![]() |
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] | |
First-tier Tribunal (Tax) |
||
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> GH Preston Partnership v Revenue and Customs (VAT - PENALTIES : Reasonable excuse) [2016] UKFTT 296 (TC) (29 April 2016) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05069.html Cite as: [2016] UKFTT 296 (TC) |
[New search]
[Contents list]
[Context]
[View without highlighting]
[Printable PDF version]
[Help]
[image removed]
Appeal number:
TC/2012/08509
style='font-family:Symbol'>
VAT
– Default Surcharge –
Value
Added Tax Act 1994, sections 59 and 71 – The cause of insufficiency of
funds – Whether or not a reasonable excuse for late payment – yes for part of
the non-payments for two periods – no for the remaining eight periods –
allocation of payments - proportionality
FIRST-TIER TRIBUNAL
TAX CHAMBER
|
![]() |
Appellant |
|
|
|
|
- and - |
|
|
|
|
|
THE COMMISSIONERS FOR HER MAJESTY’S |
Respondents |
|
REVENUE & CUSTOMS |
|
TRIBUNAL: |
JUDGE RICHARD CHAPMAN |
|
MRS BEVERLEY TANNER |
Sitting in public at Manchester on 24 November 2015 (with further written submissions on 8 December 2015 and 16 December 2015).
Mr Michael Ripley, Counsel, for the Appellant.
Mr Barry Sellers, Presenting Officer, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents.
© CROWN COPYRIGHT
2016
DECISION
Introduction
1.
This is an appeal by GH
Preston
Partnership
(“the
Partnership”)
against
default surcharges for the late payment of
VAT
in the total sum of £74,941.44.
The relevant periods, defaults and amounts involved are set out in the
following table:
Period: |
Due date: |
Amount paid by due date: |
Amount paid after due date: |
Date of late payment: |
Amount of surcharge: |
06/09 |
31/7/09 |
£0.00 |
£29,685.61 |
17/11/09 |
£4,452.84 |
09/09 |
31/10/09 |
£0.00 |
£14,722.54 £5,050.00 |
10/11/09 23/4/10 |
£2,965.88 |
12/09 |
31/1/10 |
£0.00 |
£4,847.81 £20,000.00 £8,238.43 £39,827.05 |
23/4/10 15/9/10 15/10/10 15/10/10 |
£8,721.11 |
03/10 |
30/4/10 |
£0.00 |
£14,536.20 £14.25 |
7/7/10 15/10/10 |
£2,182.56 |
06/10 |
31/7/10 |
£0.00 |
£11,022.25 £40,000.00 £14,795.17 |
15/10/10 21/10/10 25/10/10 |
£9,872.61 |
09/10 |
31/10/10 |
£25,204.83 |
£25,204.83 £20,000.00 £30,000.00 £11,182.69 |
25/10/10 4/1/11 17/6/11 5/7/11 |
£9,177.41 |
03/11 |
30/4/11 |
£0.00 |
£3,817.31 £15,000.00 £15,000.00 £37.076.94 |
5/7/11 5/7/11 22/7/11 29/7/11 |
£10,634.13 |
06/11 |
31/7/11 |
£0.00 |
£10,000.00 £50,855.84 |
7/10/11 21/10/11 |
£9,128.37 |
09/11 |
31/10/11 |
£38,853.92 |
£30,000.00 £12,995.55 |
9/12/11 12/4/12 |
£6,449.33 |
12/11 |
31/1/12 |
£0.00 |
£27,004.45 £10,897.53 £14,234.32 £23,578.40 |
12/4/12 7/6/12 3/8/12 11/9/12 |
£11,357.20 |
2. This table takes into account an agreement between the parties at the outset of the hearing that a mistake had been made in respect of the surcharge for 09/10. Contrary to the initial calculations, the appropriate surcharge was £9,177.41 instead of £12,958.12 in order to take into account the fact that £25,204 had been paid on time. The parties also agreed that the returns were all made by their due dates with the exception of 09/09.
3.
The appeal was first made on 7 September 2012 but was stayed pending the
outcome of the appeal to the Upper Tribunal in Total Technology
(Engineering) Limited v
HMRC.
The stay was lifted on 9 March 2013. The
appeal had originally also been in respect of eleven further periods between
05/87 and 06/08, together with the period 12/10. However, these periods were
struck out by Judge Cannan in a decision released on 13 February 2014.
4.
In short, the Partnership
claims that there was a reasonable excuse for
the remaining defaults. In the alternative,
Preston
claims that the default
surcharges were disproportionate.
HMRC
refutes both of these contentions.
Evidence and Findings of Fact
5.
We heard evidence on behalf of the Partnership
from Mr Frank
Preston
(the
Partnership’s
senior partner) and Mr William Reay (the
Partnership’s
accountant). Both of these witnesses were entirely credible and were doing
their best to give accurate evidence. There was no oral evidence on behalf of
HMRC.
We have also considered a bundle of documents relied upon by both
parties.
6.
There were no factual disputes between the parties (whether by virtue
of
express agreement or the absence of challenge), albeit that the
Partnership
and
HMRC
inevitably make different submissions as to how those facts affect the
outcome of the appeal. With that measure of agreement in mind, we make the
following findings of fact.
7.
The Partnership
is a family business which has been trading since 1945.
The partners are now Mr
Preston,
Mr
Preston’s
brother and Mr
Preston’s
four
sons. The
Partnership
is involved in construction and mechanical engineering
and over the years has developed a specialism in welding and steel fabrication,
particularly in relation to gas mains. The
Partnership’s
main customers are gas
companies. The
Partnership
has also carried out engineering projects for
railway companies.
8.
From 2007 onwards, the Partnership
has experienced a number of financial
pressures.
9.
First, Mr Preston
informed us (and this was not challenged) that the
general downturn in the construction industry adversely affected the demand for
the
Partnership’s
services.
10.
The Partnership’s
financial position for the relevant years can be seen
from the accounts. For the year ending 31 March 2010, the sales were
£1,947,015, the gross profit was £609,580 and the net profit was £134,084. For
the year ending 31 March 2011, the sales were £2,154,251, the gross profit was
£1,000,066 and the net profit was £375,293. For the year ending 31 March 2012,
the sales were £2,215,987, the gross profit was £798,131 and the net profit was
£146,864. The parties also drew our attention to a particularly good year
ending 31 March 2008 (for which the sales were £2,207,738, the gross profit was
£1,291,321 and the net profit was £722,021) and a particularly bad year ending
31 March 2009 (for which the sales were £2,104,072, the gross profit was
£641,450 and the net profit was £11,887).
11.
Mr Preston
said that the net profits for the year ending 31 March 2009
were a big drop and that, at that time, the
Partnership
was struggling.
Although the amount of work decreased, the wages bill remained high as the
Partnership
paid the workers even though they were staying at home in order to
retain their specialised services. They gradually got back to work after about
a month.
12.
