United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2006] UKVAT V19486

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Axxent Voice and Data Ltd v Revenue and Customs [2006] UKVAT V19486 (06 March 2006)

19486

VAT – Default Surcharge – Section 59 VATA – Reasonable excuse

LONDON TRIBUNAL CENTRE

Axxent Voice and Data Limited Appellant

and –

Her Majesty's Commissioners for Revenue and Customs Respondents

Tribunal: Charles Hellier (Chairman)

Tym Marsh

Sitting in public in London on 11 January 2006

Shez Cheema and Julie Fletcher of Azzuri Communications Limited - for the Appellant

Simon Chambers instructed by the Acting solicitor for HMRC for the Respondents

© CROWN COPYRIGHT 2006
 
DECISION
1. This is an appeal against the following default surcharges made under section 59 VAT Act 1994 against the Appellant company:

	Period	Rate	Outstanding VAT	Surcharge
02/03	28 February 2003	2%	43,869.18	987.70
05/03	31 May 2003	5%	11,953.33	597.66
08/03	31 August 203	10%	44,649.28	4,464.92
11/03	30 November 2003	15%	53,772.72	8,065.90
02/04	29 February 2004	15%	66,819.98	10,022.99
05/04	31 May 2004	15%	46,779.45	7,016.91

2. The Appellant was also late in submitting its VAT returns and paying its VAT for the period 11/02 ending on 30 November 2002.

The Evidence

3. Mr Cheema and Ms Fletcher were from Azzuri Communications Ltd (Azzuri) which since 6 August 2004 had been the holding company of Axxent Voice and Data Limited (Axxent). They explained the background to us:

(i) The Appellant's trade had been in the mobile telecommunications market. In the period to 6 August 2004 its turnover was about £1.1 to £1.5m p.a.

(ii) The Appellant company was acquired by Azzuri on 6 August 2004. Prior to that date its shares had been owned by two individuals. The same individuals had also owned the issued share capital of Jupiter Telecom Limited. Jupiter conducted a related telecommunications business. These individuals had managed and controlled, and were directors of both the Appellant and Jupiter. At the end of November 2002 a third company RSL Com UK Ltd had been put into liquidation. At the time it was put into liquidation it owed Jupiter £1.5m. Jupiter at that time had two major customers accounting for 80% of its business one of which was RSL, and taking the £1.5m debt at its face value its net assets were about £2m.

(iii) The liquidation of RSL cast serious doubts over the viability of Jupiter's business. The directors decided it could not continue to trade and it was put into liquidation in December 2002 or January 2003.

(iv) Following the appointment of a liquidator for Jupiter, Axxent decided to commence negotiations for the acquisition of Jupiter's business from its liquidator. An agreement was made by Axxent with the liquidation of Jupiter in early 2003 for the acquisition of its assets. These assets comprised furniture and fittings, mobile phones, accessories, and the debt due from RSL. No liabilities were taken over.

(v) At the time of the acquisition of Jupiter's assets the directors of Axxent apparently received an oral assurance from the liquidator of RSL that he would make a payment in respect of the debt due from RSL of £1.5m of some £285,000 in February 2003. The cash flow forecasts for Axxent prepared at the beginning of 2003 showed the expectation that the debt would be paid in accordance with this assurance. The liquidator did not make payment in accordance with this assurance. £89,000 was received in December 2003, and further instalments at later dates.

(vi) Axxent therefore had two consecutive and related sets of problems from the end of November 2002 until its acquisition by Azzuri in August 2004. The first was that in late 2002 and early 2003 the attention of the directors became focussed entirely on the problems of Jupiter and RSL and their mental, physical and monetary resources were withdrawn from Axxent. Their attention returned to Axxent in early 2003 when they negotiated the acquisition by it of Jupiter's business. The second problem was that the £285,000 did not materialise as expected. After its acquisition of Jupiter's assets the position of Axxent deteriorated because the £285,000 it had expected from the liquidator did not arrive. The company became very short of cash and the directors could not raise further funds. Each time funds became available they had to choose between using them to pay those of their employees who were vital to the business, the payment of PAYE and other taxes, and the payment of VAT.

