Electrical Installation Solutions Ltd v Revenue & Customs [2013] UKFTT 419 (TC)

FTT-Tax
Electrical Installation Solutions Ltd v Revenue & Customs
[2013] UKFTT 419 (TC) · 2013-08-02
[29]The relevant legislation is contained in section 59(7)(b) VAT Act 1994 (“VATA”). This provides that a person shall not be liable to a surcharge if he would otherwise be liable but satisfies HMRC or, on appeal, a tribunal that, in the case of a default which is material to the surcharge there was a reasonable excuse for the return or the VAT not having been despatched on time.[30]Section 71(1)(a) VATA further provides that for these purposes an insufficiency of funds to pay any VAT due is not a reasonable excuse.[31]Section 71(1)(a) was considered in the leading case of Customs and Excise Commissioners v Steptoe [1992] STC 757. The Court of Appeal held that although insufficiency of funds can never of itself constitute a reasonable excuse, the cause of that insufficiency – the underlying cause of the taxpayer’s default – might do so.[32]In Steptoe the taxpayer carried on a relatively small business as an electrical contractor. 95% of the taxpayer's work was for a Local Council, which was an extremely slow payer (taking on average 6 weeks to 2 months to pay a bill after its delivery). The taxpayer was late in paying his VAT for two periods in a year (11/86 and 08/87). In each case the delay was about two months. He was again in default for the 11/87 period and for the 02/88, 05/88 and 11/88 periods. The excuse put forward by the taxpayer for late payment in these periods was cash flow difficulties. That was rejected by the Commissioners, but accepted by the tribunal (on the grounds of the Council’s conduct in paying late), and, on appeal to the High Court, by Kennedy J. The Commissioners appealed to the Court of Appeal but their appeal was dismissed by a majority (Lord Donaldson MR and Nolan LJ, Scott LJ dissenting).[33]Scott LJ in his dissenting judgment accepted that the underlying reason for an insufficiency of funds could be put forward as a reasonable excuse. However, Scott LJ said (at 765): “…the reason [for the insufficiency] must, in my judgment, amount to something more than that the business of the taxpayer has been carried on unprofitably or that conditions of trade produce cash flow problems. It is the statutory duty of traders to make value added tax returns and pay value added tax in due time. They are not relieved of that duty by the unprofitable or barely profitable nature of their businesses. If the conditions of business produce cash flow problems it is their duty none the less to make financial arrangements that will enable their value added tax to be paid in time. Absent some 'unforeseeable or inescapable' event, cash flow problems are, in my opinion, barred by [section 71(1)(a)] from constituting a 'reasonable excuse'. … If the normal hazards of a taxpayer's particular business include the late payment of bills, then the taxpayer should make arrangements to finance his cash flow on that footing. If he cannot afford to do so, then, as it seems to me, he is relying on nothing other than an insufficiency of funds. If he can afford to do so but does not do so, the reason for insufficiency of funds can hardly be a reasonable excuse. It is only if the events giving rise to the insufficiency of funds are outside the normal course of the taxpayer's business that a possibility of a reasonable excuse can arise.” 34. The reference by Scott LJ to "some 'unforeseeable or inescapable' event" was a quotation from the judgment of Nolan J (as he then was) in Customs and Excise Commissioners v Salevon Limited [1989] STC 907 in which the misfeasance of the taxpayer company's company secretary, causing the late payment of VAT, was held to constitute a reasonable excuse. We have quoted this passage from Scott LJ in full because, as we shall see, HMRC placed considerable reliance upon it in argument before us.