[2011] UKFTT 85 (TC) 

TC00962

Appeal number:  TC/10/08039

Income Tax:  Default surcharge:  difficult trading conditions with principal main contractor going into liquidation:  Appeal allowed.

FIRST-TIER TRIBUNAL

TAX 

	KEVIN SHARP	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL JUDGE: 	Mrs G Pritchard, BL., MBA., WS

Sitting in public at George House, 126 George Street, Edinburgh on Monday 13 December 2010

Kevin Sharp for the Appellant

Joyce Ballingall, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

Background
1.	This is a basic appeal on direct tax under S59C(7) of the Taxes Management Act 1970 (TMA) against the imposition of a default surcharge of 5% issued on 03.04.10.  The sum of tax due was £49,227.94 in respect of self assessed income tax for the tax year 08/09 which was paid on 22.04.10.  The due date of payment was 31.01.10 with the usual 28 day period of grace allowed for in such cases.
The Hearing
2.	Mr Kevin Sharp appeared on his own behalf and was credible.  Ms Joyce Ballingall appeared for HMRC.  She brought to the Hearing and provided for the Tribunal the HMRC internal guide to what might be considered suitable grounds for allowing a “reasonable excuse” appeal which gave very limited examples such as bereavement, and which did not discuss any relevant case law.  I will therefore make no findings on that.  The evidence was oral from Mr Sharp in addition to what is contained in his written appeal notice dated 12.10.10 and oral from Ms Ballingall in respect of HMRC’s usual conduct of these cases.  The written evidence consisted of the first letter of appeal by Mr Sharp’s accountants to HMRC dated 30.04.10, HMRC’s refusal dated 30.08.10, HMRC’s review letter of 30.09.10 giving a fuller explanation and a copy of S59C(2)-(12) TMA highlighting the exclusion at 59C(10) of inability to pay tax as a reasonable excuse, in an appeal such as this.  The internal recommendations of HMRC I consider irrelevant for this particular appeal.  Only on 01.03.10 was the default surcharge applied.  There is no requirement in a basic case for a statement of case by HMRC in terms of Rule 24 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  However since Ms Ballingall did refer in her verbal submission to other information relating to HMRC’s discretionary power to mitigate or remit a default surcharge which I treated as fresh evidence, it might have been helpful.
A number of factors with regard to HMRC’s exercise of its discretion by the Inspector, which came into account were not apparent to the Appellant or the Tribunal from reading the written evidence but were known to HMRC and were in my view important though still not fully explained even at the conclusion of the Tribunal.
I have made no finding in fact on the issue of the default surcharge notice as that too is discretionary and is not automatic on non-payment of tax due, due to the terms of S59C(5) TMA.  I consider it would have been relevant for the Appellant to have been made aware of the timeline of decision making and to have been given reasons for each step taken by the Inspector.  If indeed the Inspector even now considers that happened in this case, it was not proved to the Tribunal.  The discretion appears open despite the mandatory nature of S59C(2) & (3) TMA.

