20184

VAT DEFAULT SURCHARGE: Reasonable Excuses for not paying VAT on time for periods 02/06 and 05/06 – 02/06 cash flow difficulties of  associate company not a member of the Appellant’s VAT group – evidence insufficient on the Appellant’s ability to pay the VAT due  – Appellant not entitled to rely on cash flow difficulties of a separate legal entity for its reasonable excuse  –  in the alternative the cause of the cash flow difficulties foreseeable and avoidable by exercise of due diligence  –  05/06 computer problem  – inadequate planning and control –  no reasonable excuse for either period –Appeal dismissed. 

LONDON TRIBUNAL CENTRE

	ORIEL HOLDINGS LIMITED	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      CHRIS PERRY			  (Member)	  

Sitting in public in Bristol on 28 March 2007

Steve Botham Chartered Tax Advisor of BNB Tax Consultants for the Appellant 

Jonathan Holl Advocate of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellant was appealing against the imposition of default surcharges in the sums of £1,871.52 and £13,232.12 for the VAT periods ending 28 February 2006 and 31 May 2006.
The Dispute
2.	The Appellant was the holding company of a group of companies incorporated on 23 May 2005. The principal activities of the group were the provision of services within the recruitment sector and other timesheet based industries; debt collection; accounting services; and internet based resource for businesses. The Appellant was the representative member of a VAT group which did not include the group company Oriel Support Limited.  The Appellant made taxable supplies to Oriel Support Limited.
3.	 The Appellant submitted that the Respondents’ wrongful refusal of a registration card and tax certificate under the Construction Industry Scheme (CIS) to Oriel Support Limited was the direct cause of the Appellant’s failures to pay the VAT due on time for the periods ending 28 February 2006 and 31 May 2006. 
4.	The Appellant contended that the Respondents’ refusal to grant Oriel Support Limited with the appropriate CIS authority was an unforeseeable and inescapable misfortune which meant that the Appellant did not have sufficient funds to pay the full amount of VAT due for the period ending 28 February 2006. The Respondents’ refusal forced the Appellant to transfer some of the business of Oriel Support Limited to another group company, Oriel Composites Limited, which required a reconstruction of the Appellant’s database. The reconstruction proved to be a mammoth task characterised by unforeseeable problems which resulted in the Appellant missing the deadline by 13 minutes for making the VAT payment by automatic bank transfer for the period ending 31 May 2006. 
5.	The Respondents submitted that the Appellant had not discharged its burden of proof in establishing reasonable excuses for the disputed default surcharges. The Respondents considered that the Appellant had sufficient funds to discharge its VAT liability for the period ending 28 February 2006. The difficulties faced by the Appellant stemmed from the separate VAT registrations for the Appellant and Oriel Support Limited. The Appellant could not rely on the problems of Oriel Support Limited as a reasonable excuse for its non-payment of VAT on time. Further the Respondents considered that the problems with the reconstruction of the database were known well before the payment deadline. The Appellant did not take sufficient steps to ensure that it met the deadline.   
The Evidence
6.	We heard evidence from Brian Pursey, director of Oriel Holdings Limited and advisor to Oriel Composites Limited and Oriel Support Ltd, and Tony Borman, tax consultant for the Oriel Support Limited with particular expertise in the Construction Industry Scheme.  The parties supplied separate bundles of documents.
7.	Oriel Business Services Limited was launched in 2000 providing a range of services which included accountancy, business advice, debt collection and supplies of staff. A group corporate structure including a VAT group evolved to supply the various services. In 2005 a new group structure was established. 
8.	On 23 May 2005 the Appellant was incorporated as Oriel Holdings Limited under the Companies Act as a private limited company. On 15 July 2005 the Appellant was registered for VAT under a group registration. On the 9 March 2006 the Appellant replaced Oriel Business Services Limited as the representative member of the group. 
