to "stay above water" and its co-operation at all times with the Debt Management Unit. However, her colleague who considered her decision referred to the outputs for the last two years as having been fairly consistent, there being no real indication as to why the business was unprofitable; paying the VAT should not have been dependent on selling a property. We regard the Appellant's circumstances as very unfortunate, and we have a great deal of sympathy for the Appellant, but we do not think that the Appellant has been able to demonstrate within the very strict limitations imposed by section 71(1)(a) of the Value Added Tax Act 1994 that the reasons for the insufficiency of funds amounted to a reasonable excuse.

We therefore confirm the dismissal of the appeal. In the Appellant's confirmation of the request to us to issue a full Decision, Dr Stock asked us to consider the case of Starlite (Chandeliers) Ltd (1998) VAT Decision 16188. We question whether it is proper for us to do so, as it was not raised at the time of the hearing, and this request has not (as far as we are aware) been referred to the Commissioners. However, in any event we do not consider that it does assist the Appellant, as it related to an agreement to postpone the trader's liability to VAT, in circumstances where there was no indication to the trader that the extension of time was conditional, and in particular it was not subject to the terms of a time to pay agreement. In the present case, the postponement of the payment for 6/02 was not agreed, so there was no reason for the normal default surcharge liability not to arise, and the wording on the Surcharge Liability Notice Extension form VAT 162 relating to an agreement with the Debt Management Unit to defer payment was not relevant. Thus Starlite makes no difference to our conclusion, that the appeal fails on the grounds that the Appellant has not been able to demonstrate a reasonable excuse for the default in respect of period 6/02.

JOHN CLARK

CHAIRMAN

LON/2002/1021

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