DEFAULT SURCHARGE – Reasonable excuse – Cash shortage caused by mismanagement of construction contract on part of Appellant – Incapacity through illness of chief executive – Whether reasonable foresight and due diligence would have prevented the insufficiency of funds – No – Appeal allowed 

LONDON TRIBUNAL CENTRE

	DUKES CONTRACTS	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC   (Chairman)
						SHAHWAR SADEQUE MBCS 

Sitting in public in London on 14 April 2004

Mr Abiodun Olusanya, financial accountant, for the Appellant 

Phillip Webb, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	Dukes Contracts appeals against two default surcharges.  The first is for the 9/02 period.  The amount assessed (at the 15% rate) is £6,952.76.  The surcharge for the period 12/02 is £8,460.60 (also at 15%).  On both occasions Dukes Contracts was late in paying the VAT due.  

2.	Dukes Contracts was represented by Mr Abiodun Olusanya, an employed financial accountant. He also gave evidence for Dukes Contracts. The Commissioners were represented by Phillip Webb, a HEO advocate.  

3.	The principal activity of Dukes Contracts is that of asphalting and roofing contract work.  It employs five administrative staff, four contract managers and about 15 on-site operatives.  When it enters into a contract with a main contractor, it usually engages subcontractors.  In the year 2001 its turnover was some £2.7 million.  In 2002 the turnover dropped to £2.4 million.

4.	In September 2001 Dukes Contracts entered into a construction agreement with Bouygues.  The contract had a value of £430,000.  Payments were due 45 days after issue of the certificate agreed between Bouygues’ contract manager and Dukes Contracts.  The contract ran well until the end of 2001.  

5.	In the first half of 2002 Bouygues became slower and slower in making payments.  We did not have an entirely satisfactory explanation as to why.  It may have been the result of mismanagement on the part of Dukes Contracts which had put the management responsibility into the hands of a manager, a Mr J, who, in the words of Mr Olusanya, “thoroughly mismanaged the contract costing Dukes Contracts over £140,000 in losses. We suspected him of fraud and believed that he was trying to send our company into liquidation to cover his misdemeanours”.  The payment of VAT for the 6/02 period, £76,561, was late.  The due date for payment was 31 July 2002 and the following day Dukes Contracts entered into a time to pay agreement stipulating instalment payments over the next two months.  It so happened that at the same time the accounts manager of Dukes Contracts had suffered a minor stroke and was unable to organize payment on any different basis. Because of a continuing disability, Mr R A Dukes, the sole owner of the business, was unable to set up any alternative means of financing the payment of the VAT. Mr Dukes had suffered a severe back injury some years earlier. He had received operations and treatment over the previous two years and was practically incapacitated in 2002.

6.	During the period 9/02, the first default period under appeal, Bouygues had stopped all payments to Dukes Contracts in respect of the construction contract.  The mismanagement of that contract was continuing. Bouygues, through their new contracts manager, refused to certify that any payments were due.  Dukes Contracts were at the same time committed to paying a number of subcontractors engaged by them for work on the Bouygues contract.  Those subcontractors had to be paid every week. Dukes Contracts could not afford to withdraw from the contract with Bouygues.  To have done so would have exposed it to a greater loss than the amount that they anticipated recovering by continuing with it. Another financial setback in September 2002 was the liquidation of a company called Redcon Ltd.  This company owed Dukes Contracts £35,374.  The main client was Hackney Council, but the liquidation of Redcon resulted in Dukes Contracts being unable to recover that amount.  

7.	All through the 9/02 period Dukes Contracts was meeting its obligations under the time to pay agreement entered into on 1 August 2002.  Mr Olusanya stated, and we accept this, that had Mr Dukes been able to get to the site and to manage the contract direct, he would have negotiated payment certificates and a better payment rate from Bouygues.  As it was, Dukes Contracts found itself unable to meet the payment of £57,351 due at the end of October 2002. It anticipated this by approaching the Debt Management Department of the Commissioners and negotiating a further time to pay agreement on 25 October 2002.  This obliged Dukes Contracts to make instalment payments, the last being on 20 December 2002.

