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United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Turk (t/a Turk Removals) v Revenue and Customs [2006] UKVAT V19503 (23 March 2006)
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Cite as: [2006] UKVAT V19503
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F Turk t/a Turk Removals v Revenue and Customs [2006] UKVAT V19503 (23 March 2006)
    19503
    VAT DEFAULT SURCHARGE: Reasonable Excuse for not paying VAT on time from 12/03 to 03/05 – cash flow difficulties stemming from inadequate control of expenditure and borrowings – A prudent business person acting with due diligence and reasonable foresight would have anticipated these difficulties considerably earlier than the Appellant – no reasonable excuse – alternative grounds for periods 06/04 and 03/05 –receivership of commercial customer and warehouse sale – no reasonable excuse – Appeal dismissed.

    LONDON TRIBUNAL CENTRE

    F TURK Appellant
    TRADING AS TURK REMOVALS

    - and -

    HER MAJESTY'S REVENUE and CUSTOMS Respondents

    Tribunal: MICHAEL TILDESLEY OBE (Chairman)

    ELIZABETH MACLEOD JP, CIPM (Member)

    Sitting in public in London on 1 February 2006

    Glynn Edwards, VAT Consultant, Wolters Kluwer (UK) Limited for the Appellant

    Pauline Crinnion, Advocate for HM Revenue & Customs, for the Respondents

    © CROWN COPYRIGHT 2006

     
    DECISION
    The Appeal
  1. The Appellant was appealing against the issue of a surcharge liability notice for the period 12/03 and the imposition of default surcharges for the periods 03/04, 06/04, 09/04, 12/04, and 3/05 on the ground that it had a reasonable excuse for the default.

  2. The amount of default surcharges were as follows:

    3. Period
    		 VAT Assessed (£) Percentage for Default (%)
    		 Default Surcharge (£)
    12/03 37,740.15 0 Surcharge Liability Notice
    03/04 25,988.46 2 519.76
    06/04 37,488.35 5 1,874.41
    09/04 37,578.85 10 3,757.88
    12/04 22,942.75 15 2,991.41
    03/05 24,964.84 15 3,744.82
    Preliminary Application
  3. The Appellant applied to extend the time limit to make its Appeal in respect of defaults incurred for periods 12/03, 03/ 04 and 6/04. The Respondents opposed the application.

  4. The Appellant's Notice of Appeal was lodged with the Tribunal on 13 July 2005 which was considerably after the 30 day period allowed by the Tribunal Rules in which to lodge the Notice following the issue of the disputed decision.

  5. We were advised that the Appellant contacted the Respondents in writing on the 29 January 2004 and 14 June 2004 about its difficulties in making the VAT payments on time. On 23 May 2005 the Appellant requested the Respondents to reconsider their decision to issue default surcharges for the periods 06/04 to 03/05. We were satisfied that the Appellant had not deliberately abused the Tribunal Rules with respect to the late service of the Notice of Appeal. We, therefore, decided to grant the Appellant's application and extend the time for service of the Notice of Appeal until 13 July 2005.

    6. Issue in Dispute
  6. The Appellant was an established fifth generation family business comprising of a father and son partnership, which dealt with removals and container storage. The Appellant experienced cash flow difficulties which made it impossible for the Appellant to meet its VAT liabilities. The Appellant contended that the cash flow difficulties were caused in part by the insolvency of several customers.

  7. The Appellant submitted that it had a reasonable excuse for the six default surcharge periods because it had done everything a prudent and competent business person, mindful of its obligations to VAT, would have done in the same or similar circumstances to try and pay the tax due. If that contention failed, the Appellant submitted that it had reasonable excuses for the two periods ending 06/04 and 3/05. The Appellant was unable to pay its VAT for the two periods because of the insolvency of one of its principal customers in the period 06/04; and the collapse of a property sale in the period 03/05.

  8. The Respondents, on the other hand, submitted that the Appellant's failure to pay the VAT due for each of the relevant periods was a result of insufficiency of funds and under capitalisation of its business, which did not amount to a reasonable excuse for avoiding the default surcharges.

    9. The Evidence
  9. We heard evidence from Andrew David Bourne, a partner, for the Appellant.

  10. We received separate bundles of documents from each of the parties.

    11. The Facts
  11. Mr Bourne told the Tribunal that his Great Grandfather founded the business in 1879. Mr Bourne and his father, Mr D T F Bourne, were the present partners of the firm. The Appellant operated in four areas of the removal business: domestic house removals, commercial haulage removals, storage, and insurance in connection with the removals. The Appellant employed 36 staff as at 1 April 2004, many of whom were long serving employees.

