“The following list shows what we believe to be the amount of “excess”
“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.”
“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.”
“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.’”
“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.”
“[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.”
“[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.”
“[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.”
“[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 of3 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.”
“(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 ending5 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 56Finance 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.”
“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.”
“[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.”
“[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”
“[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.”