8.	In the period 12/02, Dukes Contracts met all its obligations under the time to pay agreement of 25 October.  It completed the contract with Bouygues, suffering a £115,000 loss by the end of January 2003.  

9.	Mr Phillip Webb for the Commissioners argued that Dukes Contracts’ late payments for both periods had resulted from an insufficiency of funds.  He accepted that Mr Dukes’ illness had been significant. But, he pointed out, the turnover of Dukes Contracts for both periods should have been sufficient to enable it, with proper cash management, to have met its VAT obligations on time.  He suggested that more could have been done to resolve the matter with Bouygues rather than let the very substantial loss develop.

10.	In our view there was no single cause for the failures on the part of Dukes Contracts to pay the amounts due for the 9/02 and 12/02 periods.  Dukes Contracts were unable to pay because they did not have the funds available to them.  The main contributing factors to the cash shortages were the fact that the Bouygues contract went wrong and the inability of Mr Dukes, as a result of the serious back problems that he was suffering, to be on site and to keep the contract going properly.  Had he been able to work he would have been able to supervise the Bouygues contract and see to it that Mr J did not have the opportunity to mismanage the operations required by the contract.  As it was Dukes Contracts had to press on with the contract because to have backed out would have caused a greater loss than to have continued.  And because the contract manager of Bouygues, appointed in mid 2002, had refused to issue certificates to Dukes Contracts, the latter were unable to issue invoices; this again would not have been a problem had Mr Dukes been fit enough to attend meetings and to supervise properly the Bouygues contract.

11.	Bouygues was slow in making payments and eventually in the 9/02 period these dried up. All the time Dukes Contracts had to keep on paying its own subcontractors to enable it to perform its side of the bargain in the hopes of getting payment eventually.

12.	The slow payment of the Bouygues contract since mid 2002 coupled with Dukes Contracts’ own obligation to keep on paying its own subcontractors caused Dukes Contracts to be late in paying their VAT liability for the 6/02 period.  The day after the due date for payment Dukes Contracts entered into a time to pay agreement and honoured its terms.  But this had the knock-on effect using up funds received in the 9/02 period that would otherwise have been available to pay the VAT for that period.  This problem was aggravated by the fact that in July and August 2002 the accounts manager of Dukes Contracts was ill, unexpectedly, as was Mr Dukes.  Thus no alternative arrangements could be set up other than to submit to and abide by the terms of the time to pay agreement.

13.	The Bouygues contract was in acute difficulties by the 9/02 period (and, as already noted, was eventually terminated in early 2003 with a £115,000 loss to Dukes Contracts); payments by Bouygues were not being made because certificates could not be issued in the absence of Mr Dukes.  The cash position was aggravated by the £35,374 unpaid debt that arose as the result of liquidation of Redcon, one of the contractors indebted to Dukes Contracts.  Nonetheless Dukes Contracts kept up with its time to pay obligations in respect of the 6/02 VAT liability and on 25 October entered into a further time to pay agreement in respect of the amount, for the 9/02 period due on 31 October. Dukes Contracts duly discharged that obligation.  The payments by Dukes Contracts (under the time to pay agreements) coupled with the loss of the £34,374 in the liquidation of Redcon coupled with the failure to obtain payments from Bouygues (while at the same time keeping up payments to its own subcontractors) had a severe impact on Dukes Contracts’ ability to pay the tax for the 12/02 period.

14.	No doubt the Bouygues contract made sense and was commercially viable when it was entered into in mid 2001.  But by the second half of 2002 it had become a serious and unforeseen burden on Dukes Contracts’ finances.  Dukes Contracts could not have foreseen that Mr Dukes would have been wholly incapacitated and that the management of the Bouygues contract would have been placed in what turned out to be the incompetent hands of Mr J.  

15.	Taking all these factors into account we think that Dukes Contracts has demonstrated a reasonable excuse for its late payment for the periods 9/02 and 12/02.  We allow the appeal.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED:

LON/03/863