The Total Technology case centred on a payment being made one day late triggering the imposition of a default surcharge which the company argued was disproportionate. In his judgement Upper Tribunal Judge Mr Justice Warren found that:
· HMRC’s decision to charge Total Technology (Engineering) Ltd a default surcharge for the late payment was correct;
· the default surcharge regime itself does not infringe the principles of proportionality; and
· the surcharge imposed on Total Technology (Engineering) Ltd did not infringe the principle of proportionality
HMRC contend the above judgement supports HMRC’s position that the default surcharge regime itself is proportionate and that HMRC was correct in charging a default surcharge in respect of the late payment for the accounting period 12/12.
Conclusion
HMRC argue that the causes of the insufficiency of funds were not exceptional. They argue that they were foreseeable and attributable to the ordinary hazards of trade. As such, they say that they could not be regarded as a reasonable excuse for the Appellant’s late payment of VAT.
However, that is to regard foreseeability as the sole criteria for determining whether a reasonable excuse has been shown and that, in our view, is not the correct approach. The cash flow interruption in January 2013 could have been foreseen, but was unavoidable. The events which affected the Appellant’s cash flow were outside what the exercise of reasonable foresight would have enabled the Appellant to do in order to avoid the shortage of funds which led to the late payment of VAT. The Appellant’s inability to pay its VAT was caused by an unavoidable interruption to its cash flow rather than insufficiency of funds
The issue of reasonable excuse and s 71(1)(a) was considered in detail in Steptoe . The Court of Appeal held that although insufficiency of funds can never of itself constitute a reasonable excuse, the cause of that insufficiency, that is, the underlying cause of the taxpayer’s default, might do so and in considering that, as Lord Donaldson MR explained, the question is whether the late payment was “reasonably avoidable”. The test to apply can be found in his judgment where he said:
“… 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.”
That is the correct test to be applied and is binding upon the Tribunal. In Steptoe Lord Nolan said that it is necessary to distinguish between the reason for non-payment and excuse for non-payment. The taxpayer here is saying that it should be excused from the surcharge, not because it was short of funds, but because that shortage was brought about by circumstances over which it had no control. Lord Nolan quoting from his own decision in Customs and Excise Commissioners v Salevon [1989] STC 907 said:
“… It is worth bearing in mind that the penalties imposed for a delay or deficiency in payment, however slight, are fixed. Neither the commissioners nor the tribunal have any power to mitigate them by reference to the facts of the particular case. In these circumstances the wide discretion conferred on the commissioners and the tribunal by s19(6) should not in my view, be regarded as having been cut down by s33(2) to any greater extent than the language of the latter subsection strictly requires. The commissioners and the members of the tribunal are well qualified to distinguish between the trader who lacks the money to pay this tax by reason of culpable default and the trader who lacks the money by reason of unreasonable and inescapable misfortune.”
However, the management of the Appellant company could have been more proactive in ensuring that HMRC were aware of its position, and put forward proposals regarding the date on which realistically, taking into account its payment terms with EDF Energy, the 12/12 VAT would be paid. HMRC may not have been prepared to agree to a time to pay arrangement, but the Appellant did not even explore the possibility. Had it done so, and if HMRC refused a time to pay arrangement, it is possible that the circumstances in this case, that is, a temporary interruption in its cash flow, rather than an insufficiency of funds could, subject to what is said below, have been regarded as exceptional and within the principles set down in Steptoe .
The Appellant had a poor compliance history. There was clearly a history of the management not taking such reasonable steps as they were able, to maintain the company’s ability to discharge liabilities including VAT when they fell due.
The Appellant had been mandated with effect from period 06/10 onwards to render both returns and payments electronically. As HMRC say, the online registration screens, which must be used in order to register for online filing, refer to further online information on paying electronically which details the acceptable electronic payment methods. The Appellant nonetheless continued to make VAT payments by cheque contrary to VAT Regulations 1995/2518 Reg. 40(2A).
The due date for the 12/12 VAT payment by electronic means was 7 February 2013. Had the Appellant made its payment electronically it would have been in time. Because the Appellant paid by cheque, the due date for receipt of cleared funds was 31 January 2013. The tax due was received by cheque on 6 February 2013 and therefore six days late.
Taking these factors into account it cannot be said that the Appellant, having due regard for the fact that it’s VAT was payable on the due date, did everything it could by the exercise of reasonable foresight and due diligence to ensure payment was made on time.
For the above reasons we find that the Appellant has not shown that it had a reasonable excuse for the late payment of its VAT in period 12/12 and therefore dismiss the appeal.
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.
MICHAEL S CONNELL
TRIBUNAL JUDGE