Findings in Fact from the Evidence
(1)	Mr Kevin Sharp is a taxpayer who has no previous record of default or other difficulty with his payment of self assessed income tax until January 2010.
(2)	He is a builder who has been running his own business successfully for many years being almost exclusively subcontracted by Thomas Mitchell Ltd a well recognised and longstanding provider of ‘kit’ houses.  Thomas Mitchell Ltd (now in liquidation) was based in Fife, where the Appellant also has his business.
(3)	The Appellant had a number of his own direct employees but also used four to five subcontracts in his business.
(4)	He had recently converted to trading as a limited company.  Personally from his business he had profited and made some investment in heritable property as well as having cash saved.
(5)	He had set aside his tax due as at 31.01.10, and had submitted his return timeously.  The Appellant uses accountants to do his books and submit returns.  They had also prepared his appeal as the Appellant does not have good reading or writing skills.  However he does not have a problem with numbers.
(6)	When Thomas Mitchell Ltd had delayed payment towards the end of 2009 they had assured the Appellant that the funds would be forthcoming very soon.  Instead in early 2010 they went into liquidation.  This was a serious blow to the Appellant since they owed him £500,000 and were almost exclusively his providers of business.  He was on the brink of having to put his own company into liquidation.  He felt a huge responsibility for his employees and for their livelihoods and for their obligations to keep their families.  He also wished to maintain his own reputation in Fife with his subcontractors.  He therefore put in motion the sale of his heritable property and used all his cash including the sum he had set aside for his tax to pay his subcontractors, employees and trade debtors.  He has stayed in business and has continued to manage to date by finding new business.  He is still upset at not being advised by Thomas Mitchell Ltd that they were potentially in difficulty when that was true.
(7)	Immediately on the sale of his heritable property when he was put in funds by his lawyer on 21.04.10 he paid his tax liability on 22.04.10.
He regretted the delay but it took time to realise the heritable property.  He wanted to support his employees as a priority, along with subcontractors and trade debtors in Fife and to keep his good name.
(8)	When he received the Default Surcharge notice he did appeal, HMRC replied refusing.  The letter of 3.10.10 is referred to for its terms.  It does explain “reasonable excuse” and says it allows for an exceptional event as a reasonable excuse for not paying.
(9)	The Appellant on reading the letter believed that was his position and asked for a review.  The review letter is fuller in its terms with regard to financial pressure but explained “the Default Surcharge has been correctly applied”.  It also explained he should have contacted the Debt Management Service.  No comment is made on the potential for mitigation, or remission.
The Law
(1)	S59C(2) – (12) is attached to this Decision for clarification.
(2)	S71 (1)(a) VATA 1994 also provides insufficient funds is not a reasonable excuse in a default surcharge appeal.
(3)	Steptoe v C&E Commissioners 1992 STC 757 (Steptoe) states it is necessary to examine the underlying cause for the insufficiency of funds, to determine whether there is a reasonable excuse for the default in Value Added Tax matters.
(4)	David Batchelor v HMRC [2010] UK FTT 392 (TC) applies as it has imported the VAT equivalent reference to Steptoe into a direct tax matter and also determines that it is necessary in direct tax matters to look at the underlying cause of the insufficiency to determine whether there is a reasonable excuse for the default in that case.
(5)	Mediaclash Limited v HMRC 2009 UKFTT 306 (TC) applies so far as the recession is concerned as this case took into account the difficulties a trade might experience when trading conditions alter.  Mr John Brooks adopts the approach of the Court of Appeal in Steptoe also used by the President of Tribunals Sir Stephen Oliver QC in Stephen Mutch v HMRC (Trans 09/14 unreported) where he said:
[4]  to decide whether a reasonable excuse exists, when insufficiency of funds causes the failure [or as in this case the default], the Tribunal should take for comparison a person in a similar situation to that of the actual taxpayer who is relying on the reasonable excuse defence.  The Tribunal should then ask itself with that comparable person in mind, whether, notwithstanding that person’s exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become payable on the particular dates, those factors would not have avoided the insufficiency of funds, which led to the failures.  That was the approach taken by the court of appeal in a VAT context where the taxpayer, on account of insufficient funds, had failed to make periodic payments of tax.  See C and EC v Salevon [1989] STC 907 per Nolan LJ and C and EC v Steptoe [1992] STC 757 at 770 per Donaldson MR.
Submissions
3.	Mr Sharp stated that most of what he wanted to say had been expressed by his accountant in the appeal form as his grounds of appeal at P5 which is treated as repeated here.  He has poor writing skills but is good with numbers.  He considered his financial circumstances had been so catastrophic that some consideration of his problem which was so significantly affected by the liquidation of Thomas Mitchell Homes in Fife should have been given.  He had laid aside his tax liability with good intentions of paying on time.
4.	HMRC submitted that this appeal is under S59C(7) of TMA 1970.  When the tax due which had been properly assessed was unpaid then a formal notice of default was issued and “automatically” charged.  Mitigation would be considered but only 3 grounds were ever taken into account by HMRC namely bereavement, serious illness or loss of a cheque or other payment in the post.
5.	She also submitted that had the Appellant contacted HMRC when he became aware he was not able to pay his tax then a default surcharge notice would not have been issued, if he had entered a time to pay agreement.
6.	She also submitted that although the Appellant had advised HMRC later about his particular circumstances HMRC had not mitigated or remitted the default surcharge.  He had no previous record of default of any sort with HMRC.
7.	In his final submission the Appellant further explained how specific his trading difficulties were.  He had traded with Thomas Mitchell Homes Ltd in Fife for many years.  He was a subcontracted builder who employed several people and who also subcontracted other trades.  He worked mainly for Thomas Mitchell Homes Ltd who had gone into liquidation very suddenly in the early part of 2010.  He was owed £500,000.  He had formed his business into a Limited Company in 2009 so was actually unable to pay his own employees and creditors.  He had set aside his tax assessment but was so desperate not to go into liquidation in his company he put most of his personal assets into paying employees and creditors to keep everyone afloat.  He also wanted to keep his good name.  He even sold his own heritable property immediately to get more funds.  The sale went through on 21.04.10 as it took longer to sell property than other assets.  He immediately paid his tax on 22.04.10.
Decision
8.	I find in favour of the Appellant.  The Appeal is allowed.
Reasons
9.	I consider the Appellant took all possible steps to try to ensure his tax was to be paid.  He had set aside funds throughout the year for his tax.  He had no history of default.  He is not even very good at reading or writing.  He was overwhelmed by the liquidation of Thomas Mitchell Homes his main contractor.
10.	I consider the circumstances are in parallel with the case of Steptoe which although a VAT case can be used in direct tax matters, and was directly relevant.  The circumstances were equivalent.
Expenses
11.	No expenses are found due to or by either party.
12.	This document contains full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