[35]Nolan LJ reviewed his judgment in Salevon and disagreed with Scott LJ's interpretation of it. His use of the phrase an "unforeseeable or inescapable" event in Salevon was directed towards the facts of that case (ibid. at 768). In other words, Nolan LJ was making it plain that in Salevon he had not been intending to establish foreseeability or inescapability as a general test in the context of reasonable excuse. He accepted (with some misgivings) the finding of fact by the tribunal that the Council's practice of consistently paying late had had the result that the taxpayer had found himself in the situation that at the due date for the relevant accounting periods he was without sufficient funds to pay the tax due. (ibid. at 769). 36. Lord Donaldson MR agreed with Nolan LJ. He expressed the test, which we must apply in this appeal, as follows:
“… [I]f 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.” (ibid. at 770) 37. Lord Donaldson MR disagreed with the test applied by Scott LJ (ibid. at 770): "I have come to the conclusion that this [Scott LJ's test] 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." Submissions of the parties 38. Mr Newey for the Appellant argued that the correct test in respect of "reasonable excuse" to apply was that adopted by Lord Donaldson MR in Steptoe . He argued that the test being applied in this case by HMRC was whether the events were exceptional and outside the ordinary course of the Appellant's business. This was not the correct test. In any event, the evidence of Mr Neeves established that the events which affected the Appellant's business were outside its ordinary course and that the exercise of reasonable foresight and due diligence had been unable to avoid the insufficiency of funds and, therefore, the late payment of VAT in respect of the periods under appeal. Mr Newey cited two decisions of this Tribunal: Mediaclash Limited v HMRC [2009] UKFTT 306 (TC) and JMS Aggregate Supplies v HMRC [2011] UKFTT 426 (TC) . 39. Mr Newey argued that the Appellant had done its utmost to exercise reasonable foresight and due diligence. It had found new markets and customers, it had negotiated an increased overdraft with its bankers, it had cut costs e.g. by making staff redundant and the shareholders had injected new loans into the business. The evidence showed that the Appellant had paid its VAT as quickly as he could. This was not just insufficiency of funds but a deeper problem caused by the fall-off in orders, lower margins and delayed payments by customers. 40. Mrs Orimoloye for HMRC argued that many businesses pleaded the economic downturn as a reasonable excuse for late payment of taxes. To allow the Appellant to use that as a reasonable excuse would undermine the VAT surcharge system. HMRC had provided temporary support to be BPSS for the Appellant and had not specifically told the Appellant that it could not come back for further support. 41. At one point Mrs Orimoloye suggested that HMRC had not been provided with the Appellant's bank statements, but accepted that HMRC had not, in fact, requested the Appellant to provide bank statements. We therefore do not consider the Appellant can be criticised in this regard. 42. Mrs Orimoloye argued that the reasons for the insufficiency of funds were not exceptional and were attributable to the ordinary hazards of trade. She relied on HMRC's VAT Civil Penalties Manual paragraph 10534 which quotes parts of the final two paragraphs of the passage from the judgment of Scott LJ quoted in paragraph 30 above: “Mr Justice Scott [sic] commented: It is the statutory duty of traders to make VAT returns and pay VAT in due time. They are not relieved of that duty by the unprofitable or barely profitable nature of the tax-payer’s particular business. If the conditions of business produce cash flow problems it is their duty nonetheless to make financial arrangements that will enable their VAT to be paid in time. It is only if the events giving rise to the insufficiency of funds are outside the normal course of the tax-payer’s business that a possibility of reasonable excuse can arise.”