9.	The Appellant supplied services to other Oriel Group companies including Oriel Support Limited. The services comprised group payroll, accounting and management. The supplies to other members of the VAT group were disregarded for VAT purposes. The supplies to Oriel Support Limited, however, were subject to VAT as it was outside the VAT group.
10.	Amongst the members of the VAT group was Oriel Composites Limited which made supplies of staff to third party customers. Oriel Composites Limited was registered with a CIS 5 certificate which enabled it to receive as a sub-contractor payments gross of tax in connection with its supplies for the construction industry. 
11.	Oriel Support Limited was a member of the Oriel group of companies and separately registered for VAT. Oriel Support Limited was not a member of the VAT group for which the Appellant was the representative member. In July 2005 Oriel Support Limited took over the business of Oriel Support Services Limited which had a solvency issue. The transferred business consisted of supplies of staff to industry. The monthly turnover of Oriel Support Limited was about £2 million of which £400,000 came from the construction industry. The previous company, Oriel Support Services Limited, had the benefit of a CIS 5 certificate which enabled it to receive payments gross of tax for its supplies to the construction industry.
12.	Oriel Support Limited operated a group factoring facility with Barclays Bank on behalf of the whole Oriel group of companies. The facility gave 90 per cent prepayment against debtors subject to recourse after 90 days.
13.	Initially Oriel Support Limited traded under the authority of the CIS 5 certificate issued to Oriel Support Services Limited because it had taken on existing contracts.  On 29 September 2005 Oriel Support Limited applied for a CIS 5 certificate. On 13 November 2005 the Respondents refused the application on the grounds that Oriel Support Limited did not meet the business and threshold tests for the CIS 5 certificate. On 6 December 2005 Oriel Support Limited appealed against the Respondents’ refusal and requested a review of the decision.   Throughout December 2005 the company’s representative made enquiries of the Respondents about progressing the Appeal. On 10 January 2006 the representative discovered that the Appeal had not been sent to the Special Commissioners.
14.	On 19 January 2006 the Special Commissioner directed an expedited hearing of the Appeal on 3 March 2006.  After 19 January 2006 the company’s representative made regular contact with the Respondents to ensure that the Appeal was ready for hearing. On 10 February 2006 the Respondents informed the company that no consideration had yet been given to whether Oriel Support Limited met the compliance test for the issue of a CIS 5 certificate. On 13 February 2006 Brian Pursey resigned as a director of Oriel Support Limited which was followed by the appointment of  Adrian Stalley as director. On 27 February 2006 the Respondents accepted that Oriel Support Limited satisfied the business test and issued a CIS 4 Card, which permitted the company to receive payments net of income tax at 18 per cent. 
15.	On 1 March 2006 the Special Commissioner issued a direction that the Appeal be dealt with by way of a preliminary issue, namely:
“The hearing on 3 March 2006 is to be limited to (a) (if not agreed before the hearing) whether the turnover test is satisfied by (Oriel) and (b) whether it is open to [HMRC] to raise the issue of the compliance test (but not the issue of whether or not Oriel has complied with the compliance test)”
16.	On 3 March 2006 the Respondents informed the company of alleged compliance failures.  On the same day the Special Commissioner determined the preliminary issue (a) of the turnover test in favour of the Appellant. In respect of preliminary issue (b) of compliance, the Special Commissioner decided that the Respondents were only entitled to raise compliance conditions insofar as they arise from information supplied by the Appellant in showing that the turnover condition was satisfied. The Special Commissioner adjourned the Appeal for this to be decided in the absence of an agreement between the parties.
17.	The Respondents appealed against the Special Commissioner’s decision which was heard before Mr Justice Warren at the High Court on 5 December 2006. Oriel Support Limited did not appear at the hearing.  Mr Justice Warren allowed the Respondents’ Appeal holding that:
“ In my judgement, there is no basis on which HMRC’s conduct in this case can be said to result in such unfairness as to constitute an abuse of power. Nor is there any frustration of legitimate expectations (whatever the actual expectation might have been in relation to the points which would be taken on appeal). It should be noted again that Oriel and its advisers knew, or must be taken to have known, that there were three tests each of which had to be satisfied. Further, although the compliance test and the compliance failures were raised late in the day, they were raised before the hearing (although only just in the case of the schedule of failures).
