First-tier Tribunal (Tax)

[2010] UKFTT 504 (TC)

TC00759

Appeal number:  TC/2010/03930

VAT – Default surcharge – no reasonable excuse - Appeal dismissed.

FIRST-TIER TRIBUNAL

VAT

SCOTPACKAGING LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents

TRIBUNAL: JOHN M BARTON, WS (Judge)

EILEEN SUMPTER

Sitting in public in Glasgow on Friday 16 July 2010

Gerrard McSherry, Director, Scotpackaging Ltd, for the Appellants

Ms Ros Shields of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.      The Tribunal dismisses the appeal by Scotpackaging Ltd (“Scotpackaging”) against against the decision of Her Majesty’s Revenue and Customs (“HMRC”) to impose default surcharges of £975.21, £2,184.95, £1,856.16 and £1,654.91 (a total of £6,671.23) under the provisions of under s59 of the Taxes Management Act 1970 (“TMA”).

Preliminary

2.     On 20 April 2010, Scotpackaging lodged a formal appeal against surcharges of £975.21, £2,184.95 and £1,856.16 a total of £5,016.32. 

3.     The Appeal was set down for hearing on 16 July 2010. At the hearing it was disclosed that in respect of the quarter to 31 March 2010, Scotpackaging were liable to a further surcharge of 15% amounting to£1,654.91.

4.     Parties were agreed that this appeal should also cover this further surcharge of £1,654.91.

Material Facts

5.     In respect of the quarter to 30 September 2007, Scotpackaging were liable to pay VAT of £13,884.89 not later than 31 October 2007. Payment was received by HMRC on 9 November 2007.  Scotpackaging were accordingly in default and HMRC served a Surcharge Liability Notice on Scotpackaging to take effect for a period to 30 September 2008.

6.     In respect of the quarter to 31 December 2007, Scotpackaging were liable to pay VAT of £13,712.40 not later than 31 January 2008. Payment was received by HMRC on 8 February 2008.  In terms of s 59(4) and s 59(5) of the Value Added Tax Act 1994 (“the VAT Act”) Scotpackaging were liable to a surcharge of 2% but as the amount was less than £400, the surcharge was reduced to nil.  The effect of this further default was to continue the surcharge liability period to 31 December 2008.

7.     In respect of the quarter to 31 March 2008, Scotpackaging were liable to pay VAT of £7,690.62 not later than 30 April 2008. Payment was received by HMRC on 8 May 2008.  In terms of the said legislation, Scotpackaging were liable to a surcharge of 5% but as the amount was less than £400, the surcharge was reduced to nil.  The effect of this further default was to continue the surcharge liability period to 31 March 2009.

8.     In respect of the quarter to 31 March 2009, Scotpackaging were liable to pay VAT of £9,752.11 not later than 30 April 2009. Payment was received by HMRC on 5 June 2009.  In terms of the said legislation, Scotpackaging were liable to a surcharge of 10% amounting to £975.21.  The effect of this further default was to continue the surcharge liability period to 31 March 2010.

9.     In respect of the quarter to 30 September 2009, Scotpackaging were liable to pay VAT of £14,566.34 not later than 31 October 2009. Payment was received by HMRC on 30 November 2009.  In terms of the said legislation, Scotpackaging were liable to a surcharge of 15% amounting to £2,184.95. 

10.  In respect of the quarter to 31 December 2009, Scotpackaging were liable to pay VAT of £12,374.45 not later than 31 January 2010. Payment was received by HMRC on 6 February 2010.  In terms of the said legislation, Scotpackaging were liable to a surcharge of 15% amounting to £1,856.16.

11.  In respect of the quarter to 31 March 2010, Scotpackaging had been liable to pay VAT of £11,082.74 not later than 30 April 2010. Payment was received by HMRC on 24 May 2010.  In terms of the said legislation, Scotpackaging were liable to a surcharge of 15% amounting to £1,654.91.

Legislation

12.  Section 59 of the Value Added Tax Act 1995 (“VAT Act 1995”) is headed “The default surcharge” and provides

(1) Subject to subsection (1A) below if, by the last day on which a taxable person is required in accordance with regulations under this Act to furnish a return for a prescribed accounting period—

(a)   the Commissioners have not received that 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,

then that person shall be regarded for the purposes of this section as being in default in respect of that period.

(1A) A person shall not be regarded for the purposes of this section as being in default in respect of any prescribed accounting period if that period is one in respect of which he is required by virtue of any order under section 28 to make any payment on account of VAT.

(2) Subject to subsections (9) and (10) below, subsection (4) below applies in any case where—

(a) a taxable person is in default in respect of a prescribed accounting period; and

(b) the Commissioners serve notice on the taxable person (a “surcharge liability notice”) specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of the period referred to in paragraph (a) above and beginning, subject to subsection (3) below, on the date of the notice.

