Moorgate Precision Engineering Ltd v Customs and Excise [2004] UKVAT V18505 (19 February 2004)

DEFAULT SURCHARGE – no reasonable excuse for default – appeal dismissed.

									

MANCHESTER TRIBUNAL CENTRE

 
 	
	MOORGATE PRECISION ENGINEERING LIMITED 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Mr R L Barlow (Chairman)

Sitting in public in Manchester on 22 January 2004.

Mr B Greaves, managing director, for the appellant.

Miss H Redmond of counsel, instructed by the Solicitor for the Customs and Excise, for the respondents

	© CROWN COPYRIGHT 2004

DECISION
1.	The appellant appeals against a default surcharge assessment dated 21 July 2003 imposed under section 59 of the Value Added Tax Act 1994 (‘the Act’) on the ground that the appellant was in default in respect of the VAT return for the period ending 31 May 2003 by reason of the return for that period, which was due by 30 June 2003, not having been made until 16 July 2003 and by reason of the fact that tax of £16,285.79 due to be paid by 30 June 2003 was not paid until 21 July 2003.
2.	The surcharge was alleged to be payable because of those defaults and because the appellant had also been in default in respect of the periods ending July 2002 and February 2003.  The penalty was accordingly assessed as 5% of the amount of tax in respect of which the default had occurred.
3.	Mr Greaves accepted on behalf of the appellant that the relevant defaults had occurred but asked the tribunal to excuse the defaults on the ground that the company was now experiencing financial difficulties.  Section 59(7)(b) of the Act empowers the tribunal to allow an appeal against a default surcharge penalty if the appellant has a reasonable excuse for the default.  There is no definition of a reasonable excuse contained in the Act and the categories of what may be considered relevant are not closed, but insufficiency of funds to pay the tax due is expressly excluded as a ground capable of being a reasonable excuse by reason of section 71(1) of the Act.
4.	However, there are circumstances in which the underlying reason for the insufficiency, as opposed to the insufficiency itself, may be a reasonable excuse, for example where a totally unexpected event has led to the insufficiency and there has been no adequate opportunity to remedy the situation before the due date for payment.
5.	In this case Mr Greaves explained that in August 2003 an unexpected and unpredictable event had occurred which has affected the business badly and the effects of which continue to the present.  That event was the fact that the appellant had been forced to leave its premises at short notice because of difficulties created by another company with which it shared the premises.  However great those difficulties may have been and however long their effects may have lasted, they cannot afford a reasonable excuse for the default in June 2003 because they post-date the default.
6.	Mr Greaves also explained about a bad debt that had arisen before the default and I accept his evidence about it was entirely truthful.  This was at least capable of being a reasonable excuse.  The facts as I find them to be are that the appellant had a turnover of about £450,000 per annum at the relevant time.  In the August 2003 management accounts, which were produced monthly, £38,073.98 was written off as a bad debt but this represented part of a sum totalling about £60,000 that should have been paid to the appellant in January 2003.  The balance was later written off in the management accounts.
7.	The appellant had paid half its VAT on time in the period ending February 2003, i.e. by 31 March 2003, and had defaulted in respect of the other half.  The VAT due for that period was £13,188.29.  This may well have been affected by the bad debt of £60,000 but its effect on the business appears to have been relatively small as it only led to £6,594 being paid late.  When cross examined by Miss Redmond, Mr Greaves admitted that the difficulties arising from the move to different premises had been the main problem faced by the company and he added that the bad debt “didn’t help”.
8.	It seems clear and I so find, that the bad debt had a limited effect on the appellant’s ability to pay its debts as they arose and in my judgment it did not amount to the sort of unexpected event that could properly be described as a reasonable excuse for non-payment.  I hold it to be relevant to that conclusion to take into account the fact that the bad debt had arisen five months before the default in question, that it had had only a limited effect at the time of the return due at the end of March 2003 and that although £60,000 was not a small sum it was the only bad debt (as Mr Greaves admitted) and that it was not the main problem faced by the company.  The turnover of £450,000 was not so small as to make it certain that the bad debt of £60,000 would lead to such difficulties as would amount to a reasonable excuse.        
9.	In light of the above I hold that the appellant has no reasonable excuse for the default consisting of the late payment of the tax and the appeal is dismissed.
10.	No other excuse was offered for the later rendering of the return and I hold that the difficulties the appellant faced at the time the return was due certainly offered no excuse at all for failing to render it on time.  No defence of timeous posting was put forward.  On those grounds I also hold that the default consisting of rendering the return late gives rise to the conclusion that the appeal must be dismissed.
11.	The respondents made no application for costs and I make no award.

RICHARD BARLOW
CHAIRMAN
RELEASE DATE:
MAN/03/688