(vii) Ms Fletcher summarised the position by saying that in late 2003/early 2004 the directors were in panic mode, and then in 2004 in survival mode.

4. We were not shown the agreement for the acquisition of Jupiter's business, the cash flow forecasts or recent accounts for the Appellant; but we were shown the bank statements for the Appellant for the period 4 February to 9 August 2004. The only evidence of the assurance from the liquidator of RSL was the report by Ms Fletcher about the cash flow forecasts of the Appellant, and of what she and Mr Cheema had been told by the employees and officers of the company.
5. There was no other evidence before us.
6. We found Mr Cheema and Ms Fletcher open and frank and we accept their evidence of the circumstances of the company as a truthful account of their understanding. However there was no first hand or documentary evidence before us of the circumstances of Axxent at the relevant times or oral evidence from anyone directly involved in its business. As we note below the statutory provision requires us to be satisfied that there was a reasonable excuse, and that places a burden on the Appellant to satisfy the tribunal of the relevant issues. It may be more difficult for a tribunal to be satisfied on the basis of the evidence given by one person of his understanding drawn from conversation with a third party, because it is not always possible to test whether the understanding of the person giving evidence to the tribunal reflected the meaning of the person whose words are summarised or reported or whether that person gave a full and fair account of the issues of relevance for the tribunal's decision.

The Legislation

7. Section 59(1) VAT Act 1994 provides that a person is to be regarded as being in default in respect of a VAT period if his VAT return for a period is not received by the Commissioners on or before the due date, or if the VAT shown as payable on the return is not paid before the due date.
8. Section 59(2) to (5) provide that if a person is in default for a period and the Commissioners serve on him a surcharge liability notice (specifying a surcharge period of 12 months from the end of the VAT period), then if he is again in default in that surcharge period he shall be liable to a default surcharge. Any default in that 12 month period also permits the Commissioners to extend the period to 12 months from the end of the period of that later default. Another default within that extended period has the same effect both as regards a default surcharge and a further extension of the period.
9. It was not disputed by the Appellants that a surcharge liability notice and notices extending the surcharge liability period had been validly served.
10. The amount of the default surcharge is 2%, 5%, 10% or 15% of the VAT unpaid at the due date for any VAT period - the percentage depending upon whether the default is the first, second, third, or fourth or subsequent default in that period.
11. The Appellant did not dispute the application of the relevant percentage or the amount of VAT outstanding for any period relevant to this appeal.
12. Section 59(7) provides a defence. So far as relevant in this appeal it provides that:

"if a person who [otherwise] would be liable to a surcharge…satisfies… a tribunal that… there is a reasonable excuse for the return or the VAT not having been [dispatched in time] he shall not be liable to a default surcharge, and"

the default shall be treated (for the purposes of determining the surcharge liability period) as not having occurred.

13. As a result if the Appellant could satisfy us that there was a reasonable excuse for the delays (or any of them) then the applicable default surcharges would be eliminated, and the percentage penalty applicable to any surcharge in respect of any subsequent default in respect of which we were not so satisfied would be adjusted appropriately.
14. We note however that the requirement of the section is that the Appellant satisfies the tribunal. That is to say it must produce evidence to the tribunal which satisfies it that there was a reasonable excuse.
15. Section 71(1) VAT Act 1994 provides:

"(1) For the purpose of any provision of sections 59 to 70 which refers to a reasonable excuse for any conduct -

(a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and

(b) where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse."

16. The effect of this provision is that a lack of funds in itself cannot be treated as a reasonable excuse but that the underlying reason for the relevant delay, even if that reason also gave rise to the lack of funds, may itself constitute a reasonable excuse where reasonable foresight and due diligence, and a proper regard for the need to pay the tax on time would not have prevented the delay in the circumstances.

