18938
DEFAULT SURCHARGE – Reasonable excuse – Shortage of funds – Taxpayer, a builder, involved in legal proceedings against a non-paying client – Whether reasonable excuse – Yes – Appeal allowed

LONDON TRIBUNAL CENTRE

	  G J GRAY	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:     STEPHEN OLIVER QC (Chairman)
					        MICHAEL SILBERT FRICS	 

Sitting in public in London on 5 January 2005

Mrs Pat Gray for the Appellant 

Mrs P Crinnion for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Mr George Gray appeals against a default surcharge of £863.69 imposed at the 15% rate for the 03/04 period. 

2.	The return was submitted in time.  It was accompanied by a cheque.  The Commissioners presented the cheque for payment and it was returned to Mr Gray marked “Please represent”.  What had happened (according to Mrs Gray, who looked after Mr Gray’s books and finances and dealt with the VAT compliance, and who attended the hearing to give evidence) was that the cheque in favour of the Commissioners “crossed with my cheques paid in by a couple of hours”.  Once Mrs Gray had been made aware of the failure of the cheque to clear, she arranged for payment to be made by electronic transfer.

3.	Mrs Gray stated in a letter to the Commissioners of 21 May 2004 that she did not know that the Commissioners had a policy not to represent cheques.  She drew the Commissioners’ attention to “an ongoing court case for an unpaid debt of over £30,000 which is causing me considerable financial difficulties and I was only just managing to keep my head above water with all the costs involved”.

4.	The records show consistent defaults throughout 2002 and for the first three quarters of 2003. On 17 February 2004 Mr Gray entered into a time-to-pay agreement for the then outstanding debt of £3,589 by nine monthly instalments.  The instalments have, so far as we are aware, been paid on time.  

5.	We were satisfied that the approach of Mr and Mrs Gray to VAT compliance was conscientious.  They did their best to pay on time and make good any defaults as soon as they were able.  

6.	We heard no evidence of the overdraft arrangements between Mr Gray and his bank, the Bank of Ireland.  Pages of bank statements for April and May 2004 showed that Mr Gray’s account fluctuated several times between a maximum credit of £12,800 and a maximum overdrawing of £9,500. We were not provided with the 03/04 Return or a copy of the accompanying cheque.  We believe the cheque was dated 24 April and that the return bore the same date; they were, according to the Commissioners’ schedule, received by them on 29 April.  On 24 April 2004 Mr Gray was in credit with the bank.  By 4 May 2004, Mr Gray was overdrawn in the region of £9,500.  Over the next ten days £20,000 were lodged in Mr Gray’s account with the bank.

7.	Mrs Gray’s evidence was that she thought there were sufficient funds to meet the cheque in favour of the Commissioners.  She did not see a bank statement until 10 May.  She thought the cheque to the Commissioners would clear. 

8.	The fact is that the cheque did not clear.  The inference must be that there were insufficient funds at the time.  Mrs Gray’s assumption that the Commissioners would represent the cheque does not, we think, help her.  She should not have given herself the benefit of the doubt.  Without more, we do not accept that Mr Gray has presented a reasonable excuse.  

9.	There is, however, more to this case.  The circumstances of the ongoing court case have been looked at with some care.  They caught the attention of the surveyor member of this Tribunal.  We have examined the correspondence and the accounts of the court proceedings between Mr Gray and his client, a Mr D.  The impression that we have obtained is that Mr Gray has been caught up in an expensive and uncertain lawsuit with a practised exponent in the techniques of non-payment.  He has been kept out of more than £30,000, having personally borne the expenses of earning that amount.

10.	A letter from the solicitors to Mr Gray to Mr D dated 15 December 2003 set out the circumstances of the dispute.  Mr D had engaged Mr Gray to do some building works at a total cost of £73,000.  The specifications changed on three occasions.  Mr D engaged two or three other contractors to do different jobs and there was no coordination; as a result Mr Gray was delayed in carrying out his work.  Mr D failed to choose the required fittings and so further held up Mr Gray.  Mr D went to hospital and excluded Mr Gray’s workmen from entering the building.  On occasions Mr D demanded the presence of Mr Gray’s workmen who found that they could not get on with the job.  Mr D failed to agree times for site meetings.  Mr D went back on an agreement to let Mr Gray complete the job.  In the events £43,500 of the total was paid but Mr Gray had to sue for the £31,000 balance.  Mr Gray had to incur solicitors’ and counsel’s fees.  Mr Gray had to commence legal proceedings and pay the court fees; the amount due had not been recovered by the date of the hearing, i.e. January 2005.

11.	It appeared to us from our examination of the material relevant to the dispute with Mr D that Mr Gray had been kept in a state of continuing uncertainty.  Mr Gray had paid his own workmen to carry out the work on Mr D’s premises and was having to carry his own legal expenses to recover the debt.  Mr D deployed every tactic to avoid paying Mr Gray.  Mr Gray did what he could to get the money in, and had Mr D paid by the end of April 2004, Mr Gray would have had plenty of funds with which to meet his VAT liability, as well as meeting his obligations under the time-to-pay agreement.  Mr D appears to have countered every move to bring the issue to finality, obstructing inspections and avoiding meetings well into February 2004. 

12.	We recognize that £31,000 is a relatively small part of Mr Gray’s total “sales” of £407,000 for the twelve months to the end of March 2004: we take that figure from the VAT returns.  Moreover Mr Gray was on cash accounting.  Nonetheless the non-payment by Mr D of the £31,000 due had clearly damaged Mr Gray’s cashflow and interfered with Mr Gray’s ability to plan and manage his payments.  It seems to us that even with the exercise of reasonable foresight and due diligence Mr Gray, a small builder whose resources are limited, could not have avoided the insufficiency of funds that led to the default.  Overdue trade debts are foreseeable incidents of any builder’s business.  The resolute determination of the debtor not to pay is, however, something that cannot be anticipated and managed with reasonable foresight and due diligence by a trader of the likes of Mr Gray.  The Commissioners questioned whether Mr D’s non-payment could rank as a reasonable excuse on the grounds that it had already been taken into account in deciding whether the same reason excused earlier defaults.  We see no reason why it should not be taken into account in considering the position for the 03/04 period also.  It was, as already noted, still a live dispute in that period.   In that period, as in earlier ones, foresight, diligence and regard for the fact that tax was due would not have overcome the insufficiency of funds.  

13.	For those reasons we have considered that Mr Gray has demonstrated a reasonable excuse.  We allow the appeal.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 14 February 2005

LON/04/1361