Sellers Legal Services Ltd v Revenue and Customs [2005] UKVAT V19063 (05 May 2005)

19063
Value Added Tax – Default Surcharge – s.71(1)(a) VATA 1994 – Lack of funds whether reasonable excuse – Inland Revenue repayment late – appeal allowed

LONDON TRIBUNAL CENTRE

	SELLERS LEGAL SERVICES LIMITED	Appellant

-	and –

	THE COMMISSIONERS OF HM REVENUE & CUSTOMS 	Respondents

				Tribunal:	DR KAMEEL KHAN (Chairman)
						MR S K DAS

Sitting in public in London on 2 March 2005

Mr S Abraham, Director, for the Appellant 

P Crinnion, Senior Officer, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

This is an appeal against a default surcharge issued for the period 02/04.  The default surcharge liability is for £2,794.23.  Value Added Tax amounting to £18,628.26 was due on 31 March 2004, for the quarter ended 28 February 2004.  This outstanding amount of Value Added Tax was paid on 15 May 2004.

Background

The Appellant is a court reporting and legal software company, which has been trading for over 90 years.  It is a profitable company with a staff of five.  Recently, they have devoted a large amount of time and resources in developing a suite of software products, which are used by lawyers and court reporters.  The expenditure in developing the software has caused the company some cashflow difficulties.  In addition there has been some downturn in the company’s business over the past year.  The company in writing to Her Majesty’s Customs and Excise (“HMCE”) on 8 May 2003 stated “unfortunately cash resources at present do not allow for immediate payment in full of VAT due for the previous and current quarters”.  The company made a request that their outstanding liability, approximately £30,000, be paid over a period of six monthly instalments, commencing 30 June 2003.  HMCE in their reply on 5 April 2004, explained that under section 71(1) Value Added Tax Act 1994 (“VATA 1994”) lack of funds does not constitute a reasonable excuse for late payment unless there are exceptional circumstances.  

In order to consider the position of the Appellant, HMCE requested various financial information including bank statements, terms of payment and customer information.  The Appellant was informed on 26 May 2004 that the default surcharge would not be withdrawn.  The information which was requested by HMCE on 5 April 2004 was provided by the Appellant on 29 July 2004.  On 9 August 2004, HMCE wrote to the Appellant informing them that they were unable to withdraw the default surcharge. 

The Appellant  has maintained as a main argument in support of their case that they were owed £33,430 by the Inland Revenue as a repayment under the research and development credit scheme, and this money was not paid to them until 14 May. It was then used to pay HMCE their outstanding VAT liability on 17 May. 

HMCE on looking at the Appellant’s case, stated in their letter dated 9 August 2004,

“whilst a lack of funds is not itself a reasonable excuse, I have looked at the underlying cause of your lack of funds.  Your letter states that you were owed £33,430.87 from the Inland Revenue, but did not receive this until 14 May 2004, after the date of your 02/04 VAT Return and payment was due.  Unfortunately this amounts to only 26% of your declared output for the quarter of £128,689 and therefore we are unable to consider removing the surcharge on these grounds.
Your monies received during this quarter totalling £134,428.05 and as your VAT liability was £18,628.26 it is considered that sufficient funds were received into the business during the quarter to pay the VAT. 

From looking at your bank statement, although you were overdrawn at the due date, taking into account your declared overdraft limit of £80,000, the funds you received into the company was sufficient to pay the VAT due”.

The Appellant’s bank statement dated 27 March to 2 April showed an overdraft facility of £80,000 and an existing overdraft of £46,884.37 on 31 March.  The Appellant’s representative, Mr S Abraham, a director, stated in oral evidence that wages of £30,000 was due (in March) which would have taken the overdraft to approximately £77,000 leaving very little overdraft facility to be the outstanding VAT liability. They therefore say that they were dependent on the research and development credit payment from the Inland Revenue to pay outstanding VAT at the end of March. 

The Appellant’s auditors have provided, at the request of the Tribunal, a statement as to how the research and development credit payment arose and a chronology of its claim and payment.  The information was provided by letter on 4 March 2005 from the auditors, Wakelin and Day.  The chronology is as follows:

1.	The company’s accounts and corporation tax returns was submitted to the Inland Revenue on 5 March 2004.

2.	On 26 March, the Inspector responsible for the company’s tax affairs, in a telephone conversation with the Appellant, stated that the file would be looked at that week.

3.	On 29 April, the collector issued a “Receipt on form CT2009” confirming the repayment of the sum £33,348.64.

4.	On 30 April 2004, the Inspector confirmed the repayment to the Appellant of £33,430.87 to include interest of £82.23.  This was calculated from 1 April to 30 April 2004.

5.	On 13 May 2004, a cheque was received from the Inland Revenue for the sum of £33,430.87 by the Appellant.

The Appellant knew conclusively on 29 April that the payment would be made although it would appear from the interest paid by the Inland Revenue that the payment was actually due on 1 April 2004.  It is this credit that the Appellants claimed they budgeted for, for the repayment of the VAT owed to HMCE.  Mr S Abraham, for the Appellant, provided in oral and written evidence that the Inland Revenue was short staffed and this resulted in a delay in making the research and development credit payment to the company.  The HMCE Default Surcharge Progress Sheet confirmed that HMCE were informed by the Appellants throughout that they had financial difficulties and were awaiting the payment from the Inland Revenue. 

Appellant’s Submission

The basis of their argument is that it was not possible to pay the outstanding VAT on time as the company had cashflow difficulties and were awaiting from the Inland Revenue the repayment of their research and development credit of approximately £33,000 which was to pay the VAT due.  The Inland Revenue was short staffed and the payment was delayed.  They further claim that this is an exceptional circumstance and the default surcharge should not be applied in this case.  Further HMCE were informed of the Appellant’s position throughout the relevant period.

Respondent

Their argument is based on section 71(1) VATA 1994 which excludes lack of funds from being a reasonable excuse for late payment unless there are exceptional circumstances and there are no such circumstances in this case.

The Law

S.71 (1) VATA 1994 provides:

“(1)  for the purpose of any provision of Sections 59 to 70 which refers to a reasonable excuse for any conduct.

(a)  an insufficiency of funds to pay any VAT due is not a reasonable excuse”;

The Decision

There is a reasonable excuse for the non-payment of the VAT due on 31 March 2004.  While insufficiency of funds to pay the VAT due is not a reasonable excuse; there are exceptional circumstances in this case.  The Appellant expected a repayment from the Inland Revenue, who due to staff shortages, were unable to process the Appellant’s claim for credit without delay.  No evidence was presented to the Tribunal as to the normal time taken by the Inland Revenue to process and pay the research and development credit to taxpayers.  A taxpayer can expect, if returns are submitted on time, to have an expeditious payment by the Inland Revenue of monies due as a repayment.  There is also precedent supporting the position that a reasonable excuse can arise where a VAT repayment due has not been paid to the taxpayer (see G T Shaw & M A Wilcock (Man/88/616) and DPC European Transport (Lon/98/850).  An insufficiency of funds by itself may not be a reasonable excuse but if one looks behind, at the reason for the insufficiency, there may be circumstances giving rise to an excuse which the Tribunal may  consider to be reasonable.  A late repayment by a tax authority of money owing to a taxpayer, who is dependent on the repayment to pay outstanding VAT liability, is a reasonable excuse for the purposes of S.71(1) (a) VATA 1994.

Accordingly, the appeal is allowed and the default surcharge should not stand.

DR KAMEEL KHAN
CHAIRMAN

RELEASED: 5 May 2005

LON/04/1912