The relevant periods are of course 06/09 to 12/11 and so fall within the
years ending 31 March 2010 to 31 March 2012. We find that during these years
the Partnership’s
sales steadily increased and by 31 March 2012 had surpassed
the sales in the good year ending 31 March 2008. We also find that the
Partnership
was making substantial profits. Whilst these were nowhere near the
levels of the year ending 31 March 2008, they were still well above the more
precarious level of the year ending 31 March 2009. We take on board the point
that net profit does not necessarily mean availability of cash. Further,
HMRC
did not take issue with the assertion that, as a matter of fact, cash was not
available at the time that the payments were due.
13.
Secondly, in April 2007, HMRC
removed CIS 6 status from the
Partnership.
In June 1999, the
Partnership
registered for the Construction Industry Scheme.
The
Partnership
was given CIS 6 status, which meant that no deductions for tax were
made by main contractors prior to payment to the
Partnership
as a
sub-contractor. In April 2007, the
Partnership’s
status was changed to CIS 4,
with the effect that main contractors deduct 20% tax before payment to the
Partnership.
The tax is then held by
HMRC
until the partners’ tax liability is
calculated at the end of the year and returns made. Any excess in the CIS
account is refunded to the
Partnership
and any deficit is paid by the
Partnership.
Mr
Preston
accepted that the removal of CIS 6 status was because
of the
Partnership’s
default and that this was likely to be late payment of
PAYE. There was no evidence that the
Partnership
had attempted to restore its
CIS 6 status between the periods 06/09 and 12/11.
14.
The effect of the Partnership
having CIS 4 status was that CIS payments
were held by
HMRC
until the end of the tax year and then any excess payments
either refunded or set off against other liabilities to
HMRC.
An unchallenged
list of refunds prepared by the
Partnership
or its advisors appeared within the
bundle to the following effect:
“The following list shows what we believe to be the
amount of “excess” CIS tax collected by HMRC
in each of the tax years since the
partnership
lost its CIS gross payment status. These amounts gradually
accumulated in the CIS tax account during the tax years in question, and
represent the actual sums either refunded or offset against other tax
partnership
tax liabilities after deduction of income tax liabilities:
5th April 2009 £190,834.98 –
refunded to the partnership
5th April 2010 £58,884.24 –
offset by HMRC
5th April 2011 £113,971.23 –
offset by HMRC
5th April 2012 £84,855.00 -
offset by HMRC
5th April 2013 £202,847.00 –
offset by HMRC
5th April 2014 £399,597.00
– offset by HMRC”
15.
This raises the question as to what these sums were offset against. The
Partnership
suggests that these have been offset against debts to
HMRC
including, PAYE,
VAT
and
VAT
default surcharges. Although this has not been
challenged by
HMRC,
it must be said that we have not been given an account by
either party of exactly how these offsets have been applied. For the purposes
of this decision, we find as a matter of fact that some of the sums making up
the CIS refunds were applied to
VAT
default surcharges, including some of those
surcharges in question within these proceedings. However, we are unable to make
any findings as to which surcharges these related to and as to what proportion
of the refunds were involved. We also find as a matter of fact that the offsets
of CIS refunds were not applied to the
VAT
due for the periods presently under
appeal. We have made this finding upon the basis that each of the entries in
the schedule of defaults under the heading “Date payment received and method”
refers either to a cheque or a CHAPS payment; there is no mention of any offset
by
HMRC.
We also note that although Mr
Preston
stated in his second witness
statement that how
HMRC
allocated the set-offs was out of the
Partnership’s
hands, he did not go so far as to say that the
Partnership
had expressly
instructed
HMRC
to apply the offsets against current
VAT
liabilities in respect
of the periods in question. Indeed, the only evidence of a request to apply the
CIS refunds in any particular way was a letter dated 25 October 2010 from the
Partnership’s
accountants requesting a set off of the £58,884.21 refund due
against PAYE liabilities.
16.
Thirdly, it is said that HMRC
was pursuing historic debts and, in doing
so, allocated
VAT
payments to historic liabilities (including surcharges)
rather than current liabilities.
17.
We find that HMRC
was placing pressure upon the
Partnership
to clear its
debts. In particular, telephone notes for 21 December 2009, 26 March 2010 and
21 June 2010 refer to distraint being considered. An entry on 16 November 2010
states, “reminded him that Current Paye not been paid, also
VAT
due, has to pay
on time or all debts due will be enforced. He will sort this.” Further, a note
dated 23 November 2010 refers to a warning that
HMRC
were getting close to
starting “BY” action, which we take to refer to bankruptcy. In order to deal
with this, Mr
Preston
drew down on his pension in the sum of £20,000 in about
November 2010 and in the sum of about £40,000 in about 2012.
18.
We also find that HMRC
was applying
VAT
payments to historic
VAT
liabilities rather then current liabilities. As set out above, this is clear
from the schedule of defaults. It is asserted by the
Partnership
that some of
these
VAT
payments were also applied to
VAT
default surcharges. We have no
evidence as to which of the payments this related to or as to how much, but
HMRC
did not challenge this assertion and so we accept it.
19.
Importantly, the Partnership
asserted that a number of the periods would
have been paid in full – and the rest paid in part - if payments had been
allocated to current liabilities. Mr Ripley’s skeleton argument initially
restricted this to the 12/09 and 06/10 periods as follows:
“If GHP’s
VAT
payments relating to
HMRC
had not
been allocated to earlier default surcharges,
GHP
would have met its
obligations on time and in full for all the quarters under appeal except the
12/09 and 06/10 periods.”
20.
However, at the start of the hearing we were given an updated
spreadsheet prepared by or on behalf of the Partnership.
This increased the
number of periods which would not have been paid in full to four. For 06/09,
£8,096 had been paid in the previous three months whereas the
VAT
due was
£29,685.61. For 12/09, £52,554.15 had been paid in the previous three months
whereas the
VAT
due was £72,913.29. For 06/10, £14,536.20 had been paid in the
previous three months whereas the
VAT
due was £65,817.42. For 12/11, £30,000
had been paid in the previous three months whereas the
VAT
due was £75,714.70.
21.
Again, this was not challenged by HMRC
and so we accept it as a matter
of fact. We treat this as relating to actual payments by the
Partnership
as
distinct from the offsets referred to above. We therefore find that, if
payments had been allocated to current liabilities, all periods in the appeal
apart from 06/09, 12/09, 06/10 and 12/11 would have been paid in full. We also
find (by deducting the amount paid in the previous three months from the
VAT
due) that for 06/09 the unpaid sum would have been reduced to £21,589.61, for
12/09 the unpaid sum would have been reduced to £20,359.14, for 06/10, the
unpaid sum would have been reduced to £51,281.22 and for 12/11 the unpaid sum
would have been reduced to £45,714.70.
22.
There was no evidence that the Partnership
ever instructed
HMRC
to apply
the payments to current
VAT
liabilities rather than historic liabilities or
default surcharges. Mr Ripley confirmed during submissions that it was not part
of the
Partnership’s
case that any such instructions had been given.
23.