  12. The Appellant's Trade and Profit and Loss Accounts for the years ending 31 March 2003, 2004 and 2005 revealed that the Appellant's income and gross profit increased in each of the successive years. However, the Appellant suffered losses in the years ending 2004 and 2005. The loss in 2005 was halved from that in 2004.

    13.   Year ending 2003 (£) Year ending 2004 (£) Year ending 2005 (£)
    Income from sales 961,257 1,134,476 1,136,870
    Gross Profit 313,567 327,016 357,929
    Net (loss) Profit 68,452 (75,686) (37,448)
  13. The Trade and Profit and Loss Accounts showed that the major contributors to the decline in profitability from 2003 to 2004 were substantial increases in insurance charges as a result of the perceived terrorist threat, wages and national insurance costs and lorry expenses.

  14. Mr Bourne explained that the Appellant's profitability declined in the year ending March 2004 because of a downturn in the home removal market. As a result the Appellant relied more on its contracts with its commercial customers comprising of large commercial stores, such as John Lewis PLC and Allders. The profit margins for the commercial sector were considerably smaller than the home removal market because it was a competitive market and the commercial customers possessed significant bargaining power to keep contract prices low. The payment terms for its commercial customers were longer than those for its domestic customers. Mr Bourne stated that the Appellant supported costly practices, such as running vehicles at a loss, in order to secure contracts with its commercial customers.

  15. The Appellant's accountants in their letter of 30 January 2004 expressed concerns about the decline in the Appellant's profitability in the nine month period to 31 December 2003 with losses recorded in the months of May, July, September and October 2003. Essentially the cause of the losses was that the outflows of the business exceeded the turnover, notwithstanding a significant increase in the turnover. The accountants predicted that the financial difficulties would continue unless profitability improved.

  16. The Appellant on the advice of its accountants and bank took steps to deal with the decline in profitability which was creating severe financial difficulties.

    17. Period ending 12/03 and subsequent Actions
  17. The Appellants overdraft limit was £88,032 significantly over the authorised limit of £60,000. The Appellant on the advice of its bank made a part-payment of £10,000 towards its VAT liability of £37,740. On 29 January 2004 the Appellant indicated to the Respondents that one of its larger customers had gone into liquidation which was why it could only pay part of its VAT with the balance paid over the next 60 days. The Appellant's accountants recorded in their letter of 24 March 2004 that the Appellant was restricting its payments to Customs and Excise and Inland Revenue to reduce the net deficit on its balance sheet. The Appellant was also considering ways of reducing labour costs.

    18. Period ending 03/04 and subsequent Actions
  18. The Appellant's overdraft had reached £101,351 and was unable to pay any of its VAT due of £25,998. The Appellant informed the Respondents that it intended to sell one of its warehouses to pay off the debt. The Appellant converted £66,000 of its overdraft into a long-term loan repayable over seven years. In either late June or early July 2004 the Appellant formally notified its employees that it would be consulting about potential redundancies. Mr Bourne re-mortgaged his home with the purpose of injecting £50,000 into the business.

    19. Period ending 06/04 and subsequent Actions
  19. The Appellant's overdraft as at 30 July 2004 was £35,720 which was within the approved overdraft of £40,000. The Appellant was, however, unable to pay its VAT liability of £37,488. The Appellant informed the Respondents that the sale of the warehouse was proceeding and that in the meantime the Appellant would make weekly payments of £500 towards the VAT debt. During this quarter one of the Appellant's principal customers, Roberts Stonewich, went into administration owing the Appellant £56,315. As a result of this debt, the unapproved debts with the Appellant's factor, Alex Lawrie, increased from £6,326 at the end of May 2004 to £56,314 at the end of June 2004.

    20. Period ending 09/04 and subsequent Actions
  20. The Appellant was operating within its overdraft limit but unable to meet its VAT payment. Another customer, Bradley Furniture, went into receivership owing £9,000.

    21. Period ending 12/04 and subsequent Actions
  21. The Appellant exceeded its overdraft and did not pay the VAT due of £22,942. The sale of the warehouse fell through on 10 March 2005, of which the Respondents were notified. Another customer, Allders Stores Limited, went into liquidation owing £1,111.

    22. Period ending 03/05 and subsequent Actions
  22. The Appellant had an overdraft of £66,773 and was unable to meet its VAT return of £24,964. On 10 May 2005 the sale of the warehouse was completed with the Appellant remitting £75,000 of the proceeds to the Respondents to satisfy its entire VAT debt.

