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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Carne (t/a John Carnes Hair Shop) v Customs and Excise [2004] UKVAT V18878 (13 December 2004) URL: http://www.bailii.org/uk/cases/UKVAT/2004/V18878.html Cite as: [2004] UKVAT V18878

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18878

DEFAULT SURCHARGES – ten surcharges - insufficiency of funds – whether a reasonable excuse – no – appeal dismissed – VATA 1994 Ss59(7)(b) and 71(1)(a)

LONDON TRIBUNAL CENTRE

JOHN CARNE

trading as

JOHN CARNES HAIR SHOP

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: DR A N BRICE (Chairman)

MRS C S de ALBUQUERQUE

Sitting in public in London on 20 October 2004

The Appellant in person

Mrs Pauline Crinnion, Advocate instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004


 


DECISION

The appeal

1. Mr John Carne (the Appellant) trades under the name of John Carnes Hair Shop and is registered for value added tax in the name of the business. The Appellant appeals against ten default surcharges details of which are:

Accounting Period ending	Due date received	Date payment	Amount of surcharge
30.06.01	31.07.01	23.10.01	£6,002.26
30.09.01	31.10.01	30.01.02	£5,301.48
31.10.01	31.01.02	11.06.02	£5,541.06
31.03.02	30.04.02	03.09.02
		20.09.02
		05.11.02	£5,438.66
30.06.02	31.07.02	12/11/02
		13.11.02
		20.11.02	£5,699.52
30.09.02	31.10.02	28.02.03
		14.04.03
		17.04.03
		07.07.03	£6,332.10
31.12.02	31.01.03	07.05.03
		12.05.03
		15.07.03
		01.08.03	£6,894.57
31.03.03	30.04.03	01.08.03
		30.09.03
		21.10.03	£5,051.33
30.06.03	31.07.03	20.02.04	£6,142.03
		Not yet paid
		In full
30.09.03	31.10.03	Not yet paid	£6,005.99

2. Thus the amount at issue in the appeal is £58,409.

The legislation

3. Section 59 of the Value Added Tax Act 1994 (the 1994 Act) provides that where a value added tax return, or the tax due, is received late, the taxable person is in default. A surcharge is imposed for the second and subsequent defaults each surcharge being an increasing percentage of the tax paid late with a maximum of 15%. Section 59(7)(b) provides that a taxable person is not liable for a surcharge if he satisfies the Tribunal that there is a reasonable excuse for the return or tax being sent late. On the other hand section 71(1)(a) of the 1994 Act provides that an insufficiency of funds to pay any tax due is not a reasonable excuse.

The issue

4. Thus the issue we had to determine was whether the Appellant had a reasonable excuse for any of the defaults the subject of the appeal.

The evidence

5. A bundle of documents was produced by Customs and Excise. Oral evidence was given by the Appellant on his own behalf.

The facts

6. From the evidence before us we find the following facts.

The Appellant and his business

7. At the relevant time the Appellant operated a hair salon in High Street, Guidlford, Surrey. The business began in about 1980.
8. The Appellant accounts for value added tax on a cash basis. This means that the tax is included in the price paid by each client and the tax received should be accounted for to Customs and Excise at the end of each accounting period.
9. Before the ten defaults the subject of the appeal the Appellant had been in default on twelve previous occasions from October 1997. In fact between that date and September 2003 he only made three returns and payments on time. This meant that the surcharge for each of the defaults the subject of the appeal was 15% of the tax paid late.
10. At the relevant time the Appellant employed between 25 and thirty staff. The trading and profit and loss account showed the following:

Year ending	Turnover	Recruitment expenses	Net profit	Drawings
31.12.98	£907,643	£389	£191,033	£107,677
31.12.99	£945,879	N S S	£203,865	£140,432
31.12.00	£1,044,743	N S S	£220,014	£247,359
31.12.01	£1,088,531	N S S	£196,769	£253,202
31.12.02	£1,108,593	N S S	£193,791	£211,368

N S S = not shown separately

11. After 1997 Mr Carne began to get into debt and he entered into a number of personal loans and re-mortgaged his house. On 18 January 2000 his bank wrote to him to say that the previous month it had agreed to continue an overdraft facility of £90,000 subject to review. However, the letter went on to say that recent cash flow forecasts showed an increasing requirement. If (as the Appellant had suggested) there had been a downturn in sales then the level of drawings had not decreased in line with such downturn and indeed had increased. The letter concluded that the bank was of the view that the Appellant relied too heavily on borrowed funds and that it did not wish to increase its exposure. The bank suggested that the Appellant seek advice from an accountant.
12. The business was sold on 23 November 2003 to a limited company the shares of which were owned by a trust, the Appellant and Mrs Carne. The Appellant is a director of the company. After the sale the Appellant remained liable to repay his personal loans and mortgages. He now draws £100,000 per annum out of which he pays PAYE, his loans, his mortgages and his income tax.

