United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2009] UKVAT V20937

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Dale Robert Walker v Revenue & Customs [2009] UKVAT V20937 (22 January 2009)

20937

VALUE ADDED TAX – default surcharge – reasonable excuse – s 59(7)(b) VATA 1994 – solicitor in private practice – investment in film partnership – late payment of income tax refund from film partnership investment – whether reasonable excuse for late payment of VAT– no –- appeal dismissed

LONDON TRIBUNAL CENTRE

DALE ROBERT WALKER Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: EDWARD SADLER (Chairman)

J N BROWN CBE FCA ATII

Sitting in public in London on 7 January 2009

The Appellant in person

Mr J Holl, advocate, from the office of the General Counsel and Solicitor to Her Majesty's Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction and preliminary matters

This is an appeal by Mr Dale Robert Walker ("the Appellant") against two default surcharges imposed by The Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") under the default surcharge regime in relation to the late payment of VAT. The Appellant, who is a solicitor in private practice as a sole practitioner, has received notice from the Commissioners of a liability to a surcharge in the sum of £3,482.28 in respect of his VAT period 04/06 and in the sum of £5,004.32 in respect of his VAT period 07/06. Both surcharges are levied at the maximum rate of 15 per cent.

The Appellant does not dispute that he was late in his payments of VAT for the two consecutive periods in question, nor does he challenge the amount of the surcharges. His argument is that he is not liable to the surcharges because he has a reasonable excuse for the late payment of the VAT in each of those periods. In summary, his ground for arguing that he has such a reasonable excuse, and the basis of his appeal to the tribunal, is that he was due a substantial refund of income tax from the Commissioners during the relevant period by reason of his eligibility for tax relief for an investment he made in a film partnership; that the Commissioners were, to his detriment, late in making that repayment; and that accordingly his business lacked the cash required to pay the VAT.

For the reasons given below we do not consider that the Appellant has a reasonable excuse for the late payment of his VAT, and therefore his appeal is dismissed.

At the commencement of the hearing the Appellant applied for the hearing to be postponed – he had indicated by a fax to the tribunal office the previous day that he intended to apply for a postponement, and the Commissioners had indicated that they would oppose such an application since they had incurred costs in preparing for the hearing, including bringing a witness from Scotland. The Appellant argued, first, that he had not received notice of the hearing, although he accepted that, in a letter to him from the Commissioners dated 15 December 2008 (which he received on 18 December 2008) reference had been made to the hearing taking place on 7 January 2009. Secondly, he argued that he was not in a position to challenge evidence which the Commissioners proposed to bring forward at the hearing, as he had not received that evidence in due time. We adjourned to consider the Appellant's application.

We determined that the appeal should be heard. As to the Appellant's first point, we noted that there had been a previous postponement of the hearing of the appeal on the grounds that the Appellant had not received from the tribunal office a notice of the hearing. We consulted the tribunal office file, from which it was clear that the notice of hearing (sent out in October) was correctly addressed to the Appellant's office, and there was no indication that the notice had been returned by the postal authorities as not having been delivered. We also took into account the fact that the Appellant knew, from the letter he received from the Commissioners on 18 December 2008, that the hearing was due to take place on 7 January 2009, and that a simple call to the tribunal office on his part would have confirmed that to be the case. Notwithstanding the intervening holiday period, the Appellant had time to prepare his case, given that his appeal had been instituted some months previously (and preceded by lengthy correspondence with the Commissioners covering all the issues), and someone with his professional experience would be able to present his case at relatively short notice.

As to the Appellant's second point, we had more sympathy. The evidence in question was a witness statement of some six pages and several lengthy exhibits prepared by the officer responsible for the income tax affairs of the Appellant in relation to his investment in the film partnership. We did not look at this statement in detail, but its scope was to explain the procedures for considering the Appellant's claim for income tax relief for that investment and the payment by way of refund of income tax once that relief was granted. The officer concerned had made her statement in July 2008, but it was sent to the Appellant, as mentioned, on 15 December 2008 and received by him on 18 December 2008. The Appellant argued that he would want to challenge parts of that evidence, but it had been received at a very busy time of the year, and shortly before the holiday period, so that his accountant adviser and the sponsor of the film partnership had not been able to review the officer's evidence in time for the hearing, far less prepare themselves to come to the tribunal to give evidence. He questioned the motives of the Commissioners in sending the evidence to him just before the Christmas period when they had had the evidence available to them since July 2008.