Thirdly, the Partnership
experienced customer insolvency and delayed
payments. One of the
Partnership’s
customers, Fastline Limited (“Fastline”),
went into administration on or about 31 March 2010 owing the
Partnership
£19,559.84 plus
VAT
(therefore totalling £22,922.01). The
Partnership
had been
chasing for payment since November 2009. The more significant impact of
Fastline’s administration was that the
Partnership
had been developing a
sleeper delivery train for Fastline (“the Project”) and had paid its own
suppliers £120,881.78 which it would no longer be able to recoup from Fastline.
This had an effect upon the
Partnership’s
cash flow.
HMRC
did not challenge Mr
Preston’s
evidence on this point other than to seek clarification as to whether
or not the Project was sold to any other customer, to which Mr
Preston
answered
that nothing had been manufactured as it was still in design phase and so a
loss was made. We therefore accept Mr
Preston’s
evidence as to the
Partnership’s
cash flow being affected by the administration of Fastline. We
were not given any evidence as to how long this cash flow problem was said to
have lasted. We accept that the initial loss of £22,922.01 would have been felt
in the 12/09 period, upon the basis that it should have been paid in November
2009. Mr
Preston’s
evidence was that it had been agreed that Fastline would
make periodical payments for the Project. However, we were not given any
further evidence as to when this would be and in what amounts. As such, we are
not in a position to make any findings as to the effect which the
administration of Fastline had upon cash flow as compared with the cash flow
forecast had the Project continued.
24.
Fourthly, the Royal Bank of Scotland reduced the Partnership’s
overdraft. The
Partnership
was given 24 days’ notice of this, which took effect
upon the basis of a reduction of £10,000 per month from February 2011 for ten
months in the sum of £100,000. Further, arrangement fees were required in March
2011 in the sum of £1,328 and in July 2011 in the sum of £2,064. The overdraft
was increased to £160,000 in March 2012, but this was of course after the
periods in question. We find that this did have an effect upon the
Partnership’s
cash flow, as the amount of money available to the
Partnership
for working capital was reduced accordingly.
25.
Mr Preston
also gave evidence about difficulties created by a customer
known as Southern Gas Networks and the operation of a self-billing system which
was introduced in early 2012. However, this was after the periods in question
within these proceedings and so we make no findings about this.
The Legal Framework
26. There was broad agreement between the parties as to the legal framework.
27.
The default surcharge regime is contained within section 59 of the Value
Added Tax Act 1994 (“
VATA
1994”).
“59. The default surcharge
(1) Subject to subsection (1A) below if, by the last day on which a taxable person is required in accordance with regulations under this Act to furnish a return for a prescribed accounting period –
(a) the Commissioners have not received that return, or
(b) the Commissioners have received that
return but have not received the amount of VAT
shown on the return as payable
by him in respect of that period,
then that person shall be regarded for the purposes of this section as being in default in respect of that period.
(1A) A person shall not be regarded for the
purposes of this section as being in default in respect of any prescribed
accounting period if that period is one in respect of which he is required by
virtue
of any order under section 28 to make any payment on account of
VAT.
(2) Subject to subsection (9) and (10) below, subsection (4) below applies in any case where –
(a) a taxable person is in default in respect of a prescribed accounting period; and
(b) the Commissioners serve notice on the taxable person (a “surcharge liability notice”) specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of the period referred to in paragraph (a) above and beginning, subject to subsection (3) below, on the date of the notice.
(3) If a surcharge liability notice is served by reason of a default in respect of a prescribed accounting period and that period ends at or before the expiry of an existing surcharge period already notified to the taxable person concerned, the surcharge period specified in that notice shall be expressed as a continuation of the existing surcharge period and, accordingly, for the purposes of this section, that existing period and its extension shall be regarded as a single surcharge period.
(4) Subject to subsections (7) and (10) below, if a taxable person on whom a surcharge liability notice has been served –
(a) is in default in respect of a prescribed accounting period ending within the surcharge period specified in (or extended by) that notice, and
(b) has outstanding VAT
for that
prescribed accounting period,
he shall be liable to a surcharge equal to
whichever is the greater of the following, namely, the specified percentage of
his outstanding VAT
for that prescribed accounting period and £30.
(5) Subject to subsections (7) to (10)
below, the specified percentage referred to in subsection (4) above shall be
determined in relation to a prescribed accounting period by reference to the
number of such periods in respect of which the taxable person is in default
during the surcharge period and for which he has outstanding VAT,
so that –
(a) in relation to the first such prescribed accounting period, the specified percentage is 2 per cent;
(b) in relation to the second such period, the specified percentage is 5 per cent;
(c) in relation to the third such period, the specified percentage is 10 per cent; and
(d) in relation to each such period after the third, the specified percentage is 15 per cent.
(6) For the purposes of subsection (4)
and (5) above a person has outstanding VAT
for a prescribed accounting period
if some or all of the
VAT
for which he is liable in respect of that period has
not been paid by the last day on which he is required (as mentioned in
subsection (1) above) to make a return for that period; and the reference in
subsection (4) above to a person’s outstanding
VAT
for a prescribed accounting
period is to so much of the
VAT
for which he is so liable as has not been paid
by that day.
(7) If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above satisfies the Commissioners or, on appeal, a tribunal that, in the case of a default which is material to the surcharge –
(a) the return or, as the case may be, the VAT
shown on the return was despatched at such a time and in such a manner that it
was reasonable to expect that it would be received by the Commissioners within
the appropriate time limit, or
(b) there is a reasonable excuse for the
return or VAT
not having been so despatched,
he shall not be liable to the surcharge and for the purposes of the preceding provisions of this section he shall be treated as not having been in default in respect of the prescribed accounting period in question (and, accordingly, any surcharge liability notice the service of which depended upon that default shall be deemed not to have been served).
(8) For the purposes of subsection (7) above, a default is material to a surcharge if –
(a) it is the default which, by virtue
of
subsection (4) above, gives rise to the surcharge; or
(b) it is a default which was taken into account in the service of the surcharge liability notice upon which the surcharge depends and the person concerned has not previously been liable to a surcharge in respect of a prescribed accounting period ending within the surcharge period specified in or extended by that notice.
(9) In any case where –
(a) the conduct by virtue
of which a person is in
default in respect of a prescribed accounting period is also conduct falling
within section 69(1), and
(b) by reason of that conduct, the person concerned is assessed to a penalty under that section,
the default shall be left out of account for the purposes of subsections (2) to (5) above.
(10) If the Commissioners, after consultation with the Treasury, so direct, a default in respect of a prescribed accounting period specified in the direction shall be left out of account for the purposes of subsections (2) to (5) above.
(11) For the purposes of this section references to a thing’s being done by any day include references to its being done on that day.”
28.
Section 71(1) of VATA
1994 provides as follows:
“71. Construction of sections 59 to 70
(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; and
(b) where reliance is placed on any other person to perform any task, neither the fact of that reliance or any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.”
29. The burden of proof in establishing a reasonable excuse is upon an appellant.
30.
Although insufficiency of funds cannot of itself constitute a reasonable
excuse, the cause of that insufficiency can. The touchstone as to whether or
not the cause of the insufficiency of funds is a reasonable excuse is whether
or not, “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” (see paragraph 32 below). By way of shorthand, the test has been
treated as whether or not the cause of the insufficiency of funds was
reasonably avoidable. This test is taken from the judgments of Nolan LJ and
Lord Donaldson in Customs and Excuse Commissioners v
Steptoe [1992] STC
757.