The arguments

13. The Appellant argued that over the twenty years before the business was sold he had found it difficult to run. The business was very dependent upon its staff but by the nature of the business they moved away and took clients with them. That affected turnover and meant that new staff had to be employed and profitability suffered. In 1997/98 a new business in Guildford had opened just down the road from his shop and sixty per cent of his staff and clients had moved to the new business. He had had to re-employ staff and had had to forgo paying the value added tax on time. He was under pressure from his bank and had cash flow issues. He had already paid £60,000 in surcharges. From 1996 onwards he had had to take out personal loans to pay the surcharges and had got into a debt circle. In order to service the loans he had had to increase his profits which meant that his income tax bills had increased. He could not catch up and did not have the money to pay the value added tax. Customs and Excise had given him time to pay but he could not get out of the debt circle. He chose to pay the wages before the tax. Although his drawings were large he had to pay income tax out of his drawings and also repay his personal loans.
14. For Customs and Excise Mrs Crinnion argued that the Appellant operated a cash business with a turnover in excess of £1M. It was very profitable and so it had the funds to pay the tax on time. There was no reasonable excuse for the defaults.

Reasons for decision

15. In considering the arguments of the parties we begin with the terms of the legislation. Although section 59(7)(b) of the 1994 Act provides that there is no liability for a surcharge if there is a reasonable excuse, section 71(1)(a) provides that an insufficiency of funds to pay any tax due is not a reasonable excuse. The ambit of section 71(1)(a) (which was then section 33(2)(a) of the Finance Act 1985) was considered in Commissioners of Customs and Excise v Salevon [1989] STC 907 and also in Commissioners of Customs and Excise v Steptoe [1992] STC 757. Those decisions established four main principles.
16. The first principle is that section 71(1)(a) makes it clear that an insufficiency of funds is not a reasonable excuse for late payment. As Nolan J (as he then was) said in Salevon:

"Suppose a trader was able to demonstrate as a matter of fact that when the time for payment came he was, at least temporarily, bereft of funds and unable to borrow what was needed; that might be regarded … as a reasonable excuse for non-payment. The law does not as a general rule require the impossible. But [section 71(1)(a)] makes it plain that an insufficiency of funds cannot be so regarded. Insolvency is not enough."

17. The second principle is that it is necessary to distinguish the reason for late payment and the underlying cause or excuse for late payment. Even though the reason for the failure to pay on time is an insufficiency of funds, the underlying cause could, depending on the facts, be a reasonable excuse. Although a trader who lacks the money to pay his tax by reason of culpable default would not have a reasonable excuse, a trader who is deprived of the means to pay his tax for some adequate reason might well have a reasonable excuse for late payment notwithstanding that the direct cause is the insufficiency of funds.
18. The third principle is that it is for the tribunal to decide whether the underlying cause constitutes a reasonable excuse. The wrongful act of another person, or some unforeseeable or inescapable misfortune, leading to an insufficiency of funds, could well be a reasonable excuse but there are limits on what could be regarded as a reasonable excuse. The test was outlined by Lord Donaldson in Steptoe in the following way:

"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 default, then the taxpayer may well have a reasonable excuse for non-payment; but that excuse will be exhausted by the date upon which such foresight, diligence and regard would have overcome the insufficiency of funds."

19. The fourth principle is that the cases in which a trader with insufficient funds to pay the tax can successfully invoke the defence of reasonable excuse are rare because traders receive from their customers the amount of tax which must be paid to Customs and Excise. If they use that money in their business and lose it, and so cannot hand it over when the date for payment arrives, they will normally be hard put to it to persuade the tribunal that there is a reasonable excuse for late payment.
20. Applying those principles to the facts of the present appeal we begin with the principle that insufficiency of funds cannot by itself be a reasonable excuse. However, in this appeal we are not satisfied that the business had insufficient funds to pay the tax. It was very profitable indeed and, before drawings, the funds were there to pay the tax. In our view the Appellant lacked the funds to pay the tax by reason of his culpable default because he chose to take drawings from the business rather than to pay the tax. If the Appellant had exercised reasonable foresight and due diligence and had had a proper regard for the fact that the tax was due on the due dates he would not have got into the surcharge regime, or if he did, would not have stayed in it for such a long time. Finally, the Appellant was a cash trader and received from his customers the amount of tax which should have been paid to Customs and Excise. He used that money in his business (or took it out as drawings) and so could not hand it over when the dates for payment arrived. He has not persuaded us that there was a reasonable excuse for late payment.
21. We have carefully considered the arguments put to us by the Appellant. We understand that the departure of staff could affect turnover and profitability but the trading and profit and loss accounts show that turnover increased each year although there was reduced profitability in 2001 and 2002. In 2001, however, drawings increased and, although they reduced in 2002, they still remained at a higher level than earlier years. Again, although the opening of the new shop in 1997/98 might have resulted in the loss of some staff and some clients the fact is that turnover and profit increased from 1998 to 1999. As far as recruitment costs are concerned we note that £389 was spent in 1998 and that, although there might have been some expenditure on recruitment in subsequent years, it was not shown separately in the accounts and so we cannot regard the expenditure on recruitment as a reasonable excuse for not paying the tax on time. We accept that the Appellant personally had a number of debts which had to be repaid but the fact is that the business itself was profitable. On the evidence before us the Appellant has failed to substantiate his assertion that he chose to pay the wages before the tax as, in our view, the business was sufficiently profitable to pay both.
22. For the reasons we have given the appeal is dismissed.

DR A N BRICE

CHAIRMAN

RELEASE DATE: 13 December 2004

LON/2003/1176

23. 12.04