[2011] UKFTT 365 (TC)

TC01220

Appeal number TC/2010/04664

INCOME TAX – Surcharge on unpaid income tax (Taxes Management Act 1970 s.59C) – Whether a reasonable excuse for late payment – Appeal allowed

FIRST-TIER TRIBUNAL

TAX 

	MR GARY KNAPPER		Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

            TRIBUNAL:  Dr Christopher Staker (Tribunal Judge)
                                     MR HENRY RUSSELL (Tribunal Member)

Sitting in public in Reading on 16 February 2011 and 11 May 2011

The Appellant in person

No appearance for the Respondents

DECISION

Introduction
1.	This is an appeal against two default surcharges imposed pursuant to s.59C of the Taxes Management Act 1970 (the “TMA”) in respect of the late payment by the Appellant of tax in respect of the 2007/08 tax year. 
The relevant legislation
2.	Section 59C of the TMA states in relevant part as follows:
(1)	This section applies in relation to any income tax or capital gains tax which has become payable by a person (the taxpayer) in accordance with section 55 or 59B of this Act.
(2)	Where any of the tax remains unpaid on the day following the expiry of 28 days from the due date, the taxpayer shall be liable to a surcharge equal to 5 per cent of the unpaid tax.
(3)	Where any of the tax remains unpaid on the day following the expiry of 6 months from the due date, the taxpayer shall be liable to a further surcharge equal to 5 per cent of the unpaid tax.
...
(5)	An officer of the Board may impose a surcharge under subsection (2) or (3) above; and notice of the imposition of such a surcharge—
(a)	shall be served on the taxpayer, and
(b)	shall state the day on which it is issued and the time within which an appeal against the imposition of the surcharge may be brought.
...
(7)	An appeal may be brought against the imposition of a surcharge under subsection (2) or (3) above within the period of 30 days beginning with the date on which the surcharge is imposed.
...
(9)	On an appeal under subsection (7) above that is notified to the tribunal section 50(6) to (8) of this Act shall not apply but the tribunal may—
(a)	if it appears that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax, set aside the imposition of the surcharge; or
(b)	if it does not so appear, confirm the imposition of the surcharge.
(10)	Inability to pay the tax shall not be regarded as a reasonable excuse for the purposes of subsection (9) above.
...
(12)	In this section—
“the due date”, in relation to any tax, means the date on which the tax becomes due and payable; 
“the period of default”, in relation to any tax which remained unpaid after the due date, means the period beginning with that date and ending with the day before that on which the tax was paid. 
The hearing, evidence and arguments
3.	It is common ground that the Appellant’s tax return for the year 2007/08 was submitted on time, showing a tax liability for the year of £1,645.78.  This amount was due to be paid on 31 January 2009.  The amount was not paid by the due date, and the Appellant entered into a “time to pay” arrangement with HMRC, under which he would pay £140 per month from March 2009.  Three payments were made pursuant to this agreement, such that by July 2009 the amount owing was £1225.78.
4.	The HMRC position is that after the three payments, the Appellant failed to continue to comply with the “time to pay” arrangement.  On 16 February 2010, the surcharge liability notices were issued.  The surcharges imposed by HMRC were £82.28 and £61.28, calculated as 5% of the amount of tax owing 28 days after the due date (£1645.78 on 28 February 2009), and 5% of the amount of tax owing 6 months after the due date (£1225.78 on 31 July 2009) respectively.  The HMRC position is that these surcharges are in accordance with s.59C(2) and (3) of the TMA, and that if a “time to pay” agreement is not complied with by a taxpayer, the agreement can be cancelled and the surcharges imposed retrospectively.  HMRC further contends that lack of funds cannot be accepted as a reasonable excuse for late payment of tax (s.59C(10) of the TMA).
5.	The HMRC statement of case states at paragraph 9.2 that “It is for the Tribunal to decide if they accept that there was a reasonable excuse for the late payment of tax which resulted in the imposition of a surcharge”, and that “HMRC in considering such appeals would themselves be looking for an event beyond the individual’s control”.
6.	This appeal was initially set down for hearing in Reading on 16 February 2011.  The Appellant appeared in person.  There was no appearance for HMRC.
7.	The Appellant’s evidence at that hearing included the following.
8.	In 2007, at a time when the Appellant was working for BT, he was offered a job by an Irish company called Cubic Telecom Ltd (“Cubic”).  The offer seemed reliable as it was made by someone he knew from a previous company.  He commenced working for Cubic in July 2007.  At Cubic’s request, he then also recruited another person to work for Cubic, Mr Mattarini, who commenced working in about August 2007. The Appellant was the owner and director of a dormant UK company called Exocom Ltd (“Exocom”), and he agreed with Cubic to use Exocom to make payments.  Cubic paid the gross salaries for the Appellant and Mr Mattarini to Exocom, and Exocom then made salary payments to the Appellant and Mr Mattarini. The Appellant’s own contract of employment was with Cubic, and Mr Mattarini’s contract of employment was with Exocom.  The Appellant’s contract of employment stated that the Appellant would be paid a certain amount per year.
