United Kingdom VAT & Duties Tribunals Decisions

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Bollingmore Holdings Ltd v Customs and Excise [2005] UKVAT V18942 (22 February 2005)

18942

DEFAULT SURCHARGE – Reasonable excuse – Shortage of funds – Bank refused to effect VAT payment notwithstanding an "unofficial overdraft" that would have covered the payment – Whether in all circumstances Appellant was justified in relying on the unofficial overdraft – Yes – Whether a reasonable excuse – Yes – Appeal allowed

LONDON TRIBUNAL CENTRE

BOLLINGMORE HOLDINGS LTD Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

MRS E M MACLEOD CIPM

Sitting in public in London on 19 January 2005

Keith Robertson, finance director, for the Appellant

P Crinnion for the Respondents

© CROWN COPYRIGHT 2005

DECISION

Bollingmore Holdings Ltd appeals against a 5% default surcharge imposed for late payment of its 10/03 period.

Bollingmore Holdings is the representative member of a group of three companies. One of the companies, Bollingmore & Co Ltd, is a motor dealer. The circumstances of this appeal relate essentially to the affairs of Bollingmore & Co Ltd. Unless otherwise stated, we will use the term "Bollingmore" to connote the Appellant.

Keith Robertson, finance director of Bollingmore, gave evidence and presented its case.

Bollingmore's payment of VAT for the 10/03 period was due by 7 December 2003. Bolingmore's bank was Unity Trust Bank ("Unity"). Bollingmore's day-to-day banking transactions were carried out through a local branch of Barclays Bank. Unity, as Bollingmore's main bank, held its balances, made loans and granted overdraft facilities to Bollingmore.

When Bollingmore sought to make the quarterly payment of £79,904 for the 10/03 period on 3 December through the bank giro system, Barclays Bank declined to effect payment. Mr Robertson contacted the Commissioners' Contact Centre at 2.52pm that day and asked for advice. He was advised that Bollingmore would still be in time if they used BACS or CHAPS as the means of payment; they would be entitled to the "seven calendar day extension" by using that method.

Mr Robertson for Bollingmore contacted Unity the next day (4 December) and spoke to the manager, a Mr Andrew Jesson. Mr Robertson was told that, so long as a payment instruction was placed by a particular time in the afternoon, the payment would be effected the same day. In the morning of 5 December 2003 Mr Robertson presented a CHAPS payment request, on Bollingmore's behalf, to Unity for the full £79,904 in favour of the Commissioners. At 11.28am on 5 December Mr Robertson informed the Contact Centre that he was sending payment "today". Later that afternoon he was called by Mr Jesson of Unity and told that the payment would not be honoured. No payment was made for several weeks by which time a formal increased overdraft facility had been put in place between Unity and Bollingmore.

In February 2004 Unity gave as their reason for failing to pay the £79,904 amount due to the Commissioners on 5 December, the following account. The letter is signed by Mr Andrew Jesson and it reads as follows:

"When the VAT amount fell due for payment the Bank was undertaking an in-depth review of the company's facilities during which time the existing limits were being strictly enforced. Hence the CHAPS payment request made by the company on 5 December … was withheld pending either an increase in facilities or covering funds being paid into the Bank account."

Taken at face value the terms of that letter demonstrate that Bollingmore failed to pay its VAT for the 10/03 period on account of a shortage of funds. That is not a reasonable excuse and if that letter were the only evidence we would have to uphold the surcharge.

But there has been a conflict of evidence which, if resolved in favour of Bollingmore, enables them to invoke the "Steptoe" defence as explained by the Master of the Rolls, Lord Donaldson, in Customs and Excise Commissioners v Steptoe [1992] STC 757 at 770d. This reads as follows:

"Nolan LJ, as I read his judgment explaining and expanding on his judgment in Customs and Excise Commissioners v Salevon Ltd [1989] STC 907, is saying that 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."

Mr Robertson produced a letter at the hearing signed 17 January 2005, i.e. two days before the hearing, by the same Mr Jesson as had written a letter of February 2004. The statement in the February 2004 letter that "the existing time limits were being strictly enforced" presents an entirely different picture to that presented by his January 2005 letter which was clearly written for the purposes of the present proceedings. Mr Jesson was not called to give evidence. While recognizing that he is a senior official of Unity, his absence makes it difficult for us, without more, have been inclined to give full weight to the assertions in his letter. Nonetheless, we quote the relevant passages from the January 2005 letter:

"I can confirm that discussions had commenced regarding an increase in the company's overdraft from £250,000 to £480,000. In anticipation of this increase being sanctioned by the Bank's Board, borrowing in excess of the extant limit of £250,000 was permitted on a number of occasions, the peak borrowing figure being £423,000 on 16 October 2003.

The return of the quarterly VAT payment could not have been anticipated by Bollingmore's as the balance, assuming that the VAT payment was made, would have been £347,000, some £75,000 lower than the peak balance. As such, the return of the VAT would have come as an unexpected decision to our customer.

During December 2003 and January 2004, Bollingmore & Co were allowed to anticipate the requested overdraft increase in settlement of other creditors."