MRS G PRITCHARD., BL., MBA., WS
TRIBUNAL JUDGE

RELEASE DATE:  25 JANUARY 2011

APPENDIX 1

Tolley's Yellow Tax Handb... > Part 1a: Acts 1890-2000 > Taxes Manaqement Act 1970 > [Part VA Payment of Tax
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Taxes Management Act 1970
[59C Surcharges on unpaid income tax and capital gains tax
(1) This section applies in relation to any income tax or capital gains tax which has
become payable by a person (the taxpayer) in accordance with section 55 or 59B of this
Act.
(2) Where any of the tax remains unpaid on the day following the expiry of 28 days
from the due date, the taxpayer shall be liable to a surcharge equal to 5 per cent of the
unpaid tax.
(3) Where any of the tax remains unpaid on the day following the expiry of 6 months
from the due date, the taxpayer shall be liable to a further surcharge equal to 5 per cent of
the unpaid tax.
(4) Where the taxpayer has incurred a penalty under [section 93(5) of this Act,
Schedule 24 to the Finance Act 2007 or Schedule 41 to the Finance Act 2008]3, no part of
the tax by reference to which that penalty was determined shall be regarded as unpaid for
the purposes of subsection (2) or (3) above.
(5) An officer of the Board may impose a surcharge under subsection (2) or (3) above;
and notice of the imposition of such a surcharge-
(a) shall be served on the taxpayer, and
(b) shall state the day on which it is issued and the time within which an appeal against
the imposition of the surcharge may be brought.
(6) A surcharge imposed under subsection (2) or (3) above shall carry interest at the
rate applicable under section 178 of the Finance Act 1989 from the end of the period of 30
days beginning with the day on which the surcharge is imposed until payment.
(7) An appeal may be brought against the imposition of a surcharge under subsection
(2) or (3) above within the period of 30 days beginning with the date on which the
surcharge is imposed.
(8) Subject to subsection (9) below, the provisions of this Act relating to appeals shall
have effect in relation to an appeal under subsection (7) above as they have effect in
relation to an appeal against an assessment to tax.
(9) On an appeal under subsection (7) above [that is notified to the tribunal]2 section
50(6) to (8) of this Act shall not apply but the [tribunal] may-
(a) if it appears ...2 that, throughout the period of default, the taxpayer had a
reasonable excuse for not paying the tax, set aside the imposition of the surcharge; or
(b) if it does not so appear ...2, confirm the imposition of the surcharge.
(10) Inability to pay the tax shall not be regarded as a reasonable excuse for the
purposes of subsection (9) above.
(11) The Board may in their discretion-
(a) mitigate any surcharge under subsection (2) or (3) above, or
(b) stay or compound any proceedings for the recovery of any such surcharge,
and may also, after judgment, further mitigate or entirely remit the surcharge.
(12) In this section-
"the due date", in relation to any tax, means the date on which the tax becomes due and
payable;
"the period of default", in relation to any tax which remained unpaid after the due date,
means the period beginning with that date and ending with the day before that on which
the tax was paid.]