This judgement introduced the concept of legal distinction between pleading a shortage of funds and pleading, as a reasonable excuse, a series of unforeseeable circumstances which directly lead to the shortage of funds." Discussion 43. In our view, the correct test to apply in relation to "reasonable excuse" is that found in the judgment of Lord Donaldson MR quoted in paragraph 33 above. We consider this formulation of the test to be binding upon us. The essential question is the application of this test to the facts. This is an area in which every case turns on its own facts. 44. Mr Neeves impressed us as a transparently honest and responsible witness. We considered him to be a conscientious businessman who clearly was committed to preserving the Appellant’s business whilst discharging his liabilities as quickly as possible. We consider on the facts found above that the Appellant exercised reasonable foresight, due diligence and a proper regard for the fact that the tax would become due on the various due dates. Such regard is demonstrated by the fact that its VAT returns were submitted on or before the respective due dates. We also note that the Appellant always paid the VAT which was due, albeit by instalments. We find that the Appellant settled its VAT liabilities when it had the funds to do so. There was no suggestion by HMRC that the Appellant had been deliberately withheld or delayed payments of VAT when it had funds to make payment. 45. In this connection, we have noted that HMRC's Statement of Case seems to suggest that the return for the period 03/12 due, electronically, on 7 May 2012 was received on 20 May 2012, but in HMRC's Schedule of Defaults the due date for the return is shown as 30 April 2012 and the return as having been received on 20 April 2012. In the correspondence between HMRC and the Appellant which was produced to us, HMRC justified the surcharge solely on the basis of late payment of VAT. Moreover in a letter to HMRC dated 31 August 2012 the Appellant points out that its returns have always been submitted in a timely manner – a point which HMRC did not appear to dispute in correspondence. Indeed, in a letter to Mr Henry Bellingham MP (Mr Neeves’ Member of Parliament), HMRC accepted that the Appellant's returns had all been made on time. No reference to a late return was made by HMRC at the hearing. Accordingly, we concluded that the apparent reference in the Statement of Case to a late return was an error. 46. The Appellant, however, did not manage to avoid the insufficiency of funds. We find that the insufficiency was caused by the downturn in orders and the cash flow problems caused by customers extending their period of payment of the Appellant's invoices. We find that the Appellant took all reasonable steps to avoid the insufficiency, including cutting its costs by virtue of redundancies, reducing directors’ salaries and cutting overtime and travel time and reducing its fleet of managerial cars, seeking new markets (the construction industry), injecting fresh shareholder loans, increasing its overdraft with its bankers and negotiating extended credit with some of its suppliers. In short, the Appellant acted in a proactive manner to keep its business afloat, maintain its cash flow and settle its liabilities as best it could. It is hard to see what more the Appellant could reasonably have done except to go into administration (an outcome which was likely to have been of no benefit to the Appellant or to HMRC). In reaching this conclusion we are fully aware that the Appellant's financial difficulties lasted over two years. In our experience, it is not unusual for a business of the size of the Appellant's to take this period of time to retrench, refocus and turn itself around. 47. As regards support from BPSS, the evidence of Mr Neeves (which we accept) was that HMRC had made it clear in May 2011 that the support which they offered had been exhausted. In those circumstances, we considered that it was reasonable for Mr Neeves in respect of both periods under appeal to consider that that door was now closed to the Appellant. We therefore do not consider the failure by the Appellant to approach BPSS once again seeking fresh support in respect of the periods under appeal to be unreasonable. 48. We conclude therefore that the Appellant’s exercise of reasonable foresight and of due diligence and the Appellant’s proper regard for the fact that the tax would become due on a particular date did not avoid the insufficiency of funds which led to the defaults which were material to the surcharges under appeal. 