31. Nolan LJ stated as follows at 768:
“I remain of the view
which I
expressed in Salevon that as a general rule one can trust the
commissioners and the tribunal to determine whether in any given case, and
having regard to the scheme of the legislation including s 33(2)(a), a
reasonable excuse for non-payment exists. I would not accept that the
reasonable excuse must necessarily involve a wrongful act by another person. My
references in Salevon to 'the wrongful act of another' and to the
distinction between 'the trader who lacks the money to pay his tax by reason of
culpable default and the trader who lacks the money by reason of unforeseeable
and inescapable misfortune' were directed to the facts of that case. They
cannot be regarded as an all-purpose test of what constitutes a reasonable
excuse. The test is to be found in the words of ss 19(6)(b) and 33(2)(a)
read in the context of the statutory scheme for the collection of
value
added
tax. As a general rule this scheme has a highly beneficial effect on the cash
flow of traders. If I may quote again from my judgment in Salevon (at
911) -
‘... the cases in
which a trader with insufficient funds to pay the tax can successfully invoke
the defence of “reasonable excuse” must be rare. That is because the scheme of
collection which I have outlined involves at the outset the trader receiving
(or at least being entitled to receive) from his customers the amount of tax
which he must subsequently pay over to the commissioners. There is nothing in
law to prevent him from mixing this money with the rest of the funds of his
business and using it for normal business expenses (including the payment of
input tax), and no doubt he has every commercial incentive to do so. The tax
which he has collected represents, in substance, an interest-free loan from the
commissioners. But by using it in his business he puts it at risk. If by doing
so he loses it, and so cannot hand it over to the commissioners when the date
of payment arrives, he will normally be hard put to it to invoke s 19(6)(b).
In other words he will be hard put to it to persuade the commissioners or the
tribunal that he had a reasonable excuse for venturing
and thus losing money
destined for the Exchequer of which he was the temporary custodian.’”
32. Similarly, Lord Donaldson stated as follows at 770:
“The difficulty which then arises
is that Parliament has not specified what underlying causes of an insufficiency
of funds which lead to a default are to be regarded as reasonable or as not
being reasonable. Prima facie the legislative intention is the same as in the
context of s 33(2)(b). This is that, save in so far as Parliament has
given guidance, it is initially for the commissioners to decide whether the
underlying cause constitutes a reasonable excuse and for the tribunal to decide
this on an appeal. That said, there must be limits to what could be
regarded as a reasonable cause. Nolan LJ, as I read his judgment explaining and
expanding on his judgment in Customs and Excise Comrs v
Salevon Ltd [1989]
STC 907, is saying that 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.
Scott LJ on the other hand is of the opinion that the underlying cause of the insufficiency of funds must be an ‘unforeseeable or inescapable event’. I have come to the conclusion that this is too narrow in that (a) it gives insufficient weight to the concept of reasonableness and (b) it treats foreseeability as relevant in its own right, whereas I think that ‘foreseeability’ or as I would say ‘reasonable foreseeability’ is only relevant in the context of whether the cash flow problem was ‘inescapable’ or, as I would say, ‘reasonably avoidable’. It is more difficult to escape from the unforeseeable than from the foreseeable.”
33.
Mr Ripley relied upon the “reasonably avoidable” test. We agree that
this is the correct test. We note that Mr Sellers’ written submissions
suggested that the cause of the insufficiency of funds will only be a
reasonable excuse if they are unexpected or unavoidable. We assume that this arises
from the dissenting judgment of Scott LJ in Steptoe. However, Mr Sellers
(rightly, in our view)
did not argue against the “reasonably avoidable” test in
his oral submissions.
34. The parties agree that this is an objective test.
35.
Further, the parties agree that default surcharges must be
proportionate, both at a structural level and an individual level. It is clear
from Revenue and Customs Commissioners v
Total Technology (Engineering) Ltd [2012] UKUT 418 (
TCC),
[2013] STC 681 (Warren J (P) and Judge Bishopp) (“Total Technology”)
that the default surcharge regime as a whole is proportionate (see in
particular [99] and [100]).
36.
However, Total Technology left open the residual possibility that
the absence of a maximum penalty might render an individual case
disproportionate. This was addressed by the Upper Tribunal in HMRC
v
Trinity
Mirror [2015] UKUT 421 (
TCC)
(Rose J (P) and Judge Berner) (“Trinity Mirror”)
as follows at [63] to [67]:
“[63] The correct approach is to determine whether the penalty goes beyond what is strictly necessary for the objectives pursued by the default surcharge regime, as discussed in detail in Total Technology and whether the penalty is so disproportionate to the gravity of the infringement that it becomes an obstacle to the achievement of the underlying aim of the directive which, in this context, we have identified as that of fiscal neutrality. To those tests we would add that derived from Roth in the context of a challenge under the Convention to certain penalties, namely “is the scheme not merely harsh but plainly unfair, so that, however effectively that unfairness may assist in achieving the social goal, it simply cannot be permitted?”
[64] In Total Technology the Upper Tribunal identified, at [84], features of the regime which supported an argument that the scheme was fair. The tribunal said:
“However, from HMRC's
point of
view,
the regime has a lot to commend it. It is mechanistic and
therefore comparatively easy to administer. There is no need for hard-pressed
officers of
HMRC
to spend scarce time and resources in dealing with a
vague
and
amorphous power to mitigate a penalty. The following factors can be prayed in
aid in response to the unfairness alleged by the Company:
(a) The simplicity of the system makes it easily understood, as well as being relatively easy to operate.
(b) The surcharge is only imposed on a second or subsequent default, and after the taxpayer has been sent a surcharge liability notice warning him that he will be liable to surcharge if defaults again within a year. Taxpayers thus know their positions and should be able conduct their affairs so as to avoid any default.
(c) The penalty is not
a fixed sum but is geared to the amount of outstanding VAT.
Although a somewhat
blunt instrument, it does bring about a broad correlation between the size of
the business and the amount of the penalty. It does not suffer from the
objections which could be made to the fixed penalty in Urbán.
(d) The percentage applicable to the calculation of the penalty increases with successive defaults if they occur within 12 months of each other. This is a rational and reasonable response to successive defaults by a taxpayer.
(e) The ‘reasonable excuse’ exception strikes a fair balance. The gravity of the infringement is reflected in the absence of 'reasonable excuse' and the amount of the penalty reflects the extent of the default, that is to say the amount of tax not paid by the due date.’
[65] We agree with the tribunal in Total
Technology that the default surcharge regime, viewed
as a whole, is a
rational scheme. The penalties are financial penalties, calculated by reference
to the amount of tax unpaid at the due date. Although penalties may
vary
with
the liability of the taxable person for the relevant
VAT
period, and increase
commensurately with an increase in such liability (and, consequently, such
default), the penalties are not entirely open-ended. The maximum liability for
a fifth or subsequent period of default is 15% of the amount unpaid. In common
with the Upper Tribunal in Total Technology, we consider that the use of the
amount unpaid as the objective factor by which the amount of the surcharge
varies
is not a flaw in the system; to the contrary, the achievement of the aim
of fiscal neutrality depends on the timely payment of the amount due, and that
criterion is therefore an appropriate, if not the most appropriate, factor.