  23. The Appellant provided a summary of income received during the financial year of 2004/05, which totalled £1,504,726 broken down between £464,400 (bank), £818,699 (Alex Lawrie, factoring agent) and £221,627 (other receipts). The average quarterly income received from the factoring agents and other receipts amounted to £260,082.

  24. Mr Bourne accepted in cross-examination that the total sales figure for the periods 12/03 and 03/04 were £341,000 and £270,000 respectively.

  25. The Appellant entered into a factoring arrangement with Alex Lawrie, sometime in 2003, which entitled the Appellant to draw down 80 per cent of the invoice price on issue of the invoice. The factoring arrangement applied principally to the Appellant's commercial clients. The Appellant collected direct from its domestic house removal clients since the payment terms were much shorter.

  26. Mr Bourne, on behalf of the Appellant, accepted in cross-examination that the Appellant received a guaranteed income flow from the factoring arrangement but there were insufficient funds to pay all the debts. The Appellant gave priority to paying the employee's wages and vehicle fuel to keep the business afloat. Mr Bourne was of the view that if the Appellant had paid its VAT and national insurance on time during the period in the question the business would have folded with the partners losing their homes.

  27. The Respondents considered that the debt of £53,632 arising from the insolvency of Roberts Stonewich did not constitute a significant proportion of the Appellant's turnover over the year, representing five per cent of the declared outputs.

    28. Reasons for Our Decision
  28. Section 59 of the VAT Act 1994 requires the Appellant to furnish VAT returns and pay the outstanding VAT within one month of the relevant accounting period. The Appellant failed to pay the VAT due within one month for the accounting periods 12/03, 03/04, 06/04, 09/04, 12/04, and 3/05. As the Appellant was subject to a surcharge liability notice throughout the periods from 03/04 to 3/05 it was liable to pay surcharges amounting to £12,888.28 for its defaults.

  29. The Appellant can avoid the default surcharges if it can satisfy the Tribunal on a balance of probabilities that it had a reasonable excuse for not furnishing the VAT payments on time. Insufficiency of funds in itself cannot in law amount to a reasonable excuse (section 71(1)(a) of the VAT Act 1994).

  30. The Appellant stated it did not have sufficient funds to meet its VAT liabilities in the periods in question. The Appellant, however, considered it had a reasonable excuse because it done its utmost to meet its VAT liabilities and should not be penalised in the same way, and to the same degree as those who simply ignore their VAT responsibilities. The Appellant relied on the VAT and Duties Tribunal decision in Renlon Ltd v Commissioners of Customs and Excise [2000] VTD 16987 and an extract from the Respondents' correspondence dated 8 June 2005 about the prudent and competent business person as authorities for its proposition that doing its utmost may amount to a reasonable excuse.

  31. In Renlon the Tribunal found a reasonable excuse in the case of a company which relied on the then Respondents' consistent practice of not imposing surcharges on VAT payments received two days late. The statement of the Tribunal that "default surcharges are capable of operating as the most extreme financial penalties in the United Kingdom taxing regime ……the taxpayer is entitled to rely on a fair operation of this penalty system by the Commissioners" was governed by the particular factual context of the Appeal. In our view Renlon does not give support to the Appellant's proposition that the default surcharge scheme as a general rule treats a trader who has done his utmost to meet its VAT liabilities more favourably than a trader who ignores his VAT responsibilities.

  32. The Tribunal decision in Greengate Furniture Ltd v Commissioners of Customs and Excise [2003] V & DR 178 reviewed the legislative background of the default surcharge scheme and considered whether the scheme was proportionate. The Tribunal concluded that the legislature had a wide margin of appreciation when framing policies in the area of taxation and that a system of penalties based on automatic assessment was necessary to ensure compliance. The Tribunal stated at paragraph 97:

    33. "The fact remains however that default surcharges (my italics) are a blunt instrument which only takes limited account of the blameworthiness of the trader. If the trader cannot establish a reasonable excuse, the legislation takes no account of the difference between the trader who has made a genuine effort to comply albeit without success and the trader who has made very little effort and it takes no account whatever of the extent of lateness. Either the trader is on time or he is not; either he exercises due diligence or he does not. No account is taken of the degree of culpability".
  33. Thus the Appellant cannot avoid the consequences of the default surcharge scheme by simply relying on the facts that it maybe less culpable than other traders or that it did not have sufficient funds. Those consequences can only be avoided if the Appellant can satisfy us that it had a reasonable excuse for not paying its VAT on time.

  34. The Appellant contended that it met the requirements of the wording in the Respondents' letter dated 8 June 2005, and, therefore, had a reasonable excuse for not paying its VAT on time. The Respondents' letter cannot be relied upon as a statement of the law. In the letter the Respondents attempted to give their interpretation of the law regarding the circumstances where the underlying cause for the lack of funds may constitute a reasonable excuse. We are not bound by the Respondents' interpretation of the law.

