United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V20164

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Captive Clothing Ltd v Revenue & Customs [2007] UKVAT V20164 (22 May 2007)

20164

DEFAULT SURCHARGE – Reasonable excuse –– whether the Commissioners' failure to reply before the due date for the payment of VAT to a letter advising that payment would be made late (and giving reasons for the prospective late payment) and asking for default surcharge to be waived afforded the Appellant a reasonable excuse for late payment of the VAT – held it did not – appeal dismissed

LONDON TRIBUNAL CENTRE

CAPTIVE CLOTHING LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: JOHN WALTERS QC (Chairman)

MRS. R. S. JOHNSON

Sitting in public in London on 21 February 2007

Mr. D. Schneiderman, Consultant, for the Appellant

Mr. J. Holl, Advocate, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

This is an appeal against the imposition of a default surcharge of £6,966.79 (calculated at the rate of 5 per cent. of the tax returned) in respect of VAT period 06/06.

The Appellant carries on business as a manufacturer of ladies' and children's outerwear.

From the evidence before the Tribunal, it appears that the Appellant defaulted in relation to the VAT period 06/04, and again in relation to the VAT period 08/04 (when a claim return was submitted late), and again in relation to the VAT periods 03/05, 11/05 and 03/06 (the latter two of these being periods when claim returns were submitted). No default surcharges were made in respect of any of these periods

About 80% of the Appellant's trade is with two customers, BHS and Arcadia. On 4 July 2006, Arcadia wrote to the Appellant stating that for all outstanding invoices and stock commitment at 1 August 2006, its payment terms would be 60 days, instead of the then current 30 days, and there would be an additional 1 per cent. discount. On 5 July 2006, BHS wrote to the Appellant in virtually the same terms.

On 19 July 1996, the Appellant wrote to the Commissioners' Debt Management Unit informing them that, while the VAT return for the period 06/06 had been filed before the due date (31 July 2006):

"… regrettably, we will be unable to pay the VAT due on this return [£139,335.98] immediately due to unexpected changes imposed on us by our two biggest household-name customers.

Our two biggest customers have informed us that they are changing their payment terms from 30 days to 60 days with immediate effect. Therefore invoices that were to be paid to us prior to the due date of the VAT return have been delayed by 30 days. Consequently we shall not receive payment from our customers throughout the month of August. (Please find attached letters).

Needless to say, this comes as a great disappointment to us, yet it is not open for negotiation.

We therefore wish to inform you that we shall be making the payment after a period of one month and will pay the end June period at the end of August, though it is due at the end of July.

Equally, it will take a little time to reorganise our financing so, although we expect that future VAT returns will be settled on time, there may be some disruption to this return and the next one for the September period due by the end of October, since our cashflow will still be operating a further month behind.

Due to the unexpected and unforeseeable circumstances causing this situation, we are advised that it will constitute a reasonable excuse for our late payment. We ask therefore that, exceptionally, you waive the default surcharge notices that would normally be issued in such circumstances."

The Commissioners responded to this letter by a letter dated 7 August 2006. They indicated that the VAT due for the period 06/06 would be accepted if paid on or before 31 August 2006 and that a default surcharge would also be due.

The Appellant, through Mr. Schneiderman, criticised this decision, on the basis that if the Commissioners had replied (as they could have done) before the due date for payment of the VAT (31 July 2006) to indicate that a default surcharge would be made, then alternative arrangements could and would have been made to avoid the default – by the advance of private moneys to meet the VAT liability. In fact, such funds were advanced enabling the VAT to be paid on 10 August 2006 – it was received by the Commissioners on 14 August 2006.

The Appellant's case that it had a reasonable excuse for the late payment of the VAT due for the period 06/06, within the meaning of section 59(7)(b) VAT Act 1994 was that it was entitled to expect the Commissioners, if they were unwilling to waive a default surcharge, to inform the Appellant of that fact before the due date, so that it would have the opportunity to make exceptional arrangements (such as were in fact made) to make the payment on time.

Mr. Holl, for the Commissioners submitted that on the facts of the case a reasonable businessman would be expected to make the payment on time.

It is established that the underlying cause of a taxable person's default, may give rise to a reasonable excuse within section 59(7)(b) VATA – see: Customs and Excise Commissioners v Steptoe [1992] STC 757, a decision of the Court of Appeal.

In Steptoe, the Court of Appeal decided that (in the words of Lord Donaldson of Lymington MR) "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" (ibid. at p.770d/e).

The question for the Tribunal is whether in all the circumstances the failure to pay the VAT on time was "reasonably avoidable" – per Lord Donaldson in Steptoe at ibid. p.770f.

That question is to be answered by looking at the reality of the business situation in which the Appellant found itself. The Commissioners and, on appeal, the Tribunal, is to "distinguish between the trader who lacks the money to pay his tax by reason of culpable default and the trader who lacks the money by reason of unforeseeable and inescapable misfortune" (see: per Nolan LJ in Customs and Excise Commissioners v Salevon Ltd. [1989] STC 907, cited by him in Steptoe, ibid. at p.767h/i). Whether there is in any case "unforeseeable and inescapable misfortune" is to be approached on the basis that what is meant is not reasonably foreseeable and not reasonably avoidable (see; per Lord Donaldson MR ibid. at p.770e/f).

We are puzzled by the Appellant's assertion in its letter to the Commissioners of 19 July 2006 to the effect that the cash flow difficulties caused by the unilateral extension of credit terms by BHS and Arcadia would impede its ability to pay the VAT due on 31 July 2006. According to the letters from BHS and Arcadia (copies of which were apparently sent by the Appellant to the Commissioners with its letter of 19 July 2006), the extension of credit terms was to be applied to all invoices outstanding at 1 August 2006. It appears, therefore, that (contrary to what the Appellant said in its letter) the cashflow for the month of July 2006, which appears to be what is most relevant to the Appellant's ability to make the VAT payment due for the period 06/06 on time, was unaffected by the change.

We turn to the question raised by the Appellant in its submissions: whether in the circumstances that the Appellant was still, on 31 July 2006, waiting for a reply from the Commissioners to its letter of 19 July 2006, the Appellant's failure to pay the VAT on time was not reasonably avoidable.

In our view it was reasonably avoidable, and therefore this appeal fails. We agree that the Appellant was entitled to expect a reply to its letter of 19 July 2006 before 31 July 2006. However we consider that by writing the letter of 19 July 2006 to the Commissioners, the Appellant could not effectively place an obligation on the Commissioners either to reply by 31 July 2006 or otherwise afford the Appellant a reasonable excuse not to meet its obligation to pay the VAT due for the period 06/06 by 31 July 2006. This disposes of the Appellant's case (see: paragraphs 7 and 8 above).

It was not open to the Appellant to relieve itself of part of the disadvantage of its customers' unilateral extension of their credit terms, by simply paying its VAT liability 30 days after the due date, without exposure to a default surcharge.

We therefore dismiss the appeal.

JOHN WALTERS QC

CHAIRMAN

RELEASE DATE: 22 May 2007

LON/2006/1291