Default Surcharges - Series of Events Which Appellant Claimed Were Unforeseeable - Cash

Default surcharges - series of events which Appellant claimed were unforeseeable - cash flow affected - held within hazards of trade - appeal dismissed

MANCHESTER TRIBUNAL CENTRE

OLYMPIAN SECURITY SERVICES LTD. Appellant

- and -

THE COMMISSIONERS OF Respondents

HER MAJESTY’S REVENUE AND CUSTOMS

Tribunal: Elsie Gilliland (Chairman)

Sitting in public at Birmingham on 31 January 2008

David Howells, Director, for the Appellant

Kim Tilling, Advocate, of the Solicitors Office of Her Majesty’s Revenue and Customs for the Respondents

DECISION

1. The appeal before the tribunal was that of Olympian Security Services Ltd. (the Appellant) a business in the security industry against two default surcharge assessments being first in respect of the accounting period 1 March 2007 to 31 May 2007 (05/07) and secondly that of 1 June 2007 to 31 August 2007 (08/07) . In relation to 05/07 the relevant surcharge assessment was that of 20 August 2007 in the sum of £8,946.64; and for 08/07 the relevant assessment was that of 29 October 2007 in the sum of £10,011.16. The rate for each was 15%.

2. Mr. Howells, a director who presented the Appellant’s case, produced to the tribunal a bundle of documents setting out the Appellant’s grounds of appeal with supporting papers. He submitted that the business had “experienced difficulties, which, when considering the short time scale in which all of the events took place, were outside the normal hazard of trade”. He stated that the business had been through a difficult time “losing money and turnover through unforeseeable events” and that these problems had been made been made considerably worse by what he described as a dramatic increase in costs arising on the regulation of the industry through the Private Security Act 2001 which came into force on 20 March 2006. The Appellant set out in its paperwork details of several specific events which it claimed caused the problems experienced by the business. Mr. Howells was able to record currently a more positive outlook for the Appellant in its business operation with weekly profits up.

3. Miss Tilling in the questions she put to Mr. Howells went through with him the background of the events to which he had referred. The first listed related to a client of the Appellant, Sephora UK Ltd. (Sephora). There had been a settlement but, Mr. Howells said, it resulted in a loss on invoices of £9805.53 and a loss of turnover of £500,000. However, the solicitors’ letter in the bundle setting out the terms was dated 19 April 2005 and referred to Sephora imminently ceasing to trade in the UK. The date of its members’ voluntary liquidation was some time later 17 January 2007. Mr. Howells said that the legal dispute with Sephora was concluded some 2 or 3 months after the solicitors’ letter and that was 7 months before the default surcharge. I observe that the first of the accounting periods the subject of the appeal did not commence until 1 March 2007 which is some 18 months later. Miss Tilling had asked about turnover at the time and was told that it was £1.9m - £2million and that the Appellant had ten contracts (Waterstones was on an ad hoc basis).

4.The second client referred to was Midland Toys Ltd. described as a customer which went into administration leaving unpaid invoices of £7152.12 (VAT exclusive) and there was a loss of turnover. The list of invoices in the bundle shows tax dates of August and September 2006. Accordingly these related to the periods 08/06 and 11/06 and in the context of the returns for those periods the total sales figures were for 08/06 £393,949 (VAT due £57,452.38) and for 11/06 £367,219 (VAT £59,955.16). The amount of loss is small when measured against overall sales.

5.Thirdly, Beatties Department Stores (Beatties) were taken over by House of Fraser and the Appellant was informed by Beatties in October 2005 that notice would be given on all its contracts as they came up for renewal. Accordingly the final coverage on two stores was November 2005; on a further two March 2006; and five more on 1 July 2006. A store was to close also in January 2006. It was claimed that turnover was lost. The formal warning was given in October 2005 and there was sufficient time to take into consideration any cash flow implications. As Miss Tilling pointed out the Appellant’s sales for 02/06 were £411,948 (VAT £68,533.78); 05/06 was not in the schedule of defaults. It appears that any impact was recouped quickly.

6. Fourthly, there was a fraud on the part of an employee and the sum which had to be repaid to the client by the Appellant was said to be in excess of £6325.13 (the precise figure was not given). A credit note was required by the client to clear the invoices. The tribunal was told that this had occurred over a 3 month period from September to December 2006 which predates the periods under appeal.

7. The tribunal was informed that the Appellant had sought specialist corporate advice and could have chosen to go into administration which it was said would have been to the Revenue’s loss. Instead a programme of investment (not without risk) was undertaken to “turn the business around ”. The tribunal was told by Mr. Howells that this was in September /October 2005 or perhaps a little later and continued through 2006. A relevant issue also, Mr. Howells said, was the licensing legislation. Accreditation was required for customer confidence, but costs of licences and accreditation, additional salaries and training expenses were incurred in about September 2005 to March 2006. However these changes affected the industry generally; were required by legislation; and it was known within a reasonable time scale that they would happen.

8.The tribunal does not have power to mitigate a default surcharge but it can determine whether it is satisfied that on the balance of probabilities the Appellant has established a reasonable excuse for its conduct. An insufficiency of funds is not by itself a reasonable excuse (see s. 71 of the Value Added Tax Act 1994) but the underlying cause for the insufficiency might provide one. However it is established law that this does not extend to normal hazards of trade. In the case of C&E Commissioners v Steptoe [1992] STC 757 the appeal succeeded but there the taxpayer worked almost exclusively for one customer which was slow in making payment at the material time. The Court of Appeal laid down a test which requires a taxpayer to show reasonable foresight and due diligence as well as a proper regard that tax will become due on a particular date if it wishes to establish that lack of funds leading to a default could not have been avoided.

9. Mr. Howells described a series of different situations which he termed “unforeseeable events” and “inescapable misfortune” occurring outside normal trade hazards as leading to the delay in paying the VAT which he observed nevertheless was always paid. I have looked at each of the events, lost contracts, bad debts and licensing changes in detail, but they occurred before the periods under appeal and there was time for the losses to be absorbed into the business.

10. None of the events brought to the attention of the tribunal was to my mind other than part of a normal trading pattern experienced by many businesses in their day-to-day commercial operation. As has been shown none had any noticeable impact on the amounts of the sales. None arose during or immediately prior to the two relevant accounting periods. Mr. Howells suggested that there had been a knock-on effect that had to be worked through and that turnover had been dented. VAT is not calculated on forecasts nor on profits but on sales and the Appellant as was acknowledged had a number of customers. Staff still had to be paid but this had to be the case as the Appellant was trading and the usual costs and expenses would arise. The decision taken to pursue a policy of active investment was a commercial one. I do not consider any difficulties experienced by the Appellant to be outside the normal hazard of trade. The Appellant did not show a proper regard for the payment of VAT on the due date. I am satisfied that no reasonable excuse has been established by the Appellant.

11. The appeal is dismissed.

12. I make no direction as to costs.

MAN/07/1104

Elsie Gilliland

CHAIRMAN

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