What else is there to go on? We know from Mr Robertson's letter to the Commissioners of 21 January 2003 that a review of Bollingmore's bank facilities had been going on for some time before December 2003 and that the formal increased overdraft had not been in place until after that letter was written. The existing overdraft of £250,000 was then increased to £480,000. We know that Bolligmore put in the CHAPS Payment Request on 5 December and that that had not, in Mr Robertson's view, been treated by the Bank "with the urgency it merited": see the 21 January letter. Mr Robertson commented in his letter to the Commissioners of 5 March 2004 that Mr Jesson's statement, in his February 2004 letter, that the CHAPS Payment Request had been "withheld pending either an increase in facilities or covering funds being paid into the bank account", was inappropriate because at the time Unity had been asked for the £230,000 increase in facilities for the prime purpose of settling Bollingmore's VAT liabilities. In the same letter Mr Robertson had suggested a reason for Unity's decision to "return" the CHAPS Payment Request; this was because by December 2003 it was clear that Bollingmore was running into losses: these adversely affected its cashflow position. The margin obtained by Bollingmore on the purchase and sale of cars was narrow, being between one and two per cent, and a small drop in sales would, Mr Robertson said, have a large impact on cash resources. The reason Mr Robertson put forward for the bank's decision on 5 December 2003 not to agree to the CHAPS Payment Request was because the bank had become aware of those losses.

Mr Robertson's oral evidence to us started with the position earlier in 2003. He said he kept a constant check on Bollingmore's cash resources. Bollingmore had spent some £150,000 upgrading their premises. They met this partly with a special bank loan of £70,000. They had held discussions with Unity in July 2003. At the time their sales forecasts were strong on account, in part, of their improved premises. Unity had agreed to continue the £250,000 overdraft. Unity was well aware of the trading position of Bollingmore and of the financial positions of the other two companies in the group. Unity had charges over the assets of those three companies giving them a total available security of some £2.5 million. Unity had cross-guarantees from all three companies. Unity, Mr Robertson understood, had had a bad experience with another motor dealer and its management were, to use his words, "fearful of the motor trade".

Unity undertook to consider extending Bollingmore's overdraft by £230,000. No formal agreement was in place until, as already mention, January 2004. Unity was, however, prepared to allow Bollingmore to exceed the £250,000 overdraft. This was unofficial. Bollingmore's borrowings exceeded the overdraft (Mr Robertson said, and this is confirmed in Mr Jesson's January 2005 letter) on a number of occasions in the period leading up to December 2003. Mr Robertson produced in evidence two bank statements. One showed a £423,000 overdraft in October and the other a £393,000 in November 2003. Mr Jesson refers to occasions after 5 December 2003 and before the formal increased overdraft facility was granted when Bollingmore had been allowed to overrun its £250,000 overdraft.

All that time Bollingmore continued to use the local Barclays Bank to effect its drawings and deposits. But Barclays Bank, as will be recalled, declined to process the 10/03 VAT payment by bank giro when instructions were presented "over the counter" on 3 December 2003. Mr Robertson therefore notified the Commissioners Contact Centre the same day and took advice to pay by BACS or CHAPS. The next day Mr Robertson was, on his evidence, in contact with Mr Jesson of Unity. On 5 December Bollingmore made the CHAPS Payment Request on Unity. That afternoon Mr Robertson was told that Unity would not process it. Mr Robertson said in evidence of his reaction to the bank's decision – "I was surprised".

Mrs Crinnion said that Mr Robertson should not have been surprised. There had been concern about Bollingmore's solvency since at least July 2003 and the fact that no formal agreement for an extension of its overdraft was in place by December 2003 showed that Unity was still concerned about Bollingmore's cash position. By December, she said, both Bollingmore and Unity were fully aware that there were insufficient funds to pay the VAT for the 10/03 period. There was therefore nothing sudden or unexpected about Unity's refusal of the CHAPS Payment Request.

It seems to us that Unity's explanation, in its February 2004 letter to the Commissioners, that "existing limits were being strictly enforced" is an accurate reflection of Unity's decision when they received the CHAPS Payment Request on 5 December 2003. It is not, however, an accurate statement of what its practice had been over the previous 2-3 months or even in the succeeding weeks. The evidence shows that it had been unofficially allowing Bollingmore to exceed its official overdraft by nearly £175,000. Mr Robertson knew exactly what was happening. On the basis of the evidence we have heard from Mr Robertson and seen from the bank statements, we accept what Mr Jesson said in his letter of 17 January 2005, i.e. that "The return of the quarterly VAT payment could not have been anticipated by Bollingmore". Mr Robertson knew that Unity had five times the security needed to cover, not just the official overdraft of £250,000, but also the unofficial overdraft of £230,000.

Precisely why Unity refused the CHAPS Payment Request on 5 December we do not know. Mr Jesson, who had been made aware of the presentation of the CHAPS Payment Request the day before, asserts that this could not have been anticipated. Taking all the circumstances into account we are satisfied that Bollingmore, through Mr Robertson, exercised reasonable foresight and sufficient diligence. Mr Robertson was well aware that the tax was due for payment on or shortly after 5 December 2003. Despite that, Unity failed to pay. Put positively, we think that Bollingmore, through Mr Robertson, had reasonable grounds for expecting that Unity would honour the CHAPS Payment Request and allow Bollingmore an increase in its unofficial overdraft, as it had done before 5 December and as it did in the few weeks after that.

For those reasons we think that Bollingmore has shown a reasonable excuse and we allow the appeal.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 17 February 2005

LON/04/1825