  35. Customs and Excise Commissioners v J B Steptoe [1992] STC 757 is the leading authority on reasonable excuse in the context of insufficiency of funds. Steptoe established that insufficiency of funds could never of itself constitute a reasonable excuse, but the cause of that insufficiency, the underlying cause of the taxpayer's default, might do so. Nolan LJ, however, considered at page 773 that such circumstances would be rare:

    36. " …the cases in which a trader with insufficient funds to the pay the tax can successfully invoke the defence of reasonable excuse must be rare. That is because the scheme of collection which I have outlined involves at the outset the trader receiving (or at least being entitled to receive) from his customers the amount of tax which he must subsequently pay over to the commissioners. There is nothing in law to prevent him from mixing his money with the rest of the funds of his business and using it for normal business expenses (including the payment of input tax), and no doubt he has every commercial incentive to do so. The tax which he has collected represents in substance, an interest free loan from the commissioners. But by using it in his business he puts it at risk. If by doing so he loses it, and so cannot hand it over to the commissioners when the date of payment arrives, he would normally be hard to put to it to invoke section 19(6)(b). In other words he will be hard put to it to persuade the commissioners or the tribunal that he had a reasonable excuse for venturing and thus losing money destined for the Exchequer of which he was the temporary custodian".
  36. Lord Donaldson of Lymington MR at page 775 went onto explore when underlying causes of insufficiency of funds which led to a default were to be regarded as a reasonable excuse or not. He said:

    37. " …. 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".
  37. Thus in order for the Appellant to satisfy us that it had a reasonable excuse for not paying its VAT on time, the Appellant would have to establish the underlying cause of the insufficiency of funds. Further, the consequences that flow from the underlying cause could not by avoided by the exercise of reasonable foresight and due diligence on the part of the Appellant, whilst having at the same time proper regard for the fact that the VAT would be due on a particular date.

  38. We find the following facts in relation to this Appeal:

    39. (1) The Appellant did not pay its VAT on time for the periods from 12/03 to 03/05 because it did not have sufficient monies to fund the outgoings of its business.
    (2) The Appellant's income from sales increased by £170,000 in the year ending 31 March 2004 from the previous financial year. Further in the year ending 31 March 2005 there was a slight increase of £2,000 in sales income on the 2004 figure. The Appellants income for the financial year 2004/05 from all sources was £1,504,726. We conclude from these facts that the Appellant's financial difficulties were not a result of a decline in sales and income.
    (3) The Appellant suggested that the principal cause of its financial difficulties was the shift in its business from private house removals to commercial removals. The commercial removal sector resulted in smaller profit margins and longer payment terms than the private house sector. The Appellant, however, failed to back up its assertion about the shift in its customer base with detailed factual evidence about the margins, the proportions and the precise relationship between the shift and cash flow. Also the commercial risk associated with the longer payment terms was reduced by the factoring arrangement with Alex Laurie & Co which meant that the Appellant could draw down 80 per cent of its income following the issue of the invoice. We are not satisfied on the evidence before us that the principal cause of the Appellant's financial difficulties was the shift in its customer base.
    (4) The Appellant supplied the Tribunal with correspondence dated 30 January 2004 from its accountants, which in our view provided a more cogent explanation for the Appellant's financial difficulties. The contents of the letter revealed that despite a significant increase in turnover, the Appellant's outflows were significant and in part were funded by increases in creditors. Further trading losses occurred in May, July, September and October 2003 with the accountant requesting an explanation for those losses. The Appellant's Trade and Profit and Loss Accounts revealed that employee and lorry fuel costs were major contributors to the increases in the Appellant's overheads. These expenditure heads were under the Appellant's direct control. Our findings from the correspondence are that the Appellant failed to exercise proper and timely control over its expenditure and borrowings and its dilatoriness in respect of this critical area of its business was the cause of its financial difficulties from 1 January 2004 to 1 April 2005.
    (5) The Appellant sought to persuade us that the steps taken by it in 2004 and 2005 to deal with its financial difficulties were those of a prudent business person. We disagree. A prudent business person would have taken action earlier which may have avoided some of the measures it was forced to take in 2004/05 to bring down its costs.
    (6) The evidence showed that the Appellant chose to restrict its payments to Customs and Excise to fund the net deficit in its balance sheet. Mr Bourne accepted in his evidence that he gave priority to the payment of other items of the Appellant's expenditure. The Appellant produced no substantive evidence to demonstrate whether it tried to reach arrangements with other creditors before deciding to restrict payments to Customs and Excise. We are satisfied on the evidence that the Appellant perceived the VAT revenue collected as a readily available source of funds which could be utilised to manage the financial crisis which was largely of the Appellant's own making. This was a situation where the Appellant chose not to make the VAT payments on time rather than the situation where it did not have the collected revenue to pay the VAT due.
  39. We conclude from our findings of fact that