Nor do I consider that Oriel could seek to resist HMRC’s appeal on the basis of some kind of estoppel. A public authority can no more enlarge its powers by an estoppel that it can contract out of statutory requirements which are binding on it”. 
18.	The Appellant supplied the Tribunal with a detailed schedule of the dispute between Oriel Support Limited and the Respondents, which we have summarised in the above paragraphs.  The Appellant considered that the Respondents did not handle the application of Oriel Support Limited for CIS 5 certificate promptly or accurately.  Oriel Support Limited complained to the Respondents about how its application was handled and submitted a claim for substantial compensation. 
19.	Mr Borman stated that it was legitimate for Oriel Support Limited initially to trade on the CIS 5 certificate of Oriel Support Services Limited. Oriel Support Limited submitted its application for CIS 5 certificate at least one month prior to the expiry of  the certificate for Oriel Support Services Limited on 31 October 2005. Mr Borman opined that it would have been reasonable to expect a turnaround of one month for the Respondents to process the application. He considered that the grant of the certificate should have been a formality because essentially it was a renewal of the existing certificate for Oriel Support Services Limited. Mr Borman justified his opinion by the subsequent grant of the CIS 4 card to Oriel Support Limited. 
20.	As a result of the Respondents’ refusal to grant the CIS 5 certificate  Oriel Support Limited was unable to collect its fees from its customers in the construction industry which created cash flow difficulties. According to Mr Pursey the Respondents  advised  the customers of Oriel Support Limited not to pay because it did not hold a CIS 5 certificate. As at February 2006 about £1 million had been held back by its debtors in the construction industry.   Oriel Support Limited was, therefore, unable to pay the Appellant for the supplies of management services. Mr Pursey estimated that at the end of February 2006 the Appellant was owed £300,000 by Oriel Support Limited. At that time Oriel Support Limited had exhausted the factoring facility for the whole Oriel Group.  
21.	The Appellant made supplies solely to other members of the Oriel Group of companies. The Appellant had no external customers for its services. 
22.	The Appellant supplied the Tribunal with limited documentary evidence regarding the finances of the Oriel Group.  The Group Financial Statements for the period 23 May 2005 to 31 December 2005 showed that the turnover for the group was £20,511,319 which produced a gross profit of £962,303 and a operating profit of  £71,526.  Mr Pursey advised the Tribunal that the Group’s turnover for the year ending 31 December 2006 had increased to £50 million with a corresponding rise in profitability for the group. The Tribunal requested sight of the Appellant’s VAT returns for the disputed periods which were faxed from the Appellant’s office. The Appellant’s value of sales was £1,648,692 and £1,962,385 for the respective periods ending 28 February 2006 and 31 May 2006. The Appellant supplied one page of its bank statement with The Royal Bank of Scotland which showed its bank transactions from 28 March 2006 to 31 March 2006 and a credit balance of £1,540.41 as at 31 March 2006.  The Appellant supplied no accounting records or bank statements for Oriel Support Limited.
23.	 On 12 October 2006 the Respondents requested the Appellant to provide information in support of its claim of reasonable excuse, which included a summary breakdown of the monies received by Oriel Support Limited by month from 1 January 2006 to 31 March 2006, and copy bank statements showing the balance at the due date.  Mr Pursey was not sure about the summary breakdown. He explained that the Oriel Group was complex with several thousand transactions going through the bank accounts every week.  Mr Pursey confirmed that the receipts and payments across all the bank accounts for the Oriel Group totalled £3 million per month, and that the problem with the CIS 5 application caused a sustained but temporary shortfall of around £1 million. On 15 March 2007 the Respondents made a further request for financial information which included amongst others details of monies received by the Oriel Group per month between 1 November 2005 and 30 June 2006, bank statements for the period 31 March 2006 to 10 July 2006 and full details of the terms of the factoring arrangement. The Appellant’s representative considered that the request did not address the heart of the dispute, namely, the Respondents’ error that starved the Appellant of income resulting in the movement of business from one group company to another which in turn created serious computer problems. The representative considered that the Respondents held sufficient information to make a decision that the Appellant had reasonable excuses for the default surcharges. However, the Representative emphasised that the Appellant was prepared to cooperate with the Respondents. Mr Pursey in response stated that the documents requested would be a mammoth undertaking estimating that it would involve one month’s work for an employee.
