“59.— The default surcharge. (1) … 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. … (2) Subject to subsections (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) to (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 subsections (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). (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, (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. (a) is in default in respect of a prescribed accounting period ending within the surcharge period specified in (or extended by) that notice, and (a) in relation to the first such prescribed accounting period, the specified percentage is 2 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. (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, (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. …”
“was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time, a reasonable thing to do?”
“The commissioners and the members of the tribunal are well qualified to distinguish 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.” 71. Nolan J expressed some reservations about the first instance Judge’s conclusion that the bad debts could provide a reasonable excuse, as “The risk of bad debts is an incident of most, if not all, types of business activity”
“...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 amount of tax which he must subsequently pay over to the commissioners. There is nothing in law to prevent him from mixing his 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 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’.” 73. The second case concerning insufficiency of funds to which we were referred was Steptoe v Revenue and Customs Commissioners[1992] STC 757 CA (“Steptoe”). 74. In that case, Scott LJ, giving a dissenting decision, considered the question of the significance of the ‘normal hazards of trade’, as follows (at p765): “The relevant question is not what the normal hazards of are commercial in general, but what are the normal hazards of the taxpayer’s particular business. If the normal hazards of a taxpayer’s particular business include the late payment of bills, then that 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 taxpayers’ business that a possibility of a reasonable excuse can arise’.” 75. However, Nolan LJ, giving one of the majority judgments, indicated that the words “unforeseeable and inescapable misfortune” used in Salevon set the bar for a reasonable excuse too high (at p768): “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.” 76. Thus, the underlying cause of the insufficiency need not be restricted to unforeseeable or inescapable events. Lord Donaldson MR noted (at p770) that: “If the exercise of reasonable foresight and 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 taxpayer's default, then the taxpayer might well have reasonable excuse for non-payment, but that excuse would be exhausted by the date on which such foresight, diligence and regard would have overcome the insufficiency of funds.” 77. We would also note an obiter comment made by Nolan LJ in Steptoe (at p769), which may have some relevance to the VAT accounting arrangements in place in the present case: “I would repeat that as a general rule a small trader dealing with larger organisations and having difficulty in securing the prompt payment of his bills should elect to account for his value added tax on the cash basis and would have no reasonable excuse for failing to do so.” 78. Scott LJ made the following additional comment on VAT accounting arrangements (at p758): “In general, traders must account for output tax and input tax on the basis of invoices issued in respect of the supply of the goods or services in question (see ss 4, 5 and 14). It is an inevitable consequence of this scheme that a trader may become liable to account to the commissioners for output tax at a time before he has been paid by his customer the price of the goods or services supplied or the tax thereon. It may seem a hardship that traders should be placed under this liability but the hardship is the consequence of a tax collection scheme under which the trader is responsible for collecting the tax from the customer and is accountable to the commissioners not on the basis of receipts but on the basis of invoices. The hardship to which I have referred is mitigated to some extent by the 'Cash Accounting Scheme' introduced by theValue Added Tax (Cash Accounting) Regulations 1987 .” 79. Overall, we conclude that the proper approach to be applied is that set out in Perrin. When considering the question to be considered at the third stage of that approach (i.e. “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”) we consider that we must take into account that: (1) a taxpayer who has collected funds representing VAT on behalf of HMRC in advance of the date for payment to HMRC will only rarely be able to establish that he has a reasonable excuse for using those funds for a purpose other than making payment to HMRC (2) an event outside the normal course of the taxpayer’s business (but potentially falling short of an unforeseeable or inescapable event) may give rise to such a reasonable excuse (3) such an event can only be considered to provide a reasonable excuse for so long as the exercise of reasonable foresight and due diligence and a proper regard for the fact that the tax would become due would not have avoided the insufficiency of funds (4) where a taxpayer does not routinely collect funds representing VAT from customers prior to the date for payment to HMRC, the fact that the taxpayer has not adopted the cash accounting scheme is a factor to be given some weight in determining whether the taxpayer has exercised such reasonable foresight, due diligence and proper regard.”