Our conclusion was to proceed with the hearing of the appeal, since the issue of whether or not the Commissioners had been tardy in repaying any income tax due to the Appellant by way of relief for his film partnership investment might be irrelevant. If we assumed in the Appellant's favour that he was due to be paid the income tax refund before he was due to make the VAT payments which gave rise to the default surcharges, but nevertheless concluded that his delayed receipt of that refund was not a valid ground for reasonable excuse for late payment of the VAT in question, then the appeal could be determined (by way of dismissal) without need for evidence on the income tax refund point. If on the other hand we concluded that the lateness or otherwise of the income tax refund could be a valid ground for reasonable excuse for late payment of the VAT, we would treat the hearing as adjourned, and give directions as to the evidence of the parties in respect of that matter for consideration at the resumed hearing.

For the reasons given below we have concluded that, even if the Appellant could demonstrate that the income tax refund should have been paid to him before the due time for payment of the VAT in question, that would not avail him. We are therefore able to reach a decision to dismiss the appeal without hearing evidence on the income tax refund point.

The evidence and the facts

We had in evidence before us the extensive correspondence between the Appellant and the Commissioners as to the default surcharges and the Appellant's reasons why the relevant VAT had not been paid; a schedule prepared by the Commissioners showing the default surcharge "history" of the Appellant; and the oral evidence of the Appellant, who was cross-examined by Mr Holl for the Commissioners and by the tribunal.

From the evidence we find the following as the facts relevant to this appeal:

(1) The Appellant is a solicitor who, as a sole practitioner, is in private practice. He has been registered for VAT purposes since 1989. He accounts for his VAT under the cash accounting scheme, that is, for each quarterly VAT period he pays to the Commissioners the amount of VAT actually collected in that quarter from his clients on payment of their charges less the input tax he actually pays in that quarter on any taxable supplies made to him.

(2) The Appellant was first in default with payment of his VAT in his quarterly period 01/04, at which point he was served with a surcharge liability notice and became subject to the default surcharge regime. By reason of late payments in subsequent VAT periods he remained subject to the default surcharge regime up to and including the quarters 04/06 and 07/06, by which time the outstanding VAT was subject to surcharge at the maximum rate of 15 per cent, in accordance with the default surcharge provisions.

(3) For the VAT quarter 04/06 the Appellant was liable to account for VAT in the sum of £23,215.24 on the due date which was 31 May 2006. He failed to make that payment on the due date, and the Commissioners assessed him to a default surcharge of £3,482.28.

(4) For the VAT quarter 07/06 the Appellant was liable to account for VAT in the sum of £33,362.18 on the due date which was 31 August 2006. He failed to make that payment on the due date, and the Commissioners assessed him to a default surcharge of £5,004.32.

(5) The Appellant subsequently paid the outstanding VAT in full.

(6) In March 2006 (that is, shortly before the end of the 2005/06 income tax year) the Appellant invested the sum of approximately £200,000 in a film partnership. Of that amount invested approximately £140,000 was funded by a loan to the Appellant by the Bank of Scotland. The balance of the investment was from the Appellant's own cash resources which otherwise would have been available to finance his practice. The terms of his loan from the Bank of Scotland required that the loan be repaid in March 2007, but the Appellant negotiated an extension of the repayment terms (since by March 2007 he had not received any income tax refund from the Commissioners) and the loan was repaid by instalments over the following twelve months.

(7) An objective of the Appellant in making the investment in the film partnership was to obtain loss relief for income tax purposes under the special provisions relating to investments in films, with a view to such relief being set against taxable profits of his solicitor's practice for the tax year in which the film investment was made and the previous tax year. In this way a tax refund would become due to the Appellant, part of which would be applied in repaying the Bank of Scotland loan, and the balance retained by the Appellant. The Appellant's expectation was that such income tax refund would be paid to him before 31 May 2006, that is, before he became liable to account to the Commissioners for VAT for the quarter 04/06. The income tax refund was not paid to the Appellant until after March 2007.

Decision

The provisions in the VAT legislation relating to default surcharges are found in section 59 Value Added Tax Act 1994 ("VATA 1994") and can be summarised to the extent they are relevant to this appeal. A taxable person is regarded as being in default if he fails to made his VAT return for a VAT quarterly period by the due date for that quarter, or if he makes his return by that due date, but does not pay by that due date the amount of VAT shown on the return as payable in respect of that period. The Commissioners may then serve what is called a surcharge liability notice on the defaulting taxable person, which brings him within the default surcharge regime, so that any subsequent defaults within a specified period result in assessment to default surcharges at the prescribed percentage rates.