[66] However, we accept that, applying the tests we have described, the absence of any financial limit on the level of surcharge may result in an individual case in a penalty that might be considered disproportionate. In our judgment, given the structure of the default surcharge regime, including those features described in Total Technology, this is likely to occur only in a wholly exceptional case, dependent upon its own particular circumstances. Although the absence of a maximum penalty means that the possibility of a proper challenge on the basis of proportionality cannot be ruled out, we cannot ourselves readily identify common characteristics of a case where such a challenge to a default surcharge would be likely to succeed.
[67] We should, in particular, not be
taken to have endorsed the suggestion put forward by Mr Mantle that the
exceptional circumstances that might give rise to a disproportionate penalty
could include cases, such as Enersys, where there had been what was
described as a “spike” in profits, such that for a particular VAT
period the
liability to account for and pay
VAT
was of a different order of magnitude that
was normal for the trader concerned. Attempting to identify particular
categories of case in this way is not, in our
view,
helpful. Whilst it might be
tempting to seek to isolate, and thus confine, cases by reference to particular
criteria, such cases, by reason of their exceptional nature, are likely to defy
such characterisation.”
The Parties’ Submissions
The Partnership
37. Mr Ripley argued that each of the financial pressures individually, or alternatively when taken together, created a situation in which the defaults could not reasonably be avoided. He dealt with these in four categories.
38.
The first category relates to recession based factors. He drew our
attention to various
authorities to the effect that, although recession is not
sufficient in its own right to give rise to a reasonable excuse, the manner in
which the recession impacted upon a trader can do so. He accepted that each
case turns upon its own facts and that these authorities were in that sense
illustrative and, to the extent that they were first instance decisions, not
binding.
39.
In The Old Tollgate Restaurant Ltd v
HMRC
[2007] UKVAT
V20504
(Sir Stephen Oliver QC and Shahwar Sadeque) a reduction in turnover of £85,000
from a total turnover of £1,800,000 was treated as a reasonable excuse. The
Tribunal stated as follows at [8]:
“[8] We accept that the explanation given for
Tollgate amounts to a reasonable excuse. The insufficiency of funds was
attributable to Rio Tinto’s late payments associated with Tollgate’s loss of Rio
Tinto as its single customer for its contract catering business. The cash flow
attributable to the hotel business appears to have remained static. But that cash
flow could not be relied upon to meet the VAT
due at the end of March 2007. The
cancellation of the Rio Tinto catering contract and its late payment of fees to
Tollgate appears to us to have been sufficiently unforeseen events and ones
that could not have been avoided. We conclude therefore that there was a
reasonable excuse for the insufficiency of funds. Tollgate has therefore
established to our satisfaction that it has a reasonable excuse for the default
for the 02/07 period.”
40.
In Mediaclash Ltd v
HMRC
[2009]
UKFTT
306 (
TC)
(Judge Brooks and
Dr Michael James) the FTT accepted that a combination of factors caused by the
recession gave rise, on the facts of that case, to a reasonable excuse. This
was by reference to what a reasonable businessman would have done. The FTT
stated as follows at [15] to [18]:
“[15] Having considered the Company’s circumstances in the light of our findings of fact we find that [that] the underlying cause of the default was a combination of the loss of a major client, the effect of the redundancies and the late payment by the Company’s customers as a result of the current recession coupled with the necessity for prompt payment of its suppliers.
[16] In deciding whether these reasons amount to a reasonable excuse we must consider what the reasonable competent businessman (taken for comparison purposes) exercising due diligence and a proper regard to his tax obligations, who must be taken to have exercised reasonable foresight, would have done in a similar situation.
[17] We are of the view
that such a businessman,
in circumstances similar to that of the Company, would not have avoided the
insufficiency of funds that led to the default.
[18] As such we find that the Company had a
reasonable excuse for the late payment of its VAT
and allow its appeal.”
41.
In Craighill Services Ltd [2012] UKFTT
72 (
TC)
(Kenneth Mure QC),
the FTT held that a company suffered
various
setbacks which affected its
turnover. Although individually these were insufficient to constitute a
reasonable excuse, they did so when taken together. Similarly, a combination of
factors (including the reduction in an overdraft facility) constituted a
reasonable excuse for some of the periods in dispute in Robert P Slight
v
HMRC
[2015]
UKFTT
16 (
TC)
(Presiding Member Peter Shepherd and Dr Heidi
Poon).
42.
Mr Ripley noted that the Partnership
had experienced a number of the
features treated as reasonable excuses in the above cases. The
Partnership
had
seen customer insolvency, particularly Fastline, and delayed payments. There
had also been a reduction in the bank overdraft, although that only affected the
periods after February 2011.
43.
The second category relates to the removal of CIS 6 status. Mr Ripley
noted that this was suggested or required by HMRC
as a result of PAYE defaults,
even though Mr
Preston
had thought that it was potentially a good idea at the
time. Mr Reay said that the
Partnership
did not move back to CIS 6 because of
the cycle of defaults which had taken hold. The effect of this was that CIS
offsets could only be applied at the end of the year (by
virtue
of the
Partnership
being a
partnership
rather than a company) and these were applied
against both
VAT
and PAYE liabilities. Mr Ripley made the point that he was not
criticising
HMRC
for approaching the offsets in this way; instead, the point
was the effect of them doing so.
44.
The third category relates to HMRC’s
policy of enforcing previous debts,
which prevented the
Partnership
from meeting its current liabilities. There had
been threats of distraint and bankruptcy proceedings, but there was no evidence
that any enforcement proceedings had been commenced. Mr Ripley submitted that
it was common ground that the
Partnership
did not have the money to meet its
VAT
as it fell due (and it is of note that Mr Sellers did not take issue with
this either in submissions or by way of cross-examination).
45.
Mr Ripley drew our attention to Longstone Ltd v
Commissioners of
Customs and Excise [2001]
V
& DR 213 (Stephen Oliver QC) as an example
of enforcement of debts having the potential to give rise to a reasonable
excuse. In particular, the Tribunal stated as follows at [16] and [17]:
“[16] The second period raises different considerations. The large debt overhang from the first period and the Commissioners’ actions to recover the arrears left Longstone with a simple choice. Either allow liquidation to follow or attempt to keep the core business intact at the expense of paying default surcharges. Had Longstone been credit-worthy it might have borrowed funds and so protected itself against those two extremes. But borrowing was not an option. The Commissioners imposed the full rigour of the penalty regime. In the letter of 3 August 1999 they said:
‘Whilst appreciating and sympathizing with the difficulties encountered by some businesses, the Commissioners of Customs and Excise cannot make exceptions which might lead to one business gaining an unfair commercial advantage over another.’
[17] Imposing default surcharges, whilst at the same time taking recovery action in relation to outstanding tax liabilities, is a high risk strategy on the part of the Commissioners. It not only erodes the resources of the trader, it is capable also of furnishing that trader with a reasonable excuse for non-payment of current liabilities.”