9.	Matters proceeded in accordance with this arrangement in July and August 2007, but thereafter quickly went awry, and the Appellant who is just an engineer and who was focused on his job was swept along by events.  From September or October 2007, Cubic failed to make all of the payments that it should have made.  By January 2008, Cubic had decided not to proceed with the project on which the Appellant was working and terminated the arrangement.  Cubic never made the full amount of the payments that it was required to make.  As the Appellant had recruited Mr Mattarini, he felt responsible for tidying up matters for Mr Mattarini.  The Appellant paid Mr Mattorini the full amount of his outstanding salary and settled Mr Mattarini’s PAYE.  This resulted in there being an even greater shortfall in the amount that the Appellant himself should have received.  The Appellant suffered a further financial setback in that he had paid certain expenses for himself and Mr Mattarini for which he should have been reimbursed by Cubic, but for which the reimbursement was never paid.  
10.	From January 2008, the Appellant was unemployed, but did not take unemployment benefits.  From May 2008, he managed to find another job, and has been in that employment since.  However, he was subsequently unable to recover from the financial mess left behind.  For the last two years, the Appellant's outgoings have exceeded his income. He has remortgaged his house a couple of times.
11.	On the basis of the evidence presented orally at the hearing, the Tribunal considered that the Appellant’s case went beyond a mere claim of inability to pay.  Rather, the Appellant’s case was that unforeseen acts of a third party beyond his control had brought about a financial predicament that left him unable to pay the tax for the year 2007/08 during the period of default.
12.	The Tribunal enquired of the Appellant whether he had documentary evidence in support of the account that he had given.  The Appellant indicated that he did not have it with him at the hearing, but that he would be able to provide such evidence.
13.	In the circumstances, the Tribunal considered it appropriate to afford the Appellant the opportunity to adduce the documentary evidence, and to afford HMRC an opportunity to respond to it.  The Tribunal accordingly adjourned the hearing, and issued a direction giving the Appellant 14 days to file and serve any additional evidence and submissions on which he wishes to rely in this appeal, and giving HMRC a subsequent 14 days to file and serve any additional evidence and submissions in response to the Appellant’s material.  The direction indicated that thereafter the Tribunal would proceed to issue a written decision on the appeal without a further hearing unless either party requested a further hearing.
14.	The Appellant filed further representations pursuant to those directions, and also requested a further hearing in the case.  Those representations included documentary evidence in support of the account that had been given by the Appellant at the previous hearing, and provided some additional details.  The submissions stated amongst other matters as follows.  The Appellant’s work for Cubic, which began in July 2007, was to undertake the development of a hybrid GSM-WiFi service.  Both the Appellant and Mr Mattarini were given one month’s notice by Cubic of termination of their employment on 31 December 2007, and they ceased employment with Cubic on 31 January 2008.  The Appellant used whatever money he had left to pay a solicitor in Ireland to see if any action could be taken against Cubic, but he ran out of money.  The Appellant’s priority at the time was to ensure that Mr Mattarini’s net salary, PAYE and employee NI were paid in full.  As the Appellant had persuaded Mr Mattarini to leave his former employment to take up the work for Cubic, the Appellant felt responsible.  The Appellant thought that he was doing the right thing, although in retrospect he considers that Mr Mattarini might more correctly have been classed as a contractor which would have saved the employer’s NI and month’s notice.
15.	The additional submissions state that the situation regarding the Appellant is a mess, but says that it was not deliberate, and that he would not “deliberately want to quit a good job and to end up in debt and out of work and inflict this pain on my family”.
16.	The documentary material included with the additional submissions included evidence of the engagement of the Appellant by Cubic, of payments from Cubic to Exocom, of salary payments from Exocom to the Appellant and Mr Mattarini, evidence that the Appellant and Mr Mattarini were named on the Cubic website as members of “the team”, evidence that the Appellant had consulted an Irish employment lawyer in relation to the matter, and evidence of e-mail correspondence between the Appellant and the management of Cubic.  The submissions also included details of what expenses the Appellant claimed to have incurred in the expectation of reimbursement by Cubic, and details of what the Appellant claims he should have received from Cubic and of what he did receive.  The Appellant claims that there was a shortfall between what should have been paid and of what was paid of some £15,746 or almost £11,000 if Employers National Insurance is deducted.
17.	HMRC submitted a response to the Appellant’s further submissions dated 14 March 2011, stating that the onus is on the Appellant to establish a reasonable excuse for the late payment of the tax that resulted in the surcharges, and that he had not done so.  The submission noted that the Appellant not only had not paid the tax by the due date, but had also not sought to amend his income tax return.
