United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2005] UKVAT V19006

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W Mages (Rewinds) Ltd v Customs and Excise [2005] UKVAT V19006 (01 April 2005)

W Mages (Rewinds) Ltd v Customs and Excise [2005] UKVAT V19006 (01 April 2005)

19006

Value added tax – default surcharge – whether reasonable excuse – reasonable excuse shown for part of period

LONDON TRIBUNAL CENTRE

W MAGES (REWINDS) LTD Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Dr David Williams (Chairman)

Paul Adams FCA

Sitting in public in Bristol on 9 February 2005

Mr Mages, director, for the Appellant

Mr Dougal instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION

1. The Appellant company is appealing against the decision of the Commissioners to impose value added tax (VAT) default surcharges on it in respect of four consecutive quarters starting with the quarter ending on 31 May 2003. The VAT returns were received by the date due for the May and August quarters in 2003, five days late for the period ending 31 December 2003, and one day late for the period ending 31 March 2004. But full payment was not made so promptly.
2. Mark Anthony Mages, current managing director of the Appellant, gave evidence on behalf of the company. He did not dispute the Appellant's liability to make returns and pay value added tax (VAT) to the Commissioners by the required dates for each of the four quarters in question. But he explained the circumstances affecting the Appellant company during that year and invited the tribunal to find that the Appellant had a reasonable excuse for the delay in paying the full tax on each of the four occasions.
3. Having heard Mr Mages' evidence, Mr Dougal indicated for the Commissioners that they would accept that a reasonable excuse existed for the first of the four quarters, but not for the others. The tribunal, after a short adjournment, announced that in its view the Appellant had shown a reasonable excuse for the first and second of the quarters, but not the third and fourth. The Commissioners asked for a reasoned decision.