46.
The fourth category related to HMRC’s
process of allocating payments to
historic liabilities rather than current liabilities. The effect of this was
that the
Partnership
was effectively paying existing debts at the expense of
creating new defaults. The
Partnership
does not take issue with
HMRC’s
appropriation
of payments in this way, notwithstanding that Mr Ripley argues that the
Partnership’s
VAT
account with
HMRC
is a running account. Similarly, the
Partnership
accepts that it is not now entitled to insist on a different
allocation as a matter of common law.
47.
Mr Ripley submits that section 59 of VATA
1994 is to be read as
requiring
VAT
payments to be allocated first to current
VAT
liabilities and
then any excess to historic liabilities. This relies upon the reference in
section 59(6) to, “so much of the
VAT
for which he is so liable as has not been
paid by that day” as taking into account any payments made in the quarter,
regardless as to how they have been allocated.
48.
The Partnership
also makes the point that the allocation to historical
payments caused current liabilities to go unpaid and so gives a reasonable
excuse for those defaults. Mr Ripley relied upon John Francis
v
HMRC
[2013]
UKFTT
477 (
TC)
as an illustration of this, in which the First-tier Tribunal
(Judge Khan) stated as follows:
“(1) The Commissioners allocate payments to the oldest debt first and so the payments made by the Appellant were treated as being late since it was paid in satisfaction of his liability for the year ending 5 April 2011. It seems that the Appellant gave no instructions as to how the payment should be allocated.
(2) In this case the taxpayer would have a
reasonable excuse for assuming that HMRC
would allocate the payments to the
current liability rather than to the oldest debt due.
(3) The practise of the Commissioners does not appear to be covered in the legislation but rather in the Debt Management and Banking Manual (para 210105 and 210120). It does not appear that these were brought to the notice of the taxpayer. In the circumstances therefore a taxpayer should be able to ask the Commissioners to reallocate the payments as they wish.
(4) The failure to make payment on time
legislation as contained in Schedule 56 Finance Act 2009 was relatively new.
The charges applied to returns for 2010-11 and later years. If HMRC
were
operating on a non-statutory basis on a practice which was contained in their
manuals on new legislation then the taxpayer should be alerted to this
practise. There is nothing to indicate this practise was brought to the
attention of the taxpayer.
(5) A taxpayer is told in Schedule 56 FA 2009 that a penalty would be incurred if a payment is made after the due date. On a normal reading, there is nothing to suggest that if a payment is made on time it would relate to historic liabilities.
(6) A reasonable person in the circumstances would have thought that they had paid their tax on time and would not have known that their payments would be allocated to earlier periods and a penalty would have arisen. For this reason, where the taxpayer acted reasonably in trying to meet their tax liability a reasonable excuse should be allowed.”
49.
Mr Ripley also argued that the default surcharges were disproportionate.
In essence, his argument was that the Partnership
was being repeatedly penalised
for the earlier defaults. On one level, money was being applied to historic
liabilities and surcharges causing new liabilities to arise. On another level,
this circle of defaults was forming a barrier to regaining CIS 6 status. On a
further level, the default surcharges were themselves causing an insufficiency
of funds. Mr Ripley submitted that the lawfulness of the appropriation had no
bearing upon whether or not the surcharges were disproportionate.
50.
Mr Sellers did not accept that any of the Partnership’s
arguments
constituted a reasonable excuse, whether individually or together.
51.
As to the recession based factors, Mr Sellers accepted that in principle
the economic climate, and the demise of a major customer, could give rise to a
reasonable excuse. However, he submitted that there was nothing in the
recession which particularly applied to the Partnership.
Further, he submitted
that the situation with Fastline was
very
different to the situations in Steptoe
and in Old Tollgate Restaurant Ltd. He noted that Fastline was not a
major customer in comparison to the
Partnership’s
turnover and that the amounts
involved were not particularly large. Mr Sellers also made the point that “time
to pay” agreements could have been sought.
52.
As to the loss of CIS 6 status, Mr Sellers submitted that this was a
known event and so its impact was not unexpected or unavoidable. The
Partnership
would have had a reasonable opportunity to plan and act
accordingly. Further, Mr Sellers submitted that CIS 6 status was removed on 6
April 2007 whereas the first relevant default was for the 06/09 period. As
such, he argued, the passage of time meant that any reasonable excuse which
this might had given had expired by 06/09 as the
Partnership
had sufficient
time to adjust its financial planning. Mr Sellers relied upon French Polish
Limited
v
HMRC
[2014]
UKFTT
91 (
TC)
(Judge Connell) as an illustration of
this. Further, Mr Sellers made the point that there was no legal requirement to
set off CIS deductions for
partnerships
mid-year and that
HMRC
had acted
lawfully in not doing so.
53.
As to enforcement, Mr Sellers’ main point was that it was for the
Partnership
to meet its obligations and a failure to do so did not give rise to
a reasonable excuse.
54.
As to allocation, Mr Sellers submitted that HMRC
was entitled to
allocate the payments in the way in which it did. Mr Sellers referred us to a
number of cases which set out the common law position and the applicability of
those principles to tax law. In short, where separate debts are owed, it is
open to a debtor to allocate payments as he or she sees fit until the point of
payment and, if no allocation has been made, the creditor is entitled to
allocate the payment as he or she sees fit. The position is different in the case
of the operation of a running account, in which case the payment is allocated
to the earliest debt first unless there is an agreement to the contrary (the
presumption for running accounts being “the rule in Clayton’s Case”).
55.
In Cory Bros & Co Ltd v
Turkish SS Mecca [1897] AC 286, Lord
Macnaghten stated as follows at 293-294:
“When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor.”
56.
In Abbey National plc v
Commissioners of Customs and Excise [2005] EWHC 1187 (Ch), Lindsay J stated as follows at [28]:
“[28] Looking, then, to the rationality or otherwise of reg 170(1) and (2), and recognising the need, to which I have referred, for simplicity and comprehensibility, I do not feel able to say that the time-basis used in reg 170(2), qualified, as it was, by the ability of the consumer to make a specific allocation as there provided, was irrational in Wednesbury or similar terms. It is not capricious or arbitrary. Indeed, such an attribution of payments to the first debt owing has been a rule-of-thumb form of accounting since Clayton’s case in 1816 and the ability of the consumer specifically to allocate reflected the sense of the common law position that, where he owes distinct debts, the debtor has the first right to appropriate.”
57.
In AJM Mansell Limited v
HMRC
[2012]
UKFTT
602 (
TC)
(Judge
Redston and James Midgley), the First-tier Tribunal stated as follows at [53]
to [55] and [59]:
“[53] Given the existence of the statutory
obligation on employers to pay over the PAYE to HMRC,
we find that the PAYE is
a debt due to
HMRC
and that the employer is a debtor.
[54] Furthermore, as set out above, the employer must pay over the PAYE calculated on a “tax period” basis. We thus find that each month’s PAYE was a separate debt and there was no “running account”. As a result, the rule in The Mecca applies.
