First-tier Tribunal (Tax)

[2009] UKFTT 297 (TC)

TC00241             

Appeal number TC/2009/11308

VALUE ADDED TAX – default surcharge – reasonable excuse –  s 59(7)(b) VATA 1994 – video games distributor – unexpectedly large VAT return  – whether reasonable excuse for late payment of VAT – no – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

                                      CLICK DISTRIBUTION LTD                     Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)         Respondents

                                                TRIBUNAL: TRIBUNAL JUDGE MANUELL

                                                                        MR G BARDWELL CBE

Sitting in public in London on 22^nd September 2009

The Appellant did not appear and was not represented

Mr J P Holl, presenting officer, from the office of the General Counsel and Solicitor to Her Majesty’s Revenue and Customs, for the Respondents

Appeal heard in the absence of the Appellant under Rule 33 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009

© CROWN COPYRIGHT 2009

DECISION

Introduction and preliminary matters

1.     This is an appeal by Click Distribution Ltd (“the Appellant”) against four default surcharges imposed by The Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) under the default surcharge regime in relation to the late payment of VAT.  The Appellant, which carries on business as a distributor of video games, has received notice from the Commissioners of a liability to a surcharge (at the rate of 10 per cent) in the sum of £200.93 in respect of its VAT period 09/07 and of a liability to a surcharge (at the rate of 15 per cent) in the sum of £5,036.98 in respect of its VAT period 12/07.  For reasons which remain unclear to the Tribunal, the Appellant stated the surcharges were in the total sum of £6,446.78, rather than £5,237.91, according to the Commissioners’ Schedule.

2.     When the appeal was called for hearing the Appellant did not appear nor was it represented.  The Tribunal clerk telephoned the Appellant’s office, and the person there responsible for the matter indicated that there would be no attendance.  The Tribunal decided that it was in the interests of justice to hear the appeal in the absence of the Appellant, under Rule 33 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, taking the Appellant’s case to be as set out in its Notice of Appeal and as appeared from the extensive correspondence between the Appellant and the Commissioners.  In that correspondence the Appellant had had full opportunity to set out the facts and the grounds for its appeal against the default surcharge assessments in question.

3.     The Appellant’s case, is summary, is that it had a reasonable excuse for the late payment of VAT where the default surcharges were assessed.  Cash flow had been tight because of late payment of invoices.  Normally the Appellant’s VAT returns were small and it had been caught out when a larger than usual return fell due.  There had been a balancing act as stock had to be supplied to customers, who paid in advance.  The penalty was high and the Appellant offered to pay interest in its place.

4.     For the reasons which the Tribunal sets out below the Tribunal concluded from the evidence that the Appellant does not have a reasonable excuse for the late payment of its VAT in relation to either of the period 09/07 or 12/07.  Accordingly the appeal is dismissed.

The evidence and the facts

5.     The Tribunal had in evidence the Appellant’s notice of appeal dated 1 June 2009 setting out the grounds of appeal; the extensive correspondence between the Appellant and the Commissioners as to the default surcharges and the Appellant’s reasons why the relevant VAT had not been paid on the due date (including annotated copies of the Appellant’s bank statements); together with a schedule prepared by the Commissioners showing the default surcharge “history” of the Appellant.

6.     The Tribunal finds the following facts from the evidence:

(1)  The Appellant is registered for VAT purposes and carries on business as a distributor of video games.

(2)  The Appellant was in default with payment of its VAT in the quarterly period 06/06, at which point the Appellant was served with a surcharge liability notice and became subject to the default surcharge regime.  By reason of late payments of VAT in subsequent VAT periods the Appellant remained subject to the default surcharge regime up to and including the quarter 12/07. 

(3)  In relation to the period 09/07, the Appellant was liable to pay VAT of £2,009.33 on or before 31 October 2007.  No part of this payment was made by the due date.  The Appellant paid £1,809.50 on 8 February 2008 and £199.83 on 18 February 2008.  In relation to these late payments, the Appellant was assessed to a default surcharge of £200.93, at the rate of 10 per cent.

(4)  In relation to the period 12/07, the Appellant was liable to pay VAT of £33,579.88 on or before 31 January 2008.  No part of this payment was made by the due date.  The Appellant paid £9,800.17 on 18 February 2008, £7,000.00 on 19 February 2008, £2500.00 on 22 February 2008, £5,000.00 on 9^th April 2008 and £1,279.71 on 8^th October 2008.  The Appellant was assessed to a default surcharge of £5,036.98, at the rate of 15 per cent.

(5)  The Appellant provided nothing to show that it was not aware of the volume of its orders and/or sales.