24.	The Appellant had no overdraft facility. The Oriel Group’s factors were not prepared to extend the Group’s factoring facility because of the ongoing dispute with the Respondents. However, the factors agreed to maintain the existing factoring agreement.
25.	Although the Appellant did not receive the payment from Oriel Support Limited, it paid 45 per cent of the VAT owing for the period ending 28 February 2006 by the due date. The Appellant made another payment of 25 per cent of the debt due four days later, discharging the outstanding balance of 30 per cent four weeks after the due date.
26.	In late January and early February 2006 the Oriel Group embarked on an urgent restructure to meet the cash flow problem occasioned by the dispute with the Respondents over the issue of the CIS 5 certificate. The restructure involved the transfer of the construction business from Oriel Support Limited to Oriel Composites Limited which held a CIS 5 registration.  This action enabled restoration of the cash position for the Oriel Group by June 2006. 
27.	The Appellant was required to make amendments to its database to effect the transfer of the business from Oriel Support Limited to Oriel Composites Limited.  The operating system was Microsoft Access, which had been adapted to provide a bespoke solution to meet the needs of the business for the Oriel Group. The system was not designed to apply to more than one legal entity. The amendments involved the creation of additional fields to ensure that the system recognised that Oriel Composites Limited as the supplier of the services, and the recipient of the payments. Mr Pursey estimated that it was necessary to change about 2,200 computer records. The main problem was the disaggregating of the shared data between the two group companies. The Appellant carried out the changes in house, which was done by a qualified accountant advised by an employed systems developer. 
28.	Mr Pursey in evidence stated that the Appellant worked on the database from the beginning of February but only became aware of the scale of the problem as it worked through the issues. Mr Pursey stated that he forewarned the Respondents about the computer problems at a meeting with them on 12 June 2006 called to discuss the tax affairs of the Oriel Group.  In a letter dated 1 November 2006 Mr Pursey admitted that the system consequences were not adequately thought through due to the urgency of the situation. The Appellant struggled to complete the preparation of the VAT return on 7 July 2006 in time completing it just 13 minutes after the deadline had passed for making electronic payments. Mr Pursey considered that it was not possible to plan for this situation with hindsight the Appellant should have submitted an estimated return. 
29.	In evidence Mr Pursey stated that the Appellant became aware that the VAT return was wrong on the morning of the 7 July 2006 (the final day for submitting the return) when the Appellant ran off a draft return. Mr Pursey denied that the Appellant was dilatory in waiting until the 7 July 2006 to run off the draft VAT return. Mr Pursey decided against an estimated return because he believed that he could submit an accurate return.  As a result of these problems the Appellant’s VAT return for the period ending 31 May 2006 was received by the Respondents by the due date but it was not paid until 10 July 2006.
Our Reasons
The General Position
30.	 Section 59 of the VAT Act 1994 requires the Appellant to furnish VAT returns and pay the outstanding VAT within one month of the relevant accounting period.  The period of one month is extended for taxpayers paying by electronic transfers provided the return and payment reaches the Respondents’ account in cleared funds on or before the seventh calendar day after the standard due date. The Appellant failed to pay the VAT owing by the due date for the accounting periods ending 28 February 2006 and 31 May 2006. As the Appellant was subject to a surcharge liability notice throughout the relevant accounting periods it was liable to pay surcharges. The surcharge imposed for the period 28 February 2006 took into account the part payment made, and was calculated on the outstanding balance. The surcharges levied were £1,871.52 (2 per cent) and £13,232.12 (5 per cent).
