England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		14 May 2007

Mr Justice Kitchin:

Introduction

1. The appellant ("CMS") is a company which carries on business in the wholesale supply of computer peripherals and other electronic products.
2. By a notice of appeal dated 23 June 2006 CMS appealed to the VAT Tribunal against the imposition of two surcharges in respect of accounting periods ending on 31 August 2005 and 30 November 2005. The surcharges were imposed under s.59(A) of the Value Added Tax Act 1994 ("the Act"), which applied because CMS was required to make payments on account.
3. The appeal was founded upon the contention that CMS had a reasonable excuse for its default in respect of the period ending on 31 August 2005 and for its default in respect of an earlier accounting period ending on 31 December 2004 which led to the issue of a surcharge liability notice.
4. The hearing took place before the Tribunal on 20 September 2006 and by a written decision dated 28 November 2006 it dismissed the appeal, holding that CMS had no reasonable excuse for its default in respect of either the period ending on 31 December 2004 or the period ending on 31 August 2005.
5. CMS now appeals only against that part of the decision whereby the Tribunal held that CMS had no reasonable excuse for its default in respect of the period ending 31 December 2004. If CMS succeeds on this appeal then the surcharge for the second relevant period will be discharged and the rate of surcharge for the third period will be reduced.

The legislative framework

6. Under paragraph 25 of the Value Added Tax Regulations 1995 a person registered for VAT must, in respect of each period, make to the Controller a return on the specified form showing the amount of VAT payable by or to him and containing full information in respect of the other matters specified in the form. The return must be made not later than the last day of the month following the end of the period to which it relates.
7. By operation of s.59A(1) and s.59(1) of the Act a trader making payments on account is to be regarded as being in default if, by the last day on which he is required to furnish a return for a prescribed accounting period

a) the Commissioners have not received the return, or

b) the Commissioners have received that return but have not received the amount of VAT shown on the return as payable by him in respect of that period.

8. However, by operation of s.59(7)(b) he is not to be treated as being in default if there is a reasonable excuse for the return or VAT not having been so despatched.

The facts

9. As I have indicated, I am only concerned with the period to 31 December 2004. The dispute in relation to this period concerns the consequences of the way the VAT return was completed and size of payment made. However, there was agreement as to the essential facts, which can be stated quite shortly. At the relevant time CMS had a turnover of some £79 million and employed a financial controller, a management accountant and seven other staff in the accounting department. Two members of staff were involved in making the return; one was part qualified as an accountant and the other was the financial controller. The former had been with the company for a few months. She seems to have been primarily responsible for completing the details on the return.
10. She entered a figure of £2,213,095.70 in box 5 which is described as "Net VAT to be paid to Customs or reclaimed by you (Difference between boxes 3 and 4)". But shortly after having done so she realised that this sum should not be despatched to the Commissioners for two reasons. First, CMS had already made two payments on account in respect of this period, each in a sum slightly in excess of £246,308. Second, she appreciated CMS believed it was entitled to deduct a further amount of £1,029,536.33 which represented VAT paid on imports. Accordingly, she deducted these sums from the figure of £2,213,095.70, leaving a balance of £690,943.37. All of these deductions and the balance were noted in manuscript on the return just underneath box 5, with the sums to be deducted shown in brackets.
11. There is no dispute that to give effect to her intention and the understanding of CMS as to its liabilities she ought to have entered into box 5 a figure of £1,183,559.37 being the sum of £2,213,095.70 less the sum of £1,029,536.33 in respect of the VAT due on imports and then despatched, as she did, a cheque for £690,943.37 representing £1,183,559.37 less the payments already made on account.
12. The return was duly submitted to the Commissioners and was received by them on 28 January 2005. It was accompanied by payment of the sum of £690,943.37 which CMS believed to be due.
13. Subsequently, CMS made a voluntary disclosure to the Commissioners claiming that a correction of £1,029,536.33 in respect of the VAT paid on imports was appropriate. At the time of the hearing before the Tribunal that correction was the subject of continuing negotiation between CMS and the Commissioners. They had accepted a correction in excess of £559,000 but disputed the balance of around £470,000. I was told during the course of the hearing before me that a correction in excess of £900,000 has now been agreed.