18.	The second hearing of this appeal was held in Reading on 11 May 2011.  The Appellant again appeared in person, and again HMRC was not represented.
19.	At the hearing, the Appellant took the Tribunal though the materials he had presented, and made some additional submissions.  He said that from January to May 2008 he was looking for work.  From May 2008 to July 2009 he was working in Aldermaston, and in the first half of 2009 received a 20% pay cut due to the credit crunch.  He said that at the time that his work with Cubic ended, he had financial commitments.  He was a wife and five children, and home payments to make.  Throughout the period of default, his outgoings exceeded his earnings.  Throughout the difficulties, he has tried to do the right thing, and has picked himself up and carried on rather than going on unemployment benefits.
20.	On the evening of 11 May 2011, following the second hearing in this case, the Appellant sent a further e-mail to the Tribunal containing some further submissions.  In essence, the submissions are to the effect that “HMRC can sometimes say one thing and in reality do something else”, that the Appellant feels that he can no longer trust HMRC, and that the Appellant feels that he is being penalised for seeking to do what is correct.
The Tribunal’s views
21.	It is not in dispute that the Appellant failed to pay the income tax liability in respect of the 2007/08 tax year within the time limit, and that the income tax had not been paid at the time that the two default surcharges were imposed.  The only issue in the appeal is whether the Appellant had a reasonable excuse for the late payment, within the meaning of s.59C(9) of the TMA throughout the period of default.  
22.	The burden of proof is on the Appellant to establish that he has a reasonable excuse, on a balance of probabilities.
23.	In Steptoe v Revenue & Customs [1989] UKVAT V4283, a VAT case, it was held that although an insufficiency of funds to pay any tax due was not a reasonable excuse under the applicable VAT legislation, there was nonetheless a reasonable excuse in that case where the appellant had encountered cash-flow problems due to the fact that 95% of its work was done for one client which was an extremely slow payer.  In Steptoe, the Tribunal said that:
It was said by Nolan J. in the case of Commissioners of Customs & Excise v Salevon Ltd (unreported) that though Section 33(2)(a) makes it plain that insufficiency of funds cannot be regarded as a reasonable excuse, nevertheless it does not necessarily follow that a trader whose explanation of non-payment or late payment was not simply a temporary cash shortage but the fact that the wrongful act of another had deprived him of the means to pay is precluded from pleading that he had a reasonable excuse. In Salevon the trader's shortage of cash had been caused by the dishonest acts of a secretary to the Company. In the present case the shortage of cash which resulted in Mr Steptoe being unable to pay his tax on time in the first three periods with which we are concerned was the persistent delay in paying of the Redbridge Council which was virtually his only client. 
The Council's conduct was not wrongful in the same way that the conduct of the secretary in Salevon was, but it seems to me that it was conduct of a sort that a small trader was entitled to expect would not happen. It is not something that can be regarded as a normal hazard of trade such as the failure of one customer amongst several to pay a debt, which would produce a temporary shortage of funds and would not amount to a reasonable excuse. If he had brought pressure to bear on the Council he would probably have received no further orders and the bulk of his livelihood would have disappeared. It seems to me, therefore, that this is one of those rare cases where the taxpayer may legitimately put forward as the reason why he should be excused the unexpected and continuing conduct of the person which gave rise to the prolonged shortage of funds. 
24.	On appeal, in Customs and Excise Commissioners v Steptoe [1992] STC 757, it was affirmed by the Court of Appeal (Lord Donaldson of Lymington MR, Nolan and Scott LJJ) that (to quote the headnote) “insufficiency of funds could never of itself constitute a reasonable excuse, but the cause of that insufficiency, the underlying cause of the taxpayer's default, might do so”.  Lord Donaldson MR, referring to the views of the other two members of the Court in that case, 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. 
It follows that if I have correctly interpreted the two judgments, I am in agreement with Nolan LJ rather than Scott LJ. On the other hand if I have incorrectly interpreted either or both, my views are those that I have attributed to Nolan LJ. 
25.	Although Steptoe was a VAT case, the same principle has been considered to apply also in direct tax cases:  for instance Tennyson v Revenue & Customs [2011] UKFTT 119 (TC) at [15]-[16]; Sharp v Revenue & Customs [2011] UKFTT 85 (TC) at [10].
26.	The Tribunal does not criticise HMRC for the fact that it was not represented at either of the hearings in this appeal.  However, this does lead to the result that the evidence of the Appellant has not been challenged or tested in cross-examination.  The fact that evidence is unchallenged does not mean however that the Tribunal must necessarily accept it, and the Tribunal has therefore formed its own view of the evidence as a whole.