31.	 The Appellant can avoid the default surcharges if it can satisfy the Tribunal on a balance of probabilities that it had reasonable excuses  for not furnishing the VAT payments on time. Insufficiency of funds in itself cannot in law amount to a reasonable excuse (section 71(1)(a) of the VAT Act 1994). 
32.	The Tribunal decision in Greengate Furniture Ltd v Commissioners of Customs and Excise [2003] V & DR 178 reviewed the legislative background of the default surcharge scheme and considered whether the scheme was proportionate. The Tribunal concluded that the legislature had a wide margin of appreciation when framing policies in the area of taxation and that a system of penalties based on automatic assessment was necessary to ensure compliance.  The Tribunal stated at paragraph 97:
“The fact remains however that default surcharges (my italics) are a blunt instrument which only takes limited account of the blameworthiness of the trader. If the trader cannot establish a reasonable excuse, the legislation takes no account of the difference between the trader who has made a genuine effort to comply albeit without success and the trader who has made very little effort and it takes no account whatever of the extent of lateness. Either the trader is on time or he is not; either he exercises due diligence or he does not. No account is taken of the degree of culpability”.
33.	Thus the Appellant cannot avoid the consequences of the default surcharge scheme by simply relying on the facts that it maybe less culpable than other traders or that it did not have sufficient funds. Those consequences can only be avoided if the Appellant can satisfy us that it had a reasonable excuse for not paying its VAT on time. 
The Default Surcharge for the period ending 28 February 2006
34.	The Appellant accepted that the direct cause of the default was insufficiency of funds but that it had a reasonable excuse because the underlying reason for the insufficiency of funds was the absence of a CIS 4 card. The Appellant contended that Oriel Support Limited could not have foreseen that the Respondents would fail to issue a CIS 4 for the best part of six months. Further, how could the Appellant anticipate that the Respondents would refuse to issue a CIS 4 on the basis that the company was not entitled to one, yet at the same time tell its customers that they could not pay Oriel Support Limited unless it held a CIS 4. Finally Oriel Support Limited could not have been expected to enter into alternative arrangements pending the hearing of the Appeal. In summary the Appellant lacked the funds to pay the VAT due by reason of unforeseeable and inescapable misfortune.
35.	The decisions of the High Court and of the Court of Appeal in Customs and Excise Commissioners v Savelon [1989] STC 907 and Customs and Excise Commissioners v J B Steptoe  [1992] STC 757 established that insufficiency of funds could never of itself constitute a reasonable excuse, but the cause of that insufficiency, the underlying cause of the taxpayer’s default, might do so. 
36.	Nolan LJ in Savelon held that
“Although the cases in which a trader with insufficient funds could successfully show a reasonable excuse would be rare, the provisions of s33(2)(a) (now s 71 VATA 1994) did no more than make it clear that an insufficiency of funds by itself was not a reasonable excuse for non-payment. A trader who was deprived of the means to pay the value added tax by the wrongful act of another might have a reasonable excuse for non-payment or late payment of the tax notwithstanding that the direct cause of the default was an insufficiency of funds. The value added tax tribunal correctly distinguished between the direct cause of the default and the excuse for it”.
37.	Lord Donaldson of Lymington MR  in Steptoe said:
“ …. 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”.
38.	Thus in order for the Appellant to satisfy us that it had a reasonable excuse for not paying its VAT on time, the Appellant would have to establish the underlying cause of the insufficiency of funds. Further, the consequences that flow from the underlying cause could not be avoided by the exercise of reasonable foresight and due diligence on the part of the Appellant, whilst having at the same time proper regard for the fact that the VAT would be due on a particular date.