The appeal

14. CMS accepts it was in default. The figure in box 5 is the amount of VAT shown on the return as payable by the taxable person in respect of the period the subject of the return. In this case the amount shown in box 5 was £2,213,095.70 and this sum has not been received by the Commissioners. Nevertheless CMS submits that in all the circumstances it had a reasonable excuse for that VAT not having been despatched. It also submits that the Tribunal erred in law in not accepting it.
15. In assessing this submission it is important to have in mind the relevant enquiry. It is whether CMS had a reasonable excuse for not despatching the sum it had written in box 5 less the payments it had made on account – that is to say, the sum of £1,720,479.70. I believe this must be considered as of January 2005, the date the sum was due to be paid.
16. In my judgment the following matters are of particular relevance. First, CMS paid the sum which it believed to be due. It furnished the return and despatched the VAT in good time. This is not a case of a person seeking to explain or justify its failure to pay a sum which it thought it owed. Second, the figure of £2,213,095.70 was entered in box 5 as a result of a clerical error, and it was an error which was recognised almost immediately. Third, once the error had been appreciated the employee filling in the return made manuscript additions to it showing the deductions she believed it appropriate to make. She also showed the balance of £690,943.37 which she believed to be due and owing to the Commissioners. There is no dispute that if she had entered the total of this figure and the payments on account into box 5 there would have been no default.
17. I appreciate that it is important that the accurate completion of VAT returns is important to the efficient and effective administration of the VAT system. However in my judgment the particular circumstances of this case which I have outlined do amount to a reasonable excuse for CMS failing to despatch to the Commissioners in January 2005 the sum of £1,720,479.70. It committed a clerical error but attempted to correct this error in manuscript on the return. In doing so it identified immediately below box 5 the sum it believed to be due together with the sums already paid on account. If it had entered these sums in box 5 and erased the figure of £2,213,095.70 it would not have been in default. To have paid the further sum of £1,720,479.70 would have amounted to a payment of £1,029,536.33 more than it thought was due, a very large overpayment. Having made the manuscript alterations to the return, I think it had a reasonable excuse for acting as it did.
18. Of course, this is not enough to allow the appeal. It must also be shown that the Tribunal erred in law. The reasoning of the Tribunal is contained in paragraphs 13 to 16 of the decision:

"13. The appellant's case as far as period 11/04 [12/04] is concerned is that it has a reasonable excuse for the error that gave rise to the underpayment.

14. A new member of staff prepared the return and it was the first time that she had done so. That member of staff realised after completing the return that deductions relating to importations had not been taken into account and adjusted the payment accordingly but incorrectly, as it later transpired, as explained above. The appellant puts forward as the reasonable excuse for that default that it was reasonable for the member of staff concerned to withhold payment of a sum which she thought exceeded a million pounds rather than to make an overpayment of that amount.

15. Mr Watson said when he was cross-examined that two members of staff had been involved in making the return. The lady who signed it had joined the company on 29 September 2004 and the other member of staff was a man who had joined on 17 March 2003. They had therefore been in post four months and ten months respectively when the return was submitted. The lady was at least part qualified as an accountant and the man was the financial controller at the time.

16. We find that the appellants did not have a reasonable excuse on that basis. A company with a turnover as large as the appellant should, indeed must, employ staff who are capable of calculating its VAT liabilities correctly. We acknowledge that anyone can make a mistake. We might well have held that it would be reasonable for someone who has made a mistake that would lead to a large overpayment of VAT to correct it by a manual amendment to the return. We do not agree that a 'correction' that led to an underpayment of nearly £470,000 can be excused on the grounds that if no correction had been made there would have been an overpayment. Taxpayers are rightly regarded as being under a duty to declare the correct amount of tax (and are required by law to do so). To adopt the attitude that they would make a hasty correction to avoid overpaying when that gave rise to a significant underpayment is, we conclude, not reasonable."

19. The heart of the decision is paragraph 16. First, the Tribunal found that "A company with as large a turnover as the appellant should, indeed must, employ staff who are capable of calculating its VAT liabilities correctly". This may be so but in my judgment it is not relevant to the issue the Tribunal had to decide. CMS has never contended that it had a reasonable excuse for failing to pay the sum entered in box 5 because a member of staff failed to calculate its liabilities correctly. Indeed, it did have staff who were capable of calculating its VAT liabilities correctly and they did so in this case. The default arose not because the liabilities were calculated incorrectly but because of a clerical error in the completion of the return.
20. The Tribunal then acknowledged that "anyone can make a mistake" and that "We might have held that it would be reasonable for someone who has made a mistake that would lead to a large overpayment of VAT to correct it by a manual amendment to the return." That, it seems to me, is precisely what happened in this case. Nevertheless, the Tribunal continued: "We do not agree that a correction that led to an underpayment of nearly £470,000 can be excused on the ground that if no correction had been made there would have been an overpayment." Here I believe the Tribunal again fell into error. It regarded it as significant that, as at the date of the hearing, the Commissioners had only accepted a correction of some £559,000 but disputed the balance of around £470,000. As I have said, the matter was the subject of ongoing negotiation at that time and subsequently the vast majority of the correction has been accepted. But more importantly, I do not believe that these matters were relevant in any event. It was not in dispute that at the date of the return CMS believed that it was entitled to deduct the whole sum of £1,029,536.33 and that if the figure of £1,183,559.37 had been entered into box 5 there would have been no default. There was therefore no question of having to "excuse" an underpayment of £470,000. This error then permeates the rest of the reasoning. The Tribunal concluded: "To adopt the attitude that they would make a hasty correction to avoid overpaying when that gave rise to a significant underpayment is, we conclude, not reasonable." The Tribunal evidently formed the view that the correction was made in haste and without adequate consideration as to whether it would result in a considerable underpayment. In my judgment this criticism is not justified. In so far as the correction was made in haste, it was made in order to reflect what CMS believed was due. It quite properly believed it was entitled to deduct the sum whole sum of £1,029,536.33.
21. For all these reasons I have reached the conclusion that the Tribunal did fall into error and its decision was wrong in law. This is not a case where I am simply seeking to substitute my view for that of the Tribunal. In my judgment the appeal must be allowed. CMS is entitled to its costs of the appeal and of the hearing before the Tribunal.