20896

Value Added Tax   -   Default Surcharge   -   Cash flow difficulties resulting in cessation  of trading  -  no loss of, or unexpected default by, a major customer   -  Appeal Dismissed

LONDON TRIBUNAL CENTRE

	EAST WEST DEMOLITION LIMITED	           Appellant

- and -

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Tribunal: HOWARD M NOWLAN (Chairman)
               MRS NORAH CLARKE (Member)

Sitting in public in Cardiff on 6 November 2008

The Appellant indicated in advance that it would neither appear in person nor be represented

Mrs. Crinnion of the Solicitor's Office of HMRC on behalf of the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	This was a simple, but unfortunate, case in which the Appellant was marginally late (by only 6 days) in paying its VAT of £17, 204.50 for the period 04/08. The late payment resulted from general cash flow difficulties that had been affecting the business for some time, it seems, since this company had suffered default surcharges in 13 previous VAT periods, 10 of them at the 15% rate, incurring total penalties in region of £25,000.   The 15% surcharge in respect of the period under appeal alone was for £2, 580.67.

2.	In a letter written shortly before the hearing, the Appellant had written to the VAT Tribunal indicating that:-
•	the payment in question was late because the Appellant delayed in  issuing a cheque for a few days to ensure that incoming funds would be credited to its account so that the cheque, paying the VAT, would not be "bounced";  and that
•	due to the economic downturn, the business had ceased trading, so that the Appellant would not be attending the hearing. 
3.	The law in relation to the default surcharge regime clearly requires us to decide that a shortage of funds is not a reasonable excuse for the late payment of VAT. Case law, and recently a number of Tribunal decisions, somewhat modify this proposition in that it is now clear that the factor that itself occasions the shortage of funds may itself provide a reasonable excuse for the late payment of VAT, but the authorities clearly show that the underlying factor must be a major and unanticipated event, such as the loss of a key customer who generally provided a major proportion of the revenues of the trader, or a default in payment by such a customer that had not been anticipated.       

4.	In the present case the Appellant had certainly indicated that it did not have an overdraft facility with its bank, albeit that its account was in fact already overdrawn.    It also indicated that in the relevant VAT period its cash receipts fell short, by 16%, of the invoices that it itself had issued, in respect of which it was liable to VAT. It did not however provide evidence of cheque stubs issued before the cheque issued to HMRC to indicate whether funds had been available, which funds had in fact been applied in paying other creditors in preference to HMRC, and even had it been demonstrated that there was no such priority application of funds, we would still have had to decide that the shortage of funds resulting from the cash flow problems of a slow and progressive decline in business were not such as to provide a reasonable excuse for the late payment of VAT.   

5.	We should comment that the Appellant had complained to its MP, Mr. Peter Hain, in respect of the relevant surcharge, and Mr. Hain had passed on the letter of complaint to the Chancellor of the Exchequer. Predictably this resulted in a letter of explanation from HMRC in which it was explained that the law had been correctly applied in this case and that it would be wrong, in terms of fairness to other taxpayers, for any different treatment to be accorded to the Appellant. We entirely agree that in terms of the present law, this response from HMRC was correct, and that the Appellant has no complaint against the officers of HMRC who have applied the law in the present case. 

6.	It remains to be seen of course whether the Chancellor's indication in his pre-Budget speech on 4 November 2008 that attention will be given to assisting traders with the timing of their tax payments will result in any modification of the default surcharge regime, and it also remains to be seen whether the courts or the Tribunal will ever conclude that the default surcharge regime, with its inability to distinguish between a trivial default in difficult circumstances and an outrageous case, should be interpreted in some more lenient manner under the Human Rights convention and Human Rights Act. The former matter is a matter of speculation at present, and the latter point was not raised with us. Accordingly our decision is that HMRC acted correctly in this case, and that the Appellant did not demonstrate a reasonable excuse for the late payment of its VAT.

HOWARD M NOWLAN
CHAIRMAN
  RELEASED: 15 December 2008

LON/2008/1709