27.	On the basis of the oral evidence of the Appellant and the documentary evidence submitted, the Tribunal makes the following findings of fact.  
28.	The Appellant left his employment with BT in July 2008 to take up an opportunity with Cubic.  He was not an employee of Cubic, but a contractor, as the terms of the consultancy contract submitted in evidence indicate.  It was furthermore a term of that contract, in clause 3, that the contract could be terminated by either party “without any reason or explanation, upon 30 days advance written notice”.  The contract with Cubic states that the Appellant as consultant was to undertake the role of Chief Technical Officer of Cubic and that he would amongst other matters provide “Deployment of other staff and resources as required and agreed by the CEO under the [Appellant’s] own account and responsibility and at a pre-arranged fee which would be chargeable under the terms of this agreement”.
29.	The Appellant was a director and owner of Exocom.  The Appellant’s consultancy services to Cubic were provided through Exocom.  Cubic paid the Appellant for his consultancy services by making payments to Exocom.  The Appellant ultimately received payments for his own services by means of salary payments from Exocom.  Consistently with the terms of the consultancy agreement, the services of Mr Mattarini were provided to Cubic by the Appellant (through Exocom), that is to say, Mr Mattarini was an employee of Exocom and not of Cubic.  
30.	The Appellant said in his oral evidence that he considered that he and Mr Mattarini were in effect employees of Cubic, even if that was not the legal structure adopted.  It may be that the Appellant’s understanding of the legal structures, and of the tax and National Insurance requirements applicable to the particular arrangements adopted, was imperfect or incorrect.  The Tribunal considers that these are matters that it need not resolve.  The question in this appeal is whether the Appellant has a reasonable excuse for not paying on time the amount of income tax returned by him for the year 2007/08.  
31.	Although the consultancy agreement between Cubic and the Appellant stated that it could be terminated by any party “without any reason”, the Tribunal accepts that the termination of the agreement by Cubic was not reasonably foreseeable by the Appellant, and came to his as a shock.
32.	On the evidence, Cubic gave the required 30 days notice of termination.  The Tribunal is unable to conclude from the evidence that Cubic failed to comply with any of its contractual obligations under the consultancy agreement.  Having said that, the Tribunal is satisfied that the Appellant genuinely felt that there was a shortfall between what was due to be paid by Cubic and what was actually paid, such as to leave him in a considerable financial predicament.  The Tribunal does not suggest that a mere misunderstanding of the amounts due to be paid under a consultancy contract would be sufficient to amount to a reasonable excuse.  However, on the evidence as a whole, the Tribunal is satisfied in this case that the Appellant reasonably foresaw and counted on a financial situation that was significantly different from what ultimately eventuated, whether or not his understanding was legally correct.
33.	The Tribunal accepts on the evidence that following the termination of the consultancy agreement, the Appellant did ensure that Mr Mattarini was paid in full, and that PAYE and National Insurance payments on behalf of Mr Mattarini were up to date, to the date of his termination.  The Appellant says that he was trying to do the right thing.  The Tribunal accepts that this is the case, even if the Appellant (or Exocom) may have been legally required to do this in any event.  The Tribunal accepts that as a result, the remaining amount left for the Appellant was reduced even further.
34.	The Tribunal considers that the financial consequences of the unexpected and unforeseeable termination by Cubic of the consultancy agreement, coupled with the fact that the payments received by the Appellant under the agreement turned out to be significantly less than what he was expecting, are in combination sufficient to amount to a reasonable excuse in the circumstances of this case.  
35.	The termination of the consultancy agreement with Cubic took effect on 31 January 2008.  The due date for payment of the Appellant’s tax liability was not until 31 January 2009, a year later, and the second surcharge was not imposed until 31 July 2009, 18 months later.  The Tribunal considers it to be a very finely balanced question whether the reasonable excuse continued even until the time of the imposition of the second surcharge.  However, the Tribunal is ultimately satisfied of the Appellant’s submission that throughout the period of default he never recovered from the consequences of what had occurred, that he has a family of five children to maintain, that he remortgaged his home twice, and that he has in the face of adversity continued to struggle on. 
36.	The Tribunal therefore finds that the Appellant does have a reasonable excuse for the late payment of the tax throughout the period of default, for purposes of s.59C(9) of the TMA.  
Conclusion
37.	For the reasons above, the Tribunal allows the appeal and sets aside the imposition of the surcharges in respect of the late payment by the Appellant of tax in respect of the 2007/08 tax year.
38.	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.

Christopher Staker

TRIBUNAL JUDGE
RELEASE DATE: 1 JUNE 2011