[55] For completeness, we note that were a “running account” to exist, the rule in Clayton’s case means that the PAYE payments would automatically be allocated to reduce the earliest debt first; the company would have no right of allocation.
…
[59] On the basis of the foregoing,
the common law allows the company to appropriate its PAYE and NICs payments in
any way it chooses, as long as it does so before the money changes hands. We
note that HMRC’s
guidance and their debt management office appear to have
accepted this is the correct position.”
58.
Mr Sellers further submitted that section 59 of VATA
1994 does not
entitle the Tribunal to amend the allocation of the payments made by the
Partnership.
59.
Mr Sellers also submitted that the fact that HMRC
were entitled to
allocate the payments as they did precludes the surcharges from being
disproportionate. Further, Mr Sellers submitted that the regime has already
been found to be proportionate in Total Technology. Mr Sellers relied on
Swanfield Limited
v
HMRC
[2015]
UKFTT
274 (
TC)
(Judge Clark) in which
the First-tier Tribunal stated as follows:
“[68] In relation to proportionality, Mr Jenkins did not seek to argue that the system as a whole was disproportionate or unfair. However, he submitted that operating the system without reference to the allocations which the Appellants had sought to make was harsh and unfair, resulting in the imposition of substantial surcharges.
[69] We consider that the position needs to be examined by reference to the actual factual position. It needs to be established to what extent the allocations were made in respect of debts already due, for the reasons explained above. Instances of allocations made to such debts must be examined in the overall context of each Appellant’s compliance position. Other allocations, in respect of debts not yet due, are ineffective and therefore irrelevant to the question whether the operation of the system was harsh or unfair.
[70] Mr Jenkins referred to Total Technology and Enersys. He acknowledged that these cases concerned the questions of the extent to which a payment was late, and the level of that payment in the context of the particular trader’s pattern of business. Mrs Carroll submitted that the Appellants’ circumstances were entirely different from those in Enersys, and that in Total Technology the Upper Tribunal had found that the default surcharge system was not fatally flawed. Further, the Upper Tribunal accepted that a substantial default surcharge sum may be found to be proportionate.
[71] We accept Mrs Carroll’s
submissions on the application of Enersys and Total Technology.
It follows that the only relevance of proportionality to the Appellants’ case
is to the question whether effective allocations were not acted upon by HMRC.
If no effective allocations can be shown to have been requested, the issue of
proportionality falls away. We review the factual issues below.”
Decision
Reasonable excuse
Period 09/09
60. The parties agreed that the return for the period 09/09 was not received by the relevant due date. No evidence has been given or submissions made as to the reason for this. It follows that there is no reasonable excuse for such default. The remainder of this decision therefore only deals with non-payment or partial payment rather than failure to deliver a return on time.
Whether or not the defaults were reasonably avoidable
61.
We agree that the features relied upon by the Partnership
ought to be
analysed both individually and collectively. However, it is important not to
lose sight of the fact that the test is as to whether or not the insufficiency
of funds was reasonably avoidable. If it can be said that the reasonable
businessman in a similar situation would have acted in a way which would have
avoided the defaults, then this must be taken into account.
62.
Crucially, the Partnership’s
own case provides a way in which all but
four of the defaults in the present appeal could have been avoided; namely, the
allocation of the
VAT
payments made by the
Partnership
by cheque and CHAPS to
current liabilities rather than historic liabilities. We have already found as
a fact (as asserted by the
Partnership
and not challenged by
HMRC)
that allocation
of payments to current liabilities would have meant the
Partnership
would not
have been in default at all for any of the relevant periods other than 06/09,
12/09, 06/10 and 12/11 (“the Outstanding Periods”).
63.
It is clear that the proper approach at common law to the Partnership’s
liabilities is that of Cory Bros & Co Ltd
v
Turkish SS Mecca, above,
as opposed to the rule in Clayton’s Case. This is because the
Partnership
incurred numerous, separate liabilities.
HMRC
was not providing credit to the
Partnership
and was not making advances to them. What the
Partnership
has
referred to as a running account is nothing more than a statement of account.
Every time a new debt was incurred it was a separate debt. Although not binding
on us, we are reinforced in our
view
by the extracts from the decision in AJM
Mansell Limited
v
HMRC,
above, relied upon by Mr Sellers.
64.
We do not accept that the proper construction of section 59(6) of the
VATA
1994 precludes the common law rule. Section 59(6) relates to the
non-payment of liabilities. A liability has not been paid if it has not had a
payment allocated to it. In short, a different debt has been paid. In any
event, we note that the
Partnership’s
construction would reinforce the
Partnership’s
right to insist upon allocation to current liabilities and the
reasonable businessman would have sought to enforce such a right.
65.
As such, the Partnership
was fully entitled to instruct
HMRC
to apply
the payments to current
VAT
liabilities. However, the
Partnership
did not do
so. Further, unlike in John Francis
v
HMRC,
above, there was a history
of
HMRC
allocating payments to historic liabilities. Further, this was not a
situation envisaged in Swanfield Limited in which allocations had been
made by the
Partnership
but not acted upon by
HMRC.
66. We therefore find that, for all but the Outstanding Periods, the defaults were avoidable.
67.
The next question is whether or not it would have been reasonable for
the Partnership
to instruct
HMRC
to allocate the payments so as to avoid the
defaults. We find that it would have been reasonable for the following reasons:
(1)
The Partnership
itself complains about the cycle of defaults which this
was creating and argues that it would have been more beneficial to it to
allocate to current liabilities.
(2) Incurring new surcharges was increasing the amount required to clear the overall liabilities.
(3) The amount required to clear overall liabilities would crystallise, which would assist in financial planning.
(4)
By 06/09, the Partnership
was or ought to have been well aware that
payments had been allocated to historic liabilities and its impact was already
being felt.
(5)
Although HMRC
was threatening enforcement action in respect of historic
liabilities, there was no evidence of the extent to which this had happened
prior to 06/09 (being the first of the default surcharges in the present appeal
and so the date by which the reasonable businessman would have started to
allocate payments to current liabilities). Similarly, there was no evidence as
to how much the historic liabilities were as at 06/09 and the extent to which
money could have been raised by the partners themselves or from third parties
in order to meet those liabilities. Indeed, it is of note that in later periods
Mr
Preston
drew down on his pension to make payments; there is no evidence as
to whether or not this could have been done earlier and as to the resources of
the other partners. Without any such evidence, the
Partnership
cannot establish
that it would not have been reasonable to allocate payments to current
liabilities at that stage. This contrasts with Longstone Ltd
v
Commissioners
of Customs and Excise, above, in which the enforcement action was more
advanced and it was clear that no other funds could be raised.
(6)
It is not clear to what extent “time to pay” agreements had been
formally sought or pursued. A telephone note for 11 February 2010 says
(including any abbreviations and typographical errors), “Trader teli vat
dmtc
seeking ttp refused referred ff support central.” In any event, it is fair to
assume that a time to pay agreement would have had more chance of success if
further defaults were not taking place.
68.
