First-tier Tribunal (Tax)

[2010] UKFTT 211 (TC)

 TC00512

Appeal numbers: TC/2009/15208, 15209 & 15210

VALUE ADDED TAX RETURN – failure to furnish return – misdeclaration – failure to pay tax due – reasonable excuse – reliance on any other person – reliance on employed accountant – accountant responsible for late payment and misdeclaration – whether accountant’s ill health reasonable excuse for default – Value Added Tax Act 1994, section 71 – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

                                        PINNACLE OFFICE EQUIPMENT LTD                       Appellant

PINNACLE TELECOM (WALES) LTD

PINNACLE OFFICE SUPPLIES

- and -

THE COMMISSIONERS FOR

                                      HER MAJESTY’S REVENUE AND CUSTOMS         Respondents

Tribunal:        Jennifer Trigger (Judge)

                        Simon Bird (Member)

Sitting in public in Cardiff on 15 February 2010

Mr. Ryley for the Appellant

Mr. Chambers, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.           In this case the Appellant comprised a group of three associated businesses.  Pinnacle Office Equipment Ltd, Pinnacle Telecom (Wales) Ltd and Pinnacle Office Supplies (A Partnership).  Each of the constituent parts of the Appellant were under common control and all were registered for VAT.

2.           An assessment of default surcharge, default interest and civil penalties had been made by the Respondents and it was against that assessment that the Appellant appealed on the grounds that the Appellant had a reasonable excuse for failure to submit VAT returns and for errors in VAT returns.  The reasonable excuse was occasioned by the ill health of the Appellant’s accountant who was a paid employee.

3.           The Appellant conceded that the payment of default interest was not an issue that the tribunal need consider.  Further that the amount of the surcharge and the amount of civil penalties levied on the Appellant’s constituent businesses was not in dispute.

4.           The evidence upon which the tribunal was required to make its decision consisted of a bundle of copy documents submitted by both parties and the oral evidence of Mr. Nigel Harris, former group accountant to the Appellant, Mr. Brian Jones, present group accountant to the Appellant, and Mr. Ian Ryley, the Appellant’s chief executive.  On the basis of that evidence the tribunal found the following facts to have been established.

5.           Since 1989 the Appellant had regularly paid VAT over a ten-year period and in the region of 150 returns had been made with approximately £5 million paid to the Respondents.  Prior to January 2008 no difficulties had been experienced by the Appellant with the Respondents in respect of its VAT returns.  During that period Mr. Brian Jones had been the Appellant’s group accountant.

6.           In 2007 Mr. Brian Jones notified the Appellant that he intended to retire.  Mr. Nigel Harris was appointed as group accountant to the Appellant on 15 October 2007.  Mr. Harris had previously been employed as an accountant for a period of five years.  Mr. Harris was sent by the Appellant for VAT training with an outside provider.  For a ten week period after his appointment Mr. Harris worked with Mr. Jones to familiarise himself with the Appellant’s systems and procedures.  Mr. Harris took over full responsibility for all VAT and accounting procedures on 1 January 2008.  In order to fulfil his responsibilities Mr. Harris had the support of two accounting staff.  Soon after his appointment the need for a further member of staff was identified by Mr. Harris and a purchase ledger clerk was appointed with effect from 23 January 2008.  Mr. Jones retired on 20 December 2007.

7.           In March 2008 a BACS payment system was installed and Mr. Harris was trained to make payment by BACS.  Management accounts were to be provided by Mr. Harris which identified challenges and progressed date.  The content of the management reports was Mr. Harris’ sole responsibility.  He attended board meetings on a regular basis.  No reports were made by him on the Appellant’s VAT to the board or indeed to anyone.

8.           Prior to Mr. Harris’s appointment a practice had been adopted by the Appellant that all incoming post was opened in an administrative office.  Irrespective of the person to whom the letter was addressed, if the letter concerned a financial matter and in particular VAT it was sent to the group accountant for action.  This practice continued during Mr. Harris’ tenure.  The result of this practice adopted by the Appellant was that no-one other than Mr. Harris was aware of the Appellant’s true VAT liability.  No enquiries were made with Mr. Harris by the Appellant so that the Appellant had accurate information as to its VAT liability.