49. In addition, as mentioned above, we find that the Appellant over the period 03/10 – 06/12 settled its VAT liabilities in full by instalments when it was able to do so. In relation to the period 03/12, the liability of £71,338.16 was paid as to £35,000 on 7 June 2012, one month after the due date, and the balance (£36,338.16) on 6 July 2012, two months after the due date. In respect of the period 06/12, the liability of £86,748.24 was paid as to £60,000 on 3 September 2012 and as to £26,748.24 on 12 October 2012 (i.e. respectively slightly under one month and slightly over two months late). We consider, in the circumstances, the Appellant’s exercise of reasonable foresight and due diligence and its proper regard for the fact that the tax had become due on a particular date prompted the Appellant to make payment of the tax due as soon as the insufficiency of funds could be overcome. In our view, having regard to the very significant difficulties being experienced in its trade, the Appellant did all that could reasonably have been expected of it to make timely payment of the VAT due. 50. Finally, there was one aspect of this appeal which puzzled us considerably. As we have noted, HMRC's VAT Civil Penalties Manual paragraph 10534 quoted as an authority portions of the final two paragraphs of Scott LJ's judgment in Steptoe which we have set out in paragraph 30 above and took these as authority for the proposition that, in the context of insufficiency of funds, a reasonable excuse required a series of unforeseeable circumstances which directly led to the shortage of funds. 51. We could not understand why one of HMRC's official Manuals quoted the dissenting judgment from Steptoe, the leading authority on "reasonable excuse" in the context of insufficiency of funds. As regards the doctrine of precedent, a dissenting judgment of a member of the Court of Appeal has no precedent value other than as a potentially persuasive authority. Obviously, such a judgment must be treated with considerable respect as befits any judgment delivered by a member of the Court of Appeal. However, the reasoning which led Scott LJ to his conclusion cannot be regarded as a precedent, or indeed as correct, since it contradicts the reasoning of the majority. Plainly, it is the reasoning of the majority (Lord Donaldson MR and Nolan LJ) that constitutes the ratio decidendi of that case and which is binding upon us (and on both the parties to this appeal). As we have already indicated, it is the formulation of Lord Donaldson MR quoted in paragraph 34 above which we consider to represent the holding in that decision and which we have applied in this appeal. 52. We recognise that the Manual extract did not contain the passage containing Scott LJ’s formulation of the test as requiring "unforeseeable and inescapable” events. However, the comments of Scott LJ in relation to the normal "hazards of trade" (not referred to in the Manual but put to us in submissions) and events "outside the normal course of the taxpayer's business" were made in the context (and as an amplification) of his remarks in the preceding paragraph that to constitute a reasonable excuse the events pleaded by the taxpayer must be "unforeseeable and inescapable." This was the test that was clearly rejected by the majority of the Court of Appeal. Therefore, with the greatest respect, we consider that it is not safe to rely on the judgment of Scott LJ in the way in which HMRC have done in their Manual, correspondence, Statement of Case and in their submissions before this Tribunal. Indeed, we consider HMRC's VAT Civil Penalties Manual paragraph 10534 in this respect to be incorrect and misleading. 53. Furthermore, throughout the correspondence leading to this appeal and in the above Manual extract it is clear that HMRC have placed undue emphasis on "foreseeability". We do not deny that "foreseeability" is relevant, but it is relevant not in its own right, as Lord Donaldson MR explained in the quotation from his judgment in Steptoe set out in paragraph 37 above, but rather to the question whether the late payment was "reasonably avoidable." Decision 54. For the reasons given above, we allow this appeal. 55. 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. GUY BRANNAN TRIBUNAL JUDGE RELEASE DATE: 2 August 2013 The Electrical Installation Solutions Limited Schedule of VAT Payments VAT Quarter Due Date (Return & VAT Payment)** £VAT Due Date Paid £VAT Paid Comment 31/03/10 07/05/10 70,741.48 23/04/10 25/05/10 24/06/10 23,580.48 23,580.48 23,580.47 Agreed plan with BPSS 30/09/10 07/11/10 84,594.19 08/11/10 09/12/10 10/01/11 30,000.00 27,297.09 27,297.10 Agreed plan with BPSS 31/12/10 07/02/11 73,852.64 08/02/11 18/03/11 43,852.64 30,000 No record re BPSS 31/03/11 07/05/11 89,524.25 31/05/11 01/08/11 45,000.00 44,524.25 No record re BPSS First Default 30/06/11 07/08/11 80,908.35 05/09/11 04/11/11 40,908.35 40,000.00 Requested payment plan within BPSS – rejected 2% (£1,618.16) surcharge issued 12/08/11 VAT Quarter Due Date £VAT Due Date Paid £VAT Paid Comment 30/09/11 07/11/11 51,759.02 06/12/11 51,759.02 5% (£2,587.95) surcharge issued 11/11/11 31/12/11 07/02/12 16,408.51 06/02/12 16,408.51 31/03/12* 07/05/12 71,338.16 07/06/12 06/07/12 35,000.00 36,338.16 10% (£7,133.81) surcharge issued 18/05/12 30/06/12* 07/08/12 86,748.24 03/09/12 12/10/12 60,000.00 26,748.24 15% (£13,012.23) surcharge issued 17/08/12 reduced by letter (14/11/12) to £4,012 30/09/12 07/11/12 53,377.46 07/11/12 53,377.46 31/12/12 07/02/13 35,393.98 11/02/13 35,393.98 31/03/13 07/05/13 94,666.96 03/05/13 94,666.96 * Periods under appeal ** Due date for payment extended by further 7 days where payment made electronically

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