    40. (1) The cause of the Appellant's financial difficulties in 2004/05 was that the Appellant failed to take proper and timely control of its expenditure and borrowings in mid 2003. On the evidence the Appellant did not deal with this problem until after its accountant brought the problem to its notice in January 2004.
    (2) The Appellant collected the requisite VAT revenue and had more than sufficient income to meet its VAT obligations on time but chose to use the VAT revenue to meet other items of expenditure.
  40. Applying the test enunciated by Lord Donaldson in Steptoe, we are satisfied that the Appellant in dealing with its financial difficulties did not fulfil the requirement of a prudent business person exercising reasonable foresight and due diligence with proper regard for its obligations to pay VAT on time. Therefore, the Appellant has not satisfied us on the balance of probabilities that it has a reasonable excuse based on its principal submission of a prudent and competent business person for not paying the VAT on time for the periods from 12/03 to 6/05.

  41. The Appellant put forward two alternative grounds of Appeal, if it failed on its principal ground of a prudent and competent business person. The two alternative grounds were reasonable excuses specific to two default periods. The first was the accounting period ending 06/04 when one of its main commercial customers, Roberts Stonewich, went into administration owing the Appellant £56,315. The second related to the accounting period 03/05 when the sale of the warehouse fell through.

  42. The evidence indicated that the insolvency of Roberts Stonewich on 1 June 2004 did not come as a surprise to the Appellants. In its letter to the Respondents dated 29 January 2004, the Appellant announced the receivership of one of its larger customers which we have taken to be Roberts Stonewich. The Appellant, however, did not inform its employees of potential redundancies and cost savings arising from the receivership until late June/early July.

  43. The Respondents pointed out that the debt of £56,315 owed by Robert Stonewich represented just five per cent of the Appellant's total declared outputs and such a percentage would be regarded as a normal hazard of the business. The income received by the Appellant from Alex Lawrie and other receipts during the quarterly period April to June 2004 was £368,979. The VAT debt for that period was £37,488.35.

  44. After weighing up the facts we conclude that a prudent business person exercising reasonable foresight and due diligence would have taken appropriate and timely action to cope with the receivership of Roberts Stonewich, particularly as the income received during the period ending 06/04 was, in our view, sufficient to meet the VAT due. Therefore, the Appellant has failed to satisfy us on the balance of probabilities that the receivership of Roberts Stonewich on 1 June 2004 constituted a reasonable excuse for the default surcharge imposed for the period 06/04.

  45. The Appellant decided to sell one of its warehouses to meet the financial consequences arising from its inability to control its expenditure and borrowing in 2003. The Appellant hoped that the sale would be completed in March 2005 enabling it to use part of the sale proceeds to clear off its VAT and national insurance debts. Unfortunately the prospective purchaser withdrew from the transaction on the 10 March 2005 because of difficulties with rights of way. As a consequence the Appellant was unable to pay off its VAT debts as originally planned.

  46. We consider that the sale or otherwise of the warehouse was not relevant to the issue of why the Appellant did not pay the VAT due for the period 03/05. During that period the Appellant received income from Alex Laurie and other receipts of £209,454. Its VAT liability for that period was £24,965. On the face of it the Appellant had more than sufficient income during that quarter to meet its VAT payment. The non-completion of the warehouse sale did not affect the value of the taxable supplies effected during that quarter from which the VAT was calculated. Although the income received during the quarter was more than sufficient to pay on time the VAT incurred in that quarter, the Appellant chose not to pay the VAT but instead wait until it obtained the proceeds from the warehouse sale. We consider that these were not the actions of prudent business person, mindful of its VAT obligations. Therefore, the Appellant has failed to satisfy us on the balance of probabilities that the non-completion of the warehouse sale constituted a reasonable excuse for the default surcharge imposed for the period 03/05.

  47. In view of our decisions in paragraphs 40, 44 and 46 that the Appellant has failed to satisfy us on the balance of probabilities that a reasonable excuse existed for the non payment of VAT on time for the periods from 12/03 to 03/05, we dismiss the Appeal. We make no order for costs.

    48. MICHAEL TILDESLEY
    CHAIRMAN
    RELEASE DATE: 23 March 2006

    LON/05/737

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