Discussion

17. We are satisfied that the liquidation of RSL induced a degree of panic in the directors of Axxent and that this panic was the reason for the failure of the company to submit its VAT return and to pay its VAT for the 11/02 period.
18. We are also satisfied that the continuation of this panic, and the circumstances surrounding the decision to acquire, and the acquisition of Jupiter's business was the reason for the delays in the submission of the VAT return and the payment of the VAT due for the 02/03 period.
19. We are also satisfied that the failure of the liquidator of RSL to pay the £285,000 assured was at least one of the factors which gave rise to the cash flow difficulties which the company suffered from between February 2003 and August 2004, and that those difficulties gave rise to the late payment of VAT in that period.
20. However, being satisfied in any particular case that a circumstance was or the reason for a delay is not the same as being satisfied that there was a reasonable excuse for the delay.
21. In considering this issue we found it helpful to draw a distinction between risks of adverse events occurring which were outside the normal cause of business, or outside the control of the taxpayer, and risks which were inherent in business decisions of the taxpayer. In the first category would fall the sudden death of key employees, computer virus attack, earthquake or fire. Whether or not it was reasonable for such an event to excuse an action would depend upon whether its likelihood was such that in the circumstances of the taxpayer it should reasonably have been protected against. In the second category fell risks inherent in expansion plans, disposals or acquisitions where the taxpayer took a decision which involved a risk accepting that risk but hoping for a successful outcome. The assumption of the risk is part of the entrepreneurial management of the business. In those circumstances it is more reasonable to expect the business to make provision for a real risk materializing. If it does not, or cannot, make provision against the worst happening then that eventuality is less likely to be able to constitute a reasonable excuse for a delay in VAT payment. We accept that these categories are neither comprehensive nor well defined and there may well be events which fall outside or within both categories. Nevertheless we found this approach useful in considering the misfortunes which befell the company and which led, or may have led, to the delays giving rise to the imposition of the surcharges.
22. The insolvency and failure of RSL and the consequent insolvency of Jupiter fell into the first category. It was a risk, but may not have been one against which it was possible to protect, or reasonable to expect provision to be made. The failure of the liquidator to pay the £285,000 as expected fell into the latter category. The company was not compelled to acquire Jupiter's business: it decided to do so. The company had made a decision to buy the debt; there must have been a real risk that it would not be paid. That risk must have been assumed by the company. Thus we start our consideration of whether or not we have been satisfied that the company had a reasonable excuse for any of its delays expecting that we would need more persuasion that the failure to pay the debt constituted a reasonable excuse than the insolvent liquidation of RSL.
23. In relation to the insolvent liquidation of RSL we accept that this may have panicked the directors of the company and absorbed much of their time. What we were not shown however was how unexpected that event was, and why the administration of the company could not have been carried on without the continuing attention of the directors: even if the directors were not around to sign cheques, the VAT returns could have been prepared and submitted. Further, whilst we could understand that it was possible that the confusion in December 2002 and January 2003 may have been such that the VAT returns could not sensibly have been prepared or submitted, it seems to us that after that period a due regard to the company's statutory responsibilities should have overcome any initial panic and confusion.
24. Thus in relation to 11/02 and 02/03 it seems to us possible that the panic may have been a reasonable excuse for the delays, but thereafter in the absence of specific evidence to the contrary we would hold it could not. No such evidence was before us.
25. In relation to 11/02 and 02/03 we would be minded to accept the panic as a reasonable excuse for the late payment of the VAT but we were not shown why the panic led ineluctably to the failure to submit VAT returns. Because the statute places the onus on the Appellant to satisfy us of a reasonable excuse we cannot find that there was such an excuse when we harbour unresolved doubts about the reasons for the delays.
26. As a result we are not satisfied that the panic was a reasonable excuse for the delayed submissions of returns in 11/02 and 02/03.
27. The acquisition of the business of Jupiter and the debt due from RSL brought risks to the company: the risk of disorder on the amalgamation of the businesses, and the risk that the debt would not be paid.
28. Against the first of those risks it was in our view reasonable to expect the company to make provision. At the very least it could be expected to ensure timely submission of its VAT returns.
29. In relation to the debt and the cash flow shortage to which its late payment gave rise, we had several concerns. First we assumed that the company had paid the liquidator of Jupiter for the debt. If it had paid, it may have paid more or less than £285,000. If it had paid less than £285,000 that would indicate some acceptance of a risk that it would not be paid or paid on time. There was no evidence before us on this issue.
30. Second, we had no evidence of the terms of the assurance obtained from the liquidator of RSL that payment would be forthcoming. We would be surprised if a liquidator freely gave an unqualified or binding assurance. It seems to us more likely that he may have indicated his expectations but in suitably qualified language. It therefore seems likely that the risk of non-payment or late payment was not negligible. It was a real risk which the company accepted when it acquired the debt. The consequences of an adverse outcome were therefore in our view events against which the company should either have protected itself in relation to its obligation to pay VAT or which if it did not protect itself would not constitute a reasonable excuse for its failures.
31. As a result we are not satisfied that the failure of the liquidator to pay was a reasonable excuse for the delays in the submission of the return (or for late payment).