9.           It was within the knowledge of the Appellant that Mr. Harris was experiencing difficulty in adapting to the Appellant’s company.  Management accounts were delivered late by Mr. Harris.  Mr. Harris was recognised by the Appellant as being of a nervous disposition with poor communication skills.  Furthermore to the knowledge of the Appellant Mr. Harris was attempting to modernise and streamline accounting procedures, he had sought assistance from the Respondents to effect these changes but to no avail.  At this time the Respondent was moving its main site of operations and no member of the Respondents’ staff was available to deal with the enquiry raised by Mr. Harris.  The Appellant, through its CEO Mr. Ryley, operated an open-door policy.  Mr. Harris had regular meetings with Mr. Ryley.  These meetings comprised informal discussions.  Mr. Ryley was aware of the difficulties that Mr. Harris was experiencing with the Respondents but took no action to intervene in any way or to provide help or assistance to Mr. Harris in this respect.

10.        By late spring 2008 Mr. Harris was experiencing private issues which were impacting on his private life.  These issues were not known to the Appellant.

11.        During the tenure of Mr. Jones he had been given considerable autonomy and the Appellant had relied on him as group accountant to do all that was required.  The Appellant expected Mr. Harris to manage the Appellant’s financial affairs in the same way that they had been managed by Mr. Jones.  This expectation existed on the part of the Appellant even though the Appellant was aware that management accounts were not submitted on time by Mr. Harris and that Mr. Harris was experiencing difficulties in the working environment.  During the period 01/08 to 01/09 the Appellant exercised no managerial or supervisory control over the work of the group accountant, Mr. Nigel Harris.  It was only when the Appellant received a winding-up notice in respect of one of its constituent businesses that it became aware that the returns for all three of its VAT-registered constituent businesses were in arrears.  Thereafter the Appellant took immediate action by re-employing Mr. Jones and by appointing a VAT consultant.  Within a period of 13 weeks 14 VAT returns of the three constituent businesses had been made and a payment of £450,000 in outstanding VAT made to the Respondents.

12.        The legislation which the tribunal were asked to consider was Section 71 of the Value Added Tax Act 1994.

“For the purpose of any provision of Section 59 to 70 which refers to a reasonable excuse for any conduct –

(a) an insufficiency of funds to pay any tax 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.”

13.        Mr. Ryley submitted that prior to January 2008 the Appellant had had an impeccable record in its dealings with the Respondents.  The philosophy of the Appellant had been not to owe money to anyone wherever possible.  That on the appointment of Mr. Harris the Appellant had taken all reasonable steps to ensure that Mr. Harris was adequately trained and that there was a ten-week handover period to enable Mr. Harris to draw on the experience of Mr. Jones to ensure a smooth transition in the management of the Appellant’s affairs.  Mr. Harris had initially had assistance from two experienced office staff and subsequently a third member of staff was appointed after the need was identified by Mr. Harris.  Ongoing training was provided in the form of a BAS course and the open-door policy of the company ensured that any difficulties experienced by Mr Harris could be brought to the attention of the Appellant.  Mr. Ryley stated that the Appellant was unaware of any private issues in Mr. Harris’ life which might have impacted on his performance as group accountant, such matters only coming to light after the Respondents had served the winding-up order on the Appellant.  It was conceded by Mr. Ryley that with hindsight on an examination of Mr. Harris’ periods of absence from work a pattern had emerged and that Mr. Harris’s presentation skills and communication problems were known to the Appellant from January 2008 onward.  The Appellant had been aware that management accounts were being presented late but Mr. Ryley maintained on behalf of the Appellant that the appointment of Mr. Harris had been undertaken with care.  H had five years’ experience with a reputable firm known to the Appellant and the Appellant had provided sufficient training and support.  The Appellant assumed that the figures presented to the board by Mr. Harris were correct and that VAT returns had been presented.  The Appellant was unaware that the Appellant’s auditors were urgently seeking information from Mr. Harris to complete the annual report and that accounts sent to Companies House had been submitted late.  It was the Appellant’s case that it had no mechanism to detect any shortfall in Mr. Harris’ performance as group accountant and that it was unaware that Mr. Harris had private issues which were impacting on his performance as group accountant.