39.	It is important that we identify the correct issue to be determined in this Appeal. We are deciding whether the Appellant had an underlying cause for the insufficiency of funds and whether the consequences of the cause could have been avoided by the exercise of reasonable foresight and due diligence on the part of the Appellant. We are not deciding whether the Respondents’ refusal of the CIS 4 certificate for the Oriel Support Limited was correct. Further we are not determining the Respondents’ blameworthiness in handling the application. These are matters which have been scrutinised in detail by the Special Commissioners and the High Court. We are bound by the findings of the High Court.
40.	The Appellant identified the underlying cause for the insufficiency of funds was the absence of  a CIS 4 card for Oriel Support Limited, and that it could not have foreseen the consequences of the Respondents’ failure to grant a CIS 4 card for the best part of six months. We note that the Appellant has sought to restrict the question to the CIS 4 card whereas it applied in the first place for a CIS 5 certificate which is subject to a greater range of preconditions than a CIS 4 card.
41.	We make the following findings of fact on the underlying cause:
(1)	Oriel Support Limited commenced business on 12 July 2005. The directors of the Appellant company and Oriel Support Limited knew from the outset that Oriel Support Limited required a CIS 4 card or a CIS 5 certificate in order to receive payments under the Construction Industry Scheme.
(2)	Oriel Support Limited chose not to apply for a CIS 5 certificate until 29 September 2005. We find the Appellant’s reason for delaying the application unconvincing. The Appellant stated that it could rely on the existing certificate for the predecessor company and that effectively there was no urgency in submitting the application. The Appellant implied that it could not apply for a certificate until the threshold of £one million had been met. We are satisfied that a prudent business person would have put in motion his application  for at least the card if not the certificate much earlier than Oriel Support Limited, in view of the importance of compliance with CIS for the viability of the business.
(3)	Oriel Support Limited assumed that its application for CIS 5 certificate was a formality. It was taken by surprise by the Respondents’ refusal.    However, Oriel and its advisers knew, or must have known, that there were three tests, each of which had to be satisfied for the grant of the certificate (see Mr Justice Warren’s ruling). We are satisfied that a prudent business person, properly advised, would have been aware that the Respondents were obliged to exercise their statutory responsibilities in respect of the grant of the certificate and that there was a possibility the application could  be refused or delayed for additional enquiries.
(4)	The Appellant and Oriel Support Limited knew on 15 November 2005 that the certificate had been refused. The Appellant suggested that it was prevented from taking alternative action to remedy the situation because of the pending appeal. The Appellant blamed the Respondents for the delay in the hearing of the appeal. We consider that the question of blameworthiness for the delay was not the central issue. We are satisfied that a prudent business person, properly advised, would be aware that there would be some delay in arranging an Appeal hearing and that the outcome of the Appeal would be uncertain. The risks of not having a CIS 4 card or CIS 5 certificate for the viability of Oriel Support Limited was self evident to the Appellant. A prudent business person knowing of the risk would have taken action to mitigate the risk straightaway. He would not have waited until after determination of the Appeal.
(5)	The Appellant and Oriel Support Limited did have an alternative strategy to mitigate the risk of not having a CIS 4 card or CIS 5 certificate, namely transferring the business to another group member. A prudent business person would have embarked upon the strategy earlier than the Appellant. If the Appellant had done so it would not have faced the cash flow difficulties at the end of March 2006.
42.	We are satisfied from the above findings of fact that the Appellant and Oriel Support Limited knew of the risks for the business of not having in place either a CIS 4 card or a CIS 5 certificate, and that the possibility of Respondents refusing its application was foreseeable. Further we are satisfied that the Appellant did not exercise due diligence in taking steps to mitigate the risk. We hold that the Appellant’s underlying cause of not having a CIS 4 card or CIS 5 certificate  did not constitute a reasonable excuse for the default imposed for the period ending 28 February 2006.