The facts

4. The Appellant company is a specialist engineering company based on a single site in mid-Somerset. It is entirely a service industry, specialising in repairs of electric motors and related equipment, as its name indicates. As such, it had at the relevant times no regular order book but depended from one week to another on its customers asking for maintenance, repairs or upgrades to be done. The only products it made were as part of, or in anticipation of, work that it was asked to do. Consequently, its only sales were linked to the services it provided. The business was established in 1960. The current managing director took over the business in 1987 and expanded it steadily at its site in mid-Somerset.
5. The company found that the scope for expanding its business was limited by its geographical location some distance from major industrial areas in the region. In order to expand its potential customer territory and base, the Appellant decided to purchase two new businesses. This it did in 2000, purchasing a business in north Somerset nearer to the major industrial units at Avonmouth Docks and estates. That business was involved in the generator and uninterruptible power systems businesses. The Appellant's intention was to develop and broaden its business base using staff and workshops on both sites. With the new business, the Appellant acquired leasehold premises, specialist machinery subject to equipment leases, and several additional members of staff. It also inherited the existing customer base of the business acquired.
6. The newly expanded business met a series of commercial and financial problems in 2002 and 2003. At the general level it found itself confronted at its new north Somerset site with strong competition from a rival business that was based nearby and was larger than its own operation. The commercial context for the new base for its operations therefore proved aggressively competitive. Further, given that the nature of the business involved extremely short forward order periods, the business as a whole was more exposed than many to the immediate effects of such competition. The tribunal finds that such competition should probably have been foreseen or at least anticipated and should therefore have been part of the Appellant company's thinking when moving to expand. Accordingly, this should be regarded as no more than ordinary adverse trading conditions and not of itself a reasonable excuse for any difficulties in meeting the time limits for making either VAT returns or payments. Nonetheless, it removed some flexibility from the Appellant's choices of action when it suffered more serious and less foreseeable difficulties.
7. The Appellant had already suffered along with many other business from the effects of other unforeseeable events including in particular the effect on its farming industry customers of the foot and mouth disease closures and the security after-effects on some of its customers of "9/11" as it is known (with the related closure of the Westlands plant at Weston-super-Mare, previously a customer). Again, however, these background problems, while they might have explained earlier compliance problems, did not of themselves excuse continuing defaults. But again they removed some flexibility of the business to respond to future shocks.
8. On 21 February 2003 the Appellant received by fax a notice that its largest customer had ceased operation the previous day. Mr Mages told the tribunal, and it accepts, that the same notice was sent out to all the suppliers and customers of the business by its foreign owners. The tribunal also accepts that the Appellant had had no warning at all of this sudden cessation of a major part of its trade. At that time the business from that one customer constituted about 3/5ths of the work at the north Somerset base, and over 50% of its income from that base. The loss of income and work was immediate. It left half the staff at that base with no work. But it also left the Appellant with an inventory of specialist items made on a speculative basis ready for assumed future orders from the customer (and therefore with no general market value) and also a continuing financial obligation to pay equipment leasing charges on specialist equipment of use only or mainly on the contracts from that customer. At that time the north Somerset base was providing about a third of the overall turnover of the business. Overnight, therefore, it lost about a quarter of its entire business turnover.
9. About three months later, and again with minimal warning, the Appellant lost its largest customer at its mid-Somerset base. That customer had for some years been a very loyal customer and was at the time its custom ended providing about 2/5ths of the business for that base. The reason for that loss was because the customer appointed a new buyer. The tribunal was told that the buyer came from a background involving links to competitor businesses. Within a week of the appointment, and with only that amount of warning, the Appellant lost that customer save for a few small contracts. The mid Somerset base was at that time providing about two third of total business, so the loss of this customer again represented a loss of around a quarter of total turnover.
10. So in the course of the first half of 2003 the Appellant lost half or more of its customer base with minimal warning and through no direct action of its own. As a result it decided to close its north Somerset base and retrench to its mid-Somerset base, regrouping as a single site business. But in doing so it had to bear two continuing forms of liability. The first, for which there was no immediate answer, was that it had long-term financial commitments arising from the north Somerset base that could not be terminated swiftly. These included a long lease on the business premises and a significant liability under various equipment leases for specialist machinery with no realistic market value. The other liability was to the north Somerset staff. Some were moved to the mid-Somerset base, but others could be found no employment within the Appellant. Mr Mages and his colleagues took the view that it was wrong to make such staff redundant, and that they should be supported, at least in the short term, until they found other jobs. It was not until June or July that the surplus staff who were not relocated found or were found other jobs and left the Appellant's employment. While other employers might have taken a more cavalier attitude to surplus staff, the tribunal accepts that the Appellant acted reasonably in treating its staff as it did in the interests of overall staff and customer relations in a small business with specialist staff.
11. The Appellant also moved during the late spring to find other ways out of its financial problems. It brought in the services of a business consultant and, with his expertise, was able to make refinancing arrangements to rescue it from its financial problems and provide a financial base for re-establishing the business. But by this time the Appellant was having severe problems with its bankers and was subject to stringent financial limits on all its actions. It was therefore unable to write cheques at that time for any purpose at all without the sanction of the bankers or immediately identifiable funds to meet the outgoings.
12. Once the immediate effects of the loss of the customer base had been confronted, and the refinancing arrangements were put in place, the Appellant was able to start re-establishing itself. Mr Mages told the tribunal that it took a full 18 months to recover. It was on this basis that he argued that the Appellant had a reasonable excuse for defaulting in each of the four quarters in question.
13. The Commissioners accepted, in the light of this evidence, that the Appellant had a reasonable excuse for the first of the quarters and withdrew their opposition to the appeal relating to that quarter. The tribunal accepted this and find that there is reasonable excuse for that quarter. The Appellant had made its VAT return on time and paid some of the tax (in two instalments) by the due date. And it had been open with the Commissioners throughout the period about its position, providing documentary evidence both of its problems and of its finances on request.
14. Mr Dougal, while accepting that good cause was shown for the first quarter of default, opposed the appeal for the other three quarters. With regard to the fourth quarter he established from Mr Mages in evidence that the Appellant was in sufficient credit at the time of payment of the fourth quarter VAT return that the VAT could have been paid in full with the return. Mr Mages, having originally indicated that the Appellant was unable to pay in full at the end of any of the quarters, accepted that on the evidence of the bank statement he had produced the Appellant was in funds at that time. The tribunal agrees with the Commissioners that in the light of that evidence there is no basis for any delay in paying in that quarter. The amount due was around £25,000 of which about £16,000 was paid at the time and the balance only some months later. The tribunal finds that there is no reasonable excuse for this delay.
15. The tribunal considered that the second and third quarters presented a more marginal picture. The Appellant had made a timely return and paid some of the VAT on the due date for the period ending on 31 August. It made a return a few days late, and paid most of the VAT with that return, for the return for the period ending on 30 November. The tribunal does not accept that the fact that the return was due at the end of December is of itself an excuse in the absence of specific evidence (of which it was given none) of the holidays causing the delay.
16. The tribunal formed the view that the Appellant had no reasonable excuse for the third quarter, as again by that time it should reasonably have dealt with its problems sufficiently to meet its legal obligations to pay the VAT in full and on time. But on balance the tribunal consider that the Appellant had had a continuing reasonable excuse for the second quarter. Both the two totally unforeseeable but major contractions of the business base were still having a continuing effect on the Appellant well into that quarter. This included the payment of staff for whom there was no adequate employment and the inability to shed some of the continuing obligations of the closure of its north Somerset base, both being financed against a background of stringent banking arrangements. And the Appellant was working with its business consultant to arrange the refinancing that took the immediate financial pressures from it. The Tribunal accepts the evidence that during the second of the quarters the financial constraints on the Appellant were still caused to a significant degree by the unforeseen change in the customer base and an unavoidable business response to that change that involved both financial and physical restructuring. However, the Appellant had had a reasonable time to ensure the restructuring took effect by the end of the third quarter and had dealt or was dealing with the staffing and other residual effects of its problems. On balance, the tribunal finds that the excuse for delay in the previous quarters did not apply to the same extent in the third quarter and that, on balance, it did not have a reasonable excuse for its delays in that period.

David Williams

CHAIRMAN

RELEASE DATE: 1April 2005

LON/04/1285