It follows that the other features relied upon cannot constitute
reasonable excuses for the periods other than (potentially) for the Outstanding
Periods because, even if we were to find that those features taken individually
caused cash flow problems, the fact would remain that the insufficiency of
funds was avoidable if the Partnership
had allocated payments to current liabilities.
69.
Nevertheless, we consider the individual factors relied upon by the
Partnership
in order to reach a decision about the Outstanding Periods.
The economic downturn
70.
As set out above, the Outstanding Periods were after the particularly
bad year ending 31 March 2010 and came in years in which the net profits were
£134,084 and £375,293 respectively. In the light of this, the Partnership
has
not provided sufficient evidence that the economic downturn caused the
insufficiency of funds to be reasonably unavoidable for the Outstanding Periods.
The loss of CIS 6 status
71. We find that the reasonable businessman would have avoided the insufficiency of funds caused by the loss of CIS 6 status by not doing anything to lose the CIS 6 status in the first place. The rider to this is that the insufficiency of funds caused by the loss of CIS 6 status would not be reasonably avoidable if the loss of CIS 6 status itself was not reasonably avoidable.
72.
We note that CIS 6 status was lost in April 2007, over two years before
the first of the periods to which this appeal relates. We were told that this
was because of non-payment of PAYE but were not given any explanation as to why
there was such non-payment. Crucially, there was no suggestion that there was a
reasonable excuse for such non-payment of PAYE. It follows that there was no
evidence that the loss of the CIS 6 status was not reasonably avoidable and so
the Partnership
has not discharged its burden of proof in this regard.
73. As such, we find that the loss of CIS 6 status does not provide a reasonable excuse for the Outstanding Periods (and for the same reasons would not have done so for any other period).
Fastline
74. Clearly, Fastline’s administration is not relevant to the 06/09 period as this pre-dates the cash flow problems blamed upon Fastline.
75.
As set out above, we have found that the administration of Fastline did
create a cash flow problem for the 12/09 period to the extent of the loss of
£22,922.01. HMRC
did not challenge the assertion that this caused the
insufficiency of funds or that it was reasonably avoidable. Although Fastline
was not a major customer it still reduced the available cash flow in this
period and there is no evidence as to how it could have been replaced. Given
that the 12/09 period was not one of the periods for which the insufficiency of
funds could have been completely avoided by the allocation of payments, it
follows that we accept that there was a reasonable excuse for the 12/09 period
to the level of £22,922.01. Although in fact a reallocation of payments made in
the previous three months would have only left the sum of £21,589.61
outstanding, we give credit for the whole of the £22,922.01 upon the basis that
there was no challenge to the assertion that the whole of the payment had been
expected. This would reduce the default surcharge to £3,438.30 (being 15% of
£22,922.01).
76.
However, for the reasons set out above in respect of the sleeper
delivery train, the Partnership
has not discharged the burden of proof in
establishing that it caused the insufficiency of funds for any later period to
be reasonably unavoidable. As such, the
Partnership
has not established that
Fastline gives rise to a reasonable excuse for the 06/10 or 12/11 periods.
Withdrawal of the overdraft
77. The withdrawal of the overdraft began in February 2011 and so, of the Outstanding Periods, can only be relevant to the 12/11 period.
78.
Mr Sellers’ main point about the overdraft was that the Partnership
had
notice of the reduction and that it should have restructured the business
accordingly. However, with the exception of the points which have already been
made about allocation, it was not clear to us what the
Partnership
could have
done and what a reasonable businessman could have done differently. By the
12/11 period, the full extent of the reduction in overdraft had taken place. We
therefore accept that this had a major impact upon cash flow, and that this was
not reasonably avoidable. However, this only applies to the shortfall after an
allocation of payment in the previous three months to current liabilities as it
was reasonably avoidable to that extent. This means that the shortfall for
12/11 would have been reduced to £45,714.70, thereby reducing the default surcharge
to £6,857.20 (being 15% of £45,714.70).
Allocation and the enforcement of historic debts
79. The points which we have made at paragraphs 61 to 68 above equally apply to allocation and enforcement in respect of the Outstanding Periods. As such, they do not provide a reasonable excuse in their own right.
The combined effect of the various
factors
80.
The combined effect of the various
factors does not give any different
result for the Outstanding Periods. On one level, this is because for
various
of the periods in the Outstanding Periods the factors do not all operate at the
same time. On another level, this is because our conclusions about the economic
downturn and the CIS 6 status preclude these from contributing to a reasonable
excuse at all in the present case as well as from being a reasonable excuse
individually.
Proportionality
81. We do not accept that the default surcharges in the present case are disproportionate. This is for the following reasons.
82.
First, it is clear from Total Technology and Trinity Mirror
that the default surcharge regime is proportionate. In our view,
the
Partnership’s
criticisms go to the question of the proportionality of the regime
rather than the regime’s application in this particular case. This is because
there is no provision in the regime for allocation of payments in any
particular way and so it is inevitable that this sort of situation may arise.
We are of course bound by Total Technology and Trinity Mirror.
83. Secondly, the potential for individual application of the surcharge regime to be disproportionate is envisaged in Total Technology and Trinity Mirror to be exceptional. The present case is not exceptional in that the allocation of payments to historic liabilities will be a relatively common situation as it will presumably arise whenever a trader does not request allocation to current liabilities.
84. Thirdly, in Total Technology and Trinity Mirror, the type of situation in which disproportionality will arise is envisaged as being caused by the absence of a financial limit on the level of surcharge (see Trinity Mirror at [66]). The level of each surcharge in the present case is relatively modest and so is not rendered disproportionate by the absence of an upper limit.
85.
Fourthly, it is not clear that the Partnership
is correct to say that it
is being penalised for previous defaults. The surcharges are only dependant
upon previous defaults by reference to their rate. The perceived penalisation
for previous defaults is instead as a result of the decision to allocate to
previous liabilities rather than because of the way in which the default
surcharges are imposed.
86.
Fifthly, and, to our minds, most importantly, we must consider whether
in the present case, the scheme is, “not merely harsh but plainly unfair, so
that, however effective that unfairness may assist in achieving the social
goal, it simply cannot be permitted” (see Trinity Mirror at [63]). The
allocation to historic defaults in the present case does not result in default
surcharges which are plainly unfair because it was open to the Partnership
to
instruct
HMRC
prior to payment to allocate them differently. The reasons for
the
Partnership
not doing this go to the question of reasonable excuse (dealt
with above) rather than causing the surcharges to be disproportionate. As set
out in Total Technology at [84], the
very fact of the reasonable excuse
exception strikes a fair balance.
Disposition
87. It follows that our decision in respect of the relevant periods is as follows:
(1) The appeal in respect of period 12/09 is allowed to the extent that the default surcharge is reduced to £3,438.30.
(2) Insofar as it has not already been resolved by agreement, the appeal in respect of period 09/10 is allowed to the extent that the default surcharge is reduced to £9,177.41 (to take into account the fact that £25,204 had been paid on time).
(3) The appeal in respect of period 12/11 is allowed to the extent that the default surcharge is reduced to £6,857.20.
(4) The appeal in respect of the remaining periods is dismissed.
88. 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.