43.	In reaching the above decision we assessed the Appellant’s actions against the standards of a prudent business person. Judge Medd in the Tribunal decision of The Clean Car Company Limited [1990] Decision Number 5695 held that, although the test of whether or not there is a reasonable excuse is an objective one, it was permissible to take into account specific characteristics of the Appellant in deciding whether he acted reasonably. The specific characteristics of the Appellant that may be relevant in this Appeal are that it was an experienced operator in the provision of supplies to the construction industry, and its principal activities included the giving of accountancy and business advice. Applying Judge Medd’s formulation we are satisfied that the Appellant would be better informed than a prudent business person about the risks of not having a CIS 4 card or CIS 5 certificate and about the appropriate action to mitigate the risks, which reinforces our decision that the Appellant’s underlying  cause did not constitute a reasonable excuse.
44.	We decided to determine the Appellant’s assertion of underlying cause in accordance with the way it was presented to us by the Appellant. However, we consider that the Appellant’s case was misconceived in two other respects. 
45.	First, the thrust of the Appellant’s case was the effect of the Respondents’ refusal to grant Oriel Support Limited a CIS 5 certificate on the business of Oriel Support Limited. Oriel Support Limited was a different legal entity from the Appellant, not a member of the Appellant’s VAT group. This Appeal was about whether the Appellant, Oriel Holdings Limited, had an underlying reason for its inability to pay the VAT for the period ending 28 February 2005. The Appellant’s evidence was primarily directed at the reason for the cash flow difficulties of Oriel Support Limited not Oriel Holdings Limited. In this respect the decision of the Court of Session in Artful Dodger (Kilmarnock ) Ltd v Lord Advocate [1993] STC 330 which was helpfully drawn to our attention by the Appellant’s representative, provides salient guidance:
“The company had taken no steps to register itself or any associated company as a group; it could not therefore claim that non-payment to a separate legal entity was a reason for its own non-payment”.
46.	Although the facts of this Appeal were different from the Artful Dodger the principle remains that the Appellant cannot use the circumstances of an associated company which was not a member of the Appellant’s VAT group as a reason for its non-payment of VAT.
47.	 It follows from the above that the correct construction of the Appellant’s case was whether the failure by Oriel Support Limited to pay the Appellant for supplies of management services amounted to a reasonable excuse. The Appellant’s evidence of the financial impact upon itself of the non-payment of management charges by Oriel Support Limited was minimal. Essentially it consisted of an assertion by Mr Pursey that Oriel Support Limited owed the Appellant £300,000 at the end of March 2006. This assertion was not backed up by documentary evidence. In addition the Appellant supplied a copy of Oriel Group’s accounts for the period 31 December 2005. Mr Pursey in response to a question from the Tribunal advised that the Group’s turnover for the year ending 31 December 2006 increased to £50 million with a resultant increase in profits. The Appellant supplied no evidence of the breakdown of the actual charges levied by it on Oriel Support Limited; no profile of payments; and no detailed information about the income and expenditure of Oriel Holdings for the relevant period. 
48.	The Respondents requested the Appellant to supply detailed financial information on two separate occasions. The Appellant considered the requests impracticable and not directed at what it saw to be the central argument of the Appeal, namely the Respondents’ refusal to issue Oriel Support Limited with a CIS 4 card or CIS 5 certificate. The Tribunal requested sight of the Appellant’s VAT returns for the disputed periods which were supplied by fax. Although the Tribunal has an inquisitorial role, it is not the function of the Tribunal or the Respondents to advise the Appellant on the conduct of its case.
49.	 Thus the Appellant’s evidence on the financial impact upon Oriel Holdings Limited of the non-payment of charges for  management services by Oriel Support Limited amounted to the following:
(1)	The undocumented assertion of Mr Pursey that Oriel Support Limited owed the Appellant £300,000 at the end of February 2006.
(2)	The Appellant’s VAT return for 02/06 which showed that the value of sales made during the quarter was £1,648,692 with a VAT debt of £223,576.06.  Taking those figures at face vale and allowing for the uncorroborated debt of £300,000 the Appellant had sufficient funds to pay the VAT due.
(3)	The undocumented debt of £300,000 of Oriel Support Limited constituted 18 per cent of the value of the Appellant’s sales during the relevant quarter.
