United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2009] UKVAT V20939

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City AM Ltd v Revenue & Customs [2009] UKVAT V20939 (27 January 2009)

20939

DEFAULT SURCHARGE – whether caused shortage of funds – yes – appeal dismissed

LONDON TRIBUNAL CENTRE

CITY AM LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

ELIZABETH MACLEOD CIPM

Sitting in public in London on 21 January 2009

Jens Torpe, managing director, for the Appellant

Mrs Pauline Crinnion, senior officer HMRC, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

City AM Limited appeals against a default surcharge of £21,130.70 for the period 11/07. We decided after the hearing not to give an oral decision so that we could look at the figures in more detail. The Appellant was represented by its managing director Mr Jens Torpe, and the Respondents ("Customs") by Mrs Pauline Crinnion.

We herd evidence from Mr Torpe and find the following facts:

(1) The Appellant produces a free newspaper which is available on weekdays in the City and Canary Wharf.

(2) Managing cash flow is important to a free newspaper with fixed costs of producing the paper and only advertising revenue. The credit controller left in November. The financial officer, Mr Nandani, was not on top of the credit control following the credit controller leaving. Mr Torpe was alerted to this by the bank and took on supervising this himself. He had daily meetings with Mr Nadani on the topic and cash flow forecasts were prepared weekly or more frequently. Mr Torpe went on holiday on 20 or 21 December 2007 having discussed cash flow thoroughly with Mr Nadani and having concluded that a further investment of £100,000 by the shareholders was necessary. This was received in the bank account on 28 December 2007. Mr Torpe telephoned Mr Nadani while on holiday to make sure it had been received. Mr Torpe returned on 7 January 2008. Shortly thereafter Mr Nadani went to India, returning on 15 January 2008. While he was away Mr Torpe received the surcharge assessment at the rate of 10 per cent dated 18 January 2008 (earlier surcharges had been covered up by Mr Nadani and Mr Torpe was unaware of them). Mr Nadani was sacked on his return.

(3) The Appellant had an overdraft facility of £100,000. Invoices were discounted in that the bank paid 100% but deducted any invoices not paid within four months.

(4) At the start of 21 December 2007 the bank balance was £263,800 (pence are omitted in all figures). On that day a number of cheques that had been signed by Mr Torpe and sent out were paid and Mr Nadani made three electronic payments totalling £127,286 (to the printers, distributors and one other the identity of which Mr Torpe could not recall) and the balance at the close of business on 24 December 2007 was £1,284 overdrawn. By 31 December 2007 as a result of the additional funds from shareholders and after more cheques had been debited the bank balance was £48,957. The VAT of £211,307 had not then been paid. Cheque numbers 1540 and 1543 were debited on 27 December and we infer that all cheques under those numbers were signed by Mr Torpe and sent out before going away and so would figure in the cash flow projections. No cheques with higher numbers were debited until after 11 January 2008 by which time Mr Torpe had returned and could have written further cheques. The bank balance on 7 January 2008 (the last day for making a CHAPS VAT payment) was £9,381. The next substantial receipt was of £122,000 from the bank for invoice discounting which Mr Torpe said would have related to invoices sent out before Mr Nadani went away (which was after 7 January 2008).

(5) The VAT was paid on 25 January 2008.

Mr Torpe contends that he did everything a reasonable businessman should have done in making sure the cash flow was under control and obtaining sufficient additional funds from shareholders so that all liabilities could be paid. He could not understand why Mr Nadani had paid out £127,286. He had an understanding with those creditors that they would not press for payment in the period when the paper was not being produced between Christmas and early January. If he had not paid these the VAT could have been paid.

Mrs Crinnion contended that there was no possibility of paying the VAT on 7 January 2008 even if the payments of £127,286 had not been made.

If we had accepted everything that Mr Torpe said, we would have found that he had a reasonable excuse, but the problem is that we cannot make the figures add up. Suppose that the electronic payments to suppliers totalling £127,286 had not been made, the balance on 7 January 2008 would have been £136,167 (and all cheques that had by then been presented were of numbers up to 1543 written before Mr Torpe went away and so we infer were included in the cash flow projection). Payment of the VAT of £211,307 would leave an overdraft of £74,640, which was within the limit of £100,000. But the £136,167 would have been still outstanding and if paid would have resulted in an overdraft of £201,926. The next invoice discounting receipt of £122,000 were not received until 15 January 2008 and it is not suggested that they might have been received earlier.

Even if the major suppliers (printers, distributors and another) would have waited until then to be paid, this would have resulted in an overdraft of £154,566 even if no other earlier cheques had been presented (which they were). While it might have been possible, although we doubt it, to put off the payment to these major suppliers until the New Year we do not accept that they would have waited until 15 January 2008 (we notice that the previous year payments of £66,458 and £25,464 were made on 28 December 2006 which might have been the same suppliers). Since Mr Nadani had known that credit was tight we do not accept that the first thing he did was to make unnecessary payments totalling £127,286 immediately after Mr Torpe went on holiday. He may not have been on top of the details of the debtors but we do not consider that he can have been as stupid as this. It is much more likely that he was being pressed for payment by the major suppliers and had to pay them then. Accordingly we consider that the cash flow projection prepared before Mr Torpe went away must have included the £127,286. If it did, we cannot understand how the VAT could have been paid as well even with additional shareholders' funds of £100,000. We consider it more likely that delaying payment of the VAT was intended. Since the balance on 7 January 2008 (after making the £127,286 payments and after receiving the additional funds from the shareholders of £100,000) was £9,381 the VAT could only have been paid within the overdraft limit on receipt of the invoice discounting of £122,000 on 15 January 2008. We consider that it must have been part of the plan that the major suppliers were paid first and the VAT paid only when the next invoice discounting payment was received. If there had been no other payments between 7 January and the receipt, the overdraft after paying the VAT would have been about £80,000, which was within the limit, and would have allowed for other payments between 7 and 15 January 2008.

Accordingly we dismiss the appeal.

JOHN F AVERY JONES

CHAIRMAN

RELEASE DATE: 27 January 2009

LON/08/1741