(6)   The Appellant received no less than 5 warnings as to the impact of the surcharge regime.  There had been an assurance visit by one of the Commissioners’ officers in November 2008. The Appellant had the option to seek advice to change to a VAT regime available to small traders and possibly more convenient to it, but did nothing.

Decision

7.     The provisions in the VAT legislation relating to default surcharges are found in section 59 Value Added Tax Act 1994 (“VATA 1994”) and can be summarised as follows to the extent they are relevant to this appeal.  A taxable person is regarded as being in default if he fails to made his VAT return for a VAT quarterly period by the due date for that quarter or if he makes his return by that due date, but does not pay by that due date the amount of VAT shown on the return as payable in respect of that period.  The Commissioners may then serve a surcharge liability notice on the defaulting taxable person, which brings him within the default surcharge regime, so that any subsequent defaults within a specified period result in assessment to default surcharges at the prescribed percentage rates, on an ascending scale.

8.     A taxable person who is otherwise liable to a default surcharge may nevertheless escape that liability if he can establish that he has a reasonable excuse for the late payment which gave rise to the default surcharge(s).  This is provided for in subsection (7) of section 59 VATA 1994, which is as follows:

            “(7) If a person who, apart from this subsection, would be liable to a surcharge under subsection     (4) above satisfies the Commissioners or, on appeal, a tribunal that, in the case of a default which is material to the surcharge—

               (a) the return or, as the case may be, the VAT shown on the return was despatched at such a time   and in such a manner that it was reasonable to expect that it would be received by the            Commissioners within the appropriate time limit, or

               (b) there is a reasonable excuse for the return or VAT not having been so despatched,

               he shall not be liable to the surcharge and for the purposes of the preceding provisions of this           section he shall be treated as not having been in default in respect of the prescribed accounting          period in question (and, accordingly, any surcharge liability notice the service of which depended            upon that default shall be deemed not to have been served).

9.     It is, of course, sub-subsection (b) on which the Appellant seeks to rely. In the present appeal the Appellant, in relation to both the 09/07 late payment of VAT and the 12/07 late payment, claims the benefit of sub-section (7)(b) of section 59 VATA 1994.  It is clear from the language of sub-section (7) that the burden is on the Appellant to establish that it has a reasonable excuse for the late payments in question.

10.  In relation to both late payments of VAT the reasonable excuse provision in section 59 VATA 1994 must be applied subject to a limitation which is relevant in this appeal.  Section 71(1) VATA 1994 is as follows:

               (1) For the purpose of any provision of sections 59 to 70 which refers to a reasonable excuse for     any conduct—

               (a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and

               (b) where reliance is placed on any other person to perform any task, neither the fact of that             reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable            excuse.

               (2) In relation to a prescribed accounting period, any reference in sections 59 to 69 to credit for       input tax includes a reference to any sum which, in a return for that period, is claimed as a               deduction from VAT due.

11.  It is well established in law that although an insufficiency of funds to pay the VAT due cannot be a reasonable excuse for the failure to pay that VAT, the underlying cause of any insufficiency of funds may constitute a reasonable excuse.  There was no suggestion of any reliance by the Appellant on any third party, such as a professional agent or adviser.

12.  The Appellant’s case, as appears from both the notice of appeal and the correspondence between the Appellant and the Commissioners, is that the underlying cause of the insufficiency of funds to pay the Appellant’s VAT when it fell due was the fact that losses had been posted in the previous 2 years, caused by late payments of invoices to the company and pressure on profit margins.  The Appellant had then had a sudden spike in the level of orders which created an unexpectedly high VAT output.

13.  The Tribunal might perhaps have given more credence to the Appellant’s case were the late payments noted above isolated events, but the Appellant had been late in making its VAT payments in relation to each of the 4 immediately preceding VAT periods.  The picture, therefore, is of a business which, for whatever reason, consistently failed to meet its VAT payment obligations from July 2006 onwards.  That suggests that the underlying cause is simply that the business is not viable or has not been operated in a viable manner.  There was no evidence provided to show that the Appellant was not well aware of the consequences to it of increased sales and its corresponding VAT obligation.  The burden of proof on the Appellant to show that the underlying cause of its failure to meet those VAT payment obligations was due to unforeseen circumstances or events beyond its control was not discharged.

14.  For these reasons we do not consider that the Appellant has shown that there is reasonable excuse for any of its late payments of VAT.  The Tribunal has no power in law to reduce or otherwise mitigate VAT surcharge penalties.  It is all or nothing Therefore the Tribunal dismisses the Appellant’s appeal.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   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.

TRIBUNAL JUDGE MANUELL

CHAIRMAN

RELEASE DATE:   4 November 2009