(4)	The 31 December 2006 year end accounts for the Oriel Group indicated a healthy financial position.
50.	We find on the above facts that the Appellant has not satisfied us on the balance of probabilities that the non-payment of management charges by Oriel Support Limited was the reason for the Appellant’s failure to pay the VAT due on time for the period ending 28 February 2006.
51.	We, therefore, decide that the Appellant does not have a reasonable excuse for the default surcharge imposed for the period ending 28 February 2006 because:
(1)	The Appellant has not satisfied us on the balance of probabilities that the non-payment of management charges by Oriel Support Limited was the reason for the Appellant’s failure to pay the VAT due on time.
(2)	  The Appellant cannot rely on the cash flow difficulties of Oriel Support Limited and the reasons for those difficulties as its excuse for not paying its VAT on time. Oriel Support Limited was a separate legal entity, not a member of the Appellant’s VAT group.
(3)	If in the alternative the Appellant could rely on the difficulties of Oriel Support Limited, we find as fact that the underlying cause of the shortfall of funds for Oriel Support Limited was foreseeable and avoidable by the exercise of due diligence.
The Default Surcharge for the Period Ending 31 May 2006
52.	The Appellant relied on the amendments to the database necessitated by the transfer of business from Oriel Support Limited to Oriel Composites Limited as its reasonable excuse for the default surcharge. The Appellant stated that it was not relying on lack of funds for this tax period. Also for the avoidance of doubt we are satisfied that the reasonable excuse advanced does not fall in the category of reasons excluded by the Artful Dodger case as Oriel Composites Limited was a member of the Appellant’s VAT group and would have been directly affected by the database changes. 
53.	The Appellant’s representative drew our attention to several VAT and Duties Tribunal cases where the Tribunal decided that computer problems amounted to a reasonable excuse. Those cases revealed a number of common connecting themes, namely, whether the problem was foreseeable, the resources of the tax payer to deal with it, the efforts made by the taxpayer to remedy it and the existence of additional pressures aggravating the initial problem.  Equally computer problems may not be an excuse as demonstrated by Tolley’s digest of VAT cases. The Representative fairly stated that the question whether a computer related issue was a reasonable excuse depended upon the facts of the case.
54.	 We find the following facts in relation to the reason advanced by the Appellant:
(1)	The Appellant had a genuine business reason for making the amendments to the data-base.
(2)	The Appellant had sufficient time in which to carry out the amendments, starting in February 2006 which allowed five months to carry out the changes prior to the next submission of its VAT return.
(3)	The Appellant had the in-house resources and expertise to do the work required.
(4)	 The scale of the problem was manageable. In evidence Mr Pursey revised the number of records downwards to about 2,200.
(5)	Mr Pursey admitted in his letter to the Respondents dated 1 November 2005 that the problems were not adequately thought through due to the urgency of the situation.
(6)	On 12 June 2006 the Appellant told the Respondents that there were problems with the data transfer. They had more than three weeks to rectify the problems before submission of the VAT return.
(7)	The Appellant left it too late to run off a draft VAT return waiting until the morning of the last day for submission. The Appellant gave no solid reason why it was not possible to prepare a draft return earlier.
55.	We are satisfied that the Appellant could have avoided the problems with the database by better planning and effective controls for checking the accuracy of the return. We find that the Appellant does not have a reasonable excuse for the default surcharge for the period ending 31 May 2006.
56.	We acknowledge that the Appellant missed the deadline for submitting electronic payments by a very short time-scale. However, the default surcharge regime is a blunt instrument it takes no account whatever of the degree of lateness for submitting the payment. We also note that the Respondents exceptionally agreed to cancel a previous default surcharge for the period 05/05 in consideration of the Appellant’s inexperience with the rules governing electronic transfers. 
Decision
57.	In view of our findings in paragraphs 51 and 55 we dismiss the Appellant’s appeal. We make no order for costs. 

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 1 June 2007

LON/06/1397