Law Report: Trader had a reasonable excuse for unpaid VAT: Commissioners of Customs and Excise v Steptoe. Court of Appeal (Lord Donaldson of Lymington, Master of the Rolls, Lord Justice Nolan and Lord Justice Scott), 27 July 1992

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A taxpayer had a reasonable excuse for failing to pay value added tax due where he had insufficient funds to pay tax due because of persistent delays by his main client in paying bills.

The Court of Appeal (Lord Justice Scott dissenting) dismissed an appeal by the commissioners from Mr Justice Kennedy's decision that the taxpayer, John Steptoe, had shown a 'reasonable excuse' for defaults in paying value added tax due.

The supplier of goods or services is responsible for paying VAT on supplies made by him and is liable to a surcharge if he fails to pay the VAT due. Under section 19(6) of the Finance Act 1985, a taxpayer is not liable to a surcharge if he satisfies the commissioners or a VAT tribunal that there is a reasonable excuse for the tax not having been despatched. Section 33(2) provides that an insufficiency of funds to pay any tax due is not a reasonable excuse.

Mr Steptoe, an electrical contractor, was late in making VAT returns and was surcharged. He contended he had a 'reasonable excuse' within section 19(6) because 95 per cent of his work during the relevant period was done for Redbridge Borough Council which persistently took six to eight weeks to pay its bills. The commissioners, having regard to section 33(2), did not accept that Mr Steptoe's cash flow problems constituted a 'reasonable excuse'.

On Mr Steptoe's appeal a VAT tribunal decided that he had a reasonable excuse. Mr Justice Kennedy, following Customs and Excise Commissioners v Salevon Ltd (1989) STC 907, dismissed the commissioners' appeal.

Nigel Pleming QC (Customs & Excise Solicitor) for the commissioners; Mr Steptoe in person.

LORD JUSTICE SCOTT said that in Salevon, Mr Justice Nolan held that it was possible for the reason for an insufficiency of funds to constitute a reasonable excuse. His Lordship affirmed the conclusion that section 33(2)(a) did not prevent the reason for an insufficiency of funds being put forward as a 'reasonable excuse' for section 19(6) purposes.

Insufficiency of funds could not per se constitute a reasonable excuse. The reason for the insufficiency might do so but the reason must amount to something more than that the business of the taxpayer had been carried on unprofitable or that conditions of trade produced cash flow problems. Absent some 'unforeseeable or inescapable' event, cash flow problems were barred by section 33(2)(a) from constituting a reasonable excuse.

If the normal hazards of a taxpayer's particular business included the late payment of bills, then the taxpayer should make arrangements to finance his cashflow on that footing. If he could not afford to do so, then he was relying on nothing other than an insufficiency of funds. It was only if the events giving rise to the insufficiency of funds were outside the normal course of the taxpayer's business that a possibility of reasonable excuse could arise.

In the present case the late payment by the council was not an unforeseeable event in the conduct by Mr Steptoe of his business. If a trader's narrow profit margins or financial circumstances made it unprofitable or impracticable for him to make financial arrangements enabling him to pay his VAT obligations on time, he was caught by section 33(2)(a). The reason for the insufficiency of funds was itself an insufficiency of funds. The present case was such a case. There was nothing capable of constituting a reasonable excuse that could escape section 33(2)(a).

LORD JUSTICE NOLAN said that in Salevon, he was unable to accept the commissioners' argument that to distinguish between the reason for non-payment and the excuse for non-payment was to rob section 33(2)(a) of any effect and he had arrived once again at the same conclusion.

The commissioners' concern was that if section 33(2)(a) read with section 19(6) allowed one to look beyond the insufficiency of funds to the reasons for that insufficiency, then all reasons for the insufficiency were capable of being advanced as reasonable excuses and section 33(2)(a) was rendered ineffectual. That concern was exaggerated. As a general rule one could trust the commissioners to determine whether in any given case, and having regard to the scheme of the legislation including section 33(2)(a), a reasonable excuse for non-payment existed. The reasonable excuse need not necessarily involve a wrongful act by another person.

The test of what constituted a reasonable excuse was to be found in the words of section 19(6)(b) and section 33(2)(a), read in the context of the statutory scheme for the collection of value added tax. As a general rule the scheme had a highly beneficial effect on the cash flow of traders.

The finding of the VAT tribunal that as a result of the council's conduct, Mr Steptoe was without sufficient funds to pay the tax due was on the borderline of sustainability as a matter of law. However, on the basis of its findings, it did not go wrong in deciding that Mr Steptoe had a reasonable excuse. The appeal would be dismissed.

LORD DONALDSON MR, agreeing with Lord Justice Nolan, said that if the exercise of reasonable foresight and of due diligence and a proper regard for the fact that tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, then the taxpayer might well have a reasonable excuse for non-payment, but that excuse would be exhausted by the date on which such foresight, diligence and regard would have overcome the insufficiency of funds. To conclude that the underlying cause that the insufficiency must be an unforseeable or inescapable event was too narrow.