Other Matters

32. Mr Cheema and Ms Fletcher explained to us the circumstances of their involvement with the affairs of the Appellant. Prior to the acquisition of Axxent, Azzuri had investigated its affairs. That investigation revealed the failure to submit VAT returns and to pay VAT for a considerable period. Mr Cheema together with their lawyers, Osborne Clark, and accountants had acted for Azzuri in this investigation Mr Cheema's responsibility was in relation to financial matters. He had required the directors of Axxent to submit VAT returns and proposed for the payment of the outstanding VAT before the acquisition completed. As a result of his actions returns were submitted on 5 August 2004.
33. Following the acquisition Mr Cheema made strenuous efforts to agree with the Respondents a timetable for the payment by Axxent of the outstanding VAT. Although he found some of the Respondents' staff helpful, some were less so and there were frequent changes of responsibility.
34. Mr Cheema said that Azzuri's control of Axxent's business had resulted in the payment of VAT and payroll taxes which would in all probability otherwise not have been paid. Azzuri's actions had been responsible and speedy and had brought about proper compliance by the Appellant. In those circumstances it was unfair to impose surcharges which would economically damage - Azzuri the very person who had ensured that tax had been paid which would otherwise not have been paid.
35. Mr Cheema also said that immediately following Azzuri's acquisition of Axxent he had contacted Mr Patel at the Respondents debt management unit, and had explained the situation of Axxent to him and sought his advice. He had asked Mr Patel about the surcharge liability returns the company had received and Mr Patel had said that the notices were generated by the computer system and would be resolved or cancelled when a payment plan was agreed between the Appellant and the Commissioners. Mr Cheema thereafter made strenuous efforts to agree a repayment plan but received only sporadic help in so doing from the Respondents.
36. Mr Cheema said that Azzuri's policy was to ensure proper compliance and full disclosure. It was an important reputational concern. His communications with the Respondents were in pursuance of that policy.
37. In the circumstances Mr Cheema suggested to us was not proper for the Respondents to seek default surcharges.
38. The Chairman indicated to Mr Cheema in the course of the hearing that those issues were outside the jurisdiction of the tribunal. The actions of the Respondents may or may not have been fair or reasonable, but the tribunal was concerned only with whether or not the statutory requirements for the calculation and imposition of the surcharge had been complied with, and whether or not for the purposes of section 59 there was a default. Questions of fairness either in a broad sense or narrow public law sense were not matters which were relevant to its jurisdiction. It could be that they were relevant in a different forum - in judicial review or in representations to the adjudicator or to an ombudsman.
39. Accordingly the tribunal did not proceed to hear all of the issues Mr Cheema wished to raise on these topics, and our decision has been made without regard to them because they were not relevant to the actions of Axxent which gave rise to the delays nor the causes of any of those delays.
40. We would like however to commend Azzuri for what appeared to us to have been a proper, diligent and responsible approach to the liabilities and duties of its new subsidiary. We must, however, dismiss this appeal.
41. Our decision unanimous.
CHARLES HELLIER CHAIRMAN RELEASED: 6 March 2006

LON/2005/0946