14.        It was Mr. Chambers’ assertion on behalf of the Respondents that the directors of a limited company were responsible for ensuring that VAT returns were submitted on time.  Furthermore that in a partnership that responsibility rested with the partners.  It was an onerous responsibility which required strict compliance.  Mr. Chambers maintained that the Appellant had no checks in place to ensure that VAT returns were made on time and that it was not a proper exercise of the responsibility placed on directors of a company or partners in a partnership to delegate solely that responsibility to a member of staff, particularly, as in the case of the Appellant, when that member of staff was a new member of staff.

15.        It was accepted that the ill health of Mr. Harris had affected his performance but at what point during his period of tenure that ill health occurred was not entirely clear.  Nevertheless the Appellant was aware of Mr. Harris’ nervous disposition and poor presentation skills and that he was having difficulty adjusting to the new work environment.  Mr. Chambers maintained that this imposed a responsibility on the Appellant to have made further enquiries and to have exercised some supervisory jurisdiction to establish what effect these shortcomings may have had on Mr. Harris’ performance as group accountant.

16.        Mr. Chambers maintained that it was not acceptable for the Appellant to allow a period of 12 months to elapse without any action being taken by the directors or the partners to make proper enquiry to establish whether timely VAT returns were being made and the correct amount of VAT paid.

17.        Mr. Chambers drew the attention of the tribunal to the case –

Profile Security Services Ltd v Customs and Excise Commissioners [1996] STC 808

It was the Respondents’ submission that in accordance with this case the Appellant should have had more control over its own servant, namely Mr. Nigel Harris, than it would have exercised over an outside accountant employed to provide services to the Appellant.

18.        The main issue was whether the Appellant had properly managed the submitting of VAT returns and the payment of the correct amount of VAT.  It was the Respondents’ case that it had not done so because it exercised no or no adequate supervision over the group accountant and further that the Appellant had placed reliance on Mr. Harris to perform the task of submitting VAT returns.  In those circumstances any dilatoriness or inaccuracy on the part of Mr. Harris could not be relied upon by the Appellant as a reasonable excuse.

Conclusion

19.        The tribunal was satisfied on the balance of probabilities that the Appellant had no reasonable excuse for its failure to submit timely and accurate VAT returns.  The primary responsibility for the accurate and timely submission of VAT returns rested with the Appellant.  The Appellant had delegated that responsibility in its entirety to its group accountant Mr. Nigel Harris without exercising any form or any adequate form of managerial control.  For a period of 12 months no enquiries had been made by the Appellant to ascertain that its VAT responsibilities had been complied with.  The group accountant had been dilatory and inaccurate in the submission of the Appellant’s VAT returns.  The Appellants were aware that Mr. Harris was late in submitting management accounts but made no enquiries to ascertain whether there were failings on his part in exercising his other duties, in particular those in relation to VAT.  Mr. Harris’ failings were due to a number of issues, some private and some work-related.  As the Appellant had no mechanism in place to ensure that its primary responsibility to submit timely and accurate VAT returns was being carried out by the officer to whom it had delegated that function it could not rely on any dilatoriness or inaccuracy on behalf of the group accountant Mr. Harris.  It was the lack of control by the Appellant of its servant Mr. Harris which caused late and inaccurate VAT returns to be submitted and the Appellant’s total reliance on Mr. Harris.  Accordingly the tribunal dismissed the appeal.

The Appellant has a right to apply for permission to appeal against this decision in accordance with rule 39 of the Rules.  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.

JENNIFER TRIGGER

JUDGE
Release Date: 11 May 2010