The Appellant does not challenge the validity of the default surcharge assessments made on him in terms of what one might call the processes: he acknowledges that the VAT payments for the quarterly periods 04/06 and 07/06 were indeed made after the respective due dates for those periods, and he accepts that, by virtue of previous defaults, the assessments are correctly made at the rate of 15 per cent. However, he claims the benefit of the "reasonable excuse" escape provision, which is found in subsection (7) of section 59 VATA 1994, and is in these terms:

"If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above satisfies the Commissioners or, on appeal, a tribunal, that, in the case of a default which is material to the surcharge –

(a) the return, or as the case may be, the VAT shown on the return was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit, or

(b) there is a reasonable excuse for the return or VAT not having been so despatched,

he shall not be liable to the surcharge…."

It is, of course, sub-subsection (b) which the Appellant calls in aid.

The reasonable excuse escape provision in section 59 VATA 1994 must be applied subject to a limitation which is relevant in this appeal. Section 71(1) VATA 1994 is in these terms:

"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) …."

It is well established by case law that although an insufficiency of funds to pay the VAT due cannot be a reasonable excuse for the failure to pay that VAT, the underlying cause of any insufficiency of funds may constitute a reasonable excuse.

It is clear from the terms of section 59(7) VATA 1994 that the burden rests on the Appellant to satisfy the tribunal that there is a reasonable excuse for his failure to pay by the due date the VAT for the two periods in question. The Appellant's case is that he had an insufficiency of funds to pay that VAT by reason of the fact that he had not received, at the time he expected it (and, he claims further, at the time it was due to him), an income tax refund derived from his film partnership investment, and that this constitutes a reasonable excuse for his failure to pay on time the VAT due. The Appellant offered no other evidence as to why he was unable to pay the VAT due.

We are prepared to assume, in the Appellant's favour, that he had a proper expectation that the income tax refund derived from his film partnership investment would be paid by 31 May 2006 if the Commissioners acted correctly in applying the law and practice relevant to the payment of such a refund derived from such an investment. We are prepared to assume further that the income tax refund was due to the Appellant before 31 May 2006 and that the underlying cause of his insufficiency of funds to pay the VAT in question was the failure of the Commissioners to pay the income tax refund when it was due. That does not, however, amount to a reasonable excuse.

The investment made by the Appellant in the film partnership was, in terms of business, unrelated to his business as a solicitor in private practice – the only relationship was that he anticipated that the investment would provide relief in the form of losses which could be set against the taxable profits of his solicitor's practice thereby reducing the amount of income tax payable on those profits. It is clear from the case law that where a business suffers a cashflow difficulty which could not reasonably have been expected, then that might constitute a reasonable excuse for the late payment of the VAT due in relation to that business, but that must be a difficulty resulting from the vicissitudes of the business itself. In this case the Appellant chose to invest funds otherwise available to his business (together with a substantial borrowing) to make a very sizeable investment in an unrelated business less than three months before his VAT was due. The detriment he suffered (or, rather, which we are prepared to assume he suffered) was in respect of that investment, not his solicitor's practice. He would have been fully able to pay his VAT on time in relation to his solicitor's practice had he not made the investment in the unrelated business. A taxable person is expected to make proper provision for the payment of VAT due from his business, and it is not reasonable that losses or other detriment suffered as a result of other ventures which he embarks upon should excuse him from making such proper provision.

We consider that this principle applies where a taxable person accounts for VAT on the normal basis, by reference to invoices rendered and received. In the present case the Appellant benefited from the more favourable cash accounting method of paying his VAT, so that he was required to account for VAT only to the extent that he had actually collected it from his clients (less any VAT he had actually paid on supplies to the business). If anything, this increases the responsibility of the Appellant to pay his VAT on time rather than utilise it to fund his business when factors extraneous to the business result in cashflow problems.

In part, as he put his case to us, the Appellant felt that he was justified in making late payment of his VAT to the Commissioners in circumstances where it was the Commissioners themselves who were late in making payment to him of his income tax refund. That is irrelevant. The Commissioners, in relation to the administration and collection of VAT, are given certain powers, including those under the default surcharge regime. Their right to exercise those powers is distinct from any duties they may have in relation to income tax and the payment of tax refunds. If, as the Appellant in effect asserts, they were in breach of their duties in that regard and in consequence he suffered detriment, then he should have recourse to whatever remedies the law provides in those circumstances. What he cannot do, at least in the circumstances of this case, is argue that a failure by the Commissioners to pay a tax refund on time in relation to a film investment justifies his late payment of VAT in relation to his solicitor's practice.

For these reasons we do not need to hear evidence on the issue of whether or not the Commissioners did in fact make a late payment of the income tax refund due to the Appellant, and we dismiss the appeal.

We make no order as to costs.

EDWARD SADLER

CHAIRMAN

RELEASE DATE: 22 January 2009

LON/2008/0549