(3) If a surcharge liability notice is served by reason of a default in respect of a prescribed accounting period and that period ends at or before the expiry of an existing surcharge period already notified to the taxable person concerned, the surcharge period specified in that notice shall be expressed as a continuation of the existing surcharge period and, accordingly, for the purposes of this section, that existing period and its extension shall be regarded as a single surcharge period.

(4) Subject to subsections (7) to (10) below, if a taxable person on whom a surcharge liability notice has been served—

a) is in default in respect of a prescribed accounting period ending within the surcharge period specified in (or extended by) that notice, and

(b) has outstanding VAT for that prescribed accounting period,

he shall be liable to a surcharge equal to whichever is the greater of the following, namely, the specified percentage of his outstanding VAT for that prescribed accounting period and £30.

(5) Subject to subsections (7) to (10) below, the specified percentage referred to in subsection (4) above shall be determined in relation to a prescribed accounting period by reference to the number of such periods in respect of which the taxable person is in default during the surcharge period and for which he has outstanding VAT, so that—

(a) in relation to the first such prescribed accounting period, the specified percentage is 2 per cent;

(b) in relation to the second such period, the specified percentage is 5 per cent;

(c) in relation to the third such period, the specified percentage is 10 per cent; and

(d) in relation to each such period after the third, the specified percentage is 15 per cent.

(6) For the purposes of subsections (4) and (5) above a person has outstanding VAT for a prescribed accounting period if some or all of the VAT for which he is liable in respect of that period has not been paid by the last day on which he is required (as mentioned in subsection (1) above) to make a return for that period; and the reference in subsection (4) above to a person's outstanding VAT for a prescribed accounting period is to so much of the VAT for which he is so liable as has not been paid by that day.

(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).

13.  Section 71(1) of the VAT Act 1995 provides -

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.

Submissions

14.  In the letter from Scotpackaging which accompanied their Notice of Appeal (which was directed to the penalties then totalling £5,016.32), it was stated that they were a small company located in Hillington Industrial Estate near Glasgow. The previous directors of the company had made a VAT payment on 5 June 2009 which was 36 days later than the due date. The subsequent VAT payments made on 5 August 2009 and 4 February 2010 which were 5 days and 4 days late respectively. It was submitted that the “inordinately huge” penalty arising from the late payment in June 2009 was disproportionate to the "offence".

15.  Trade in the UK had gone through one of the hardest economic periods since 1929 and it was draconian to impose a financial penalty of that magnitude where the only loss to HMRC was effectively the interest which may have been made on the monies for the relevant periods of 36, 5 and 4 days.

16. Scotpackaging, like many thousands of other companies, had found it increasingly difficult to trade profitably in recent years while striving to retain the employment of over 20 staff; and it was accordingly submitted that the imposition of a penalty of £5,016.32 would have serious consequences in respect of the future of the business in its current form.

17.  The amount of penalty applied by HMRC was unreasonably excessive with regard to the payments arriving late; and it was suggested that there should be some “degree of reason” in order to assist a small UK company during extremely tough trading conditions.

18.  In addressing the Tribunal, Mr McSherry explained that he did not dispute that his company had failed to make the above payments on the due dates, but he submitted that the resulting surcharges were disproportionate to HMRC’s loss of interest, which he calculated at £12.81. His explanation for the failures was a lack of funds resulting from late payment by customers. He had been unaware of the Budget announcement in 2009, otherwise he would have made an appropriate application to HMRC.

19.  In reply, Ms Shields pointed out that Scotpackaging had been in continuing default since June 2007.

Reasons

20.   The Tribunal has had due regard to Mr McSherry’s submission based on the principle of proportionality, but the various levels of surcharge are clearly set out in s 59(4) and s 59(5) of the VAT Act. The Tribunal has also taken into account that many of the failures were of short duration; but in any collection procedure, it is necessary to set down a specific time for payment. Scotpackaging failed on successive occasions. Section 59 provides for a gradual increase in the rate of surcharge, and that company had only itself to blame for allowing the rate of surcharge to rise to the maximum of 15%. It is also significant that such surcharge was a proportion of the outstanding VAT, thereby relating that charge to the size of the particular business.

21.   Consideration was given to Mr McSherry’s explanation that the various failures were caused by a lack of funds resulting from late payment by customers. The question is whether such cash flow problem constituted a “reasonable excuse” for the purposes of s59(7) of the VAT Act. The expression “reasonable excuse” is not defined except that s71(1)(a) declares that an “insufficiency of funds to pay any VAT due is not a reasonable excuse”. The situation with Scotpackaging was not a case where the exercise of reasonable foresight and of due diligence would not have avoided the insufficiency of funds which led to the default, such as a major client failing to pay or delaying payment. Mr McSherry was aware of his company’s financial position and that he was required to pay VAT by a specified date every three months. The company’s cash flow problem was an incident of business activity, which as a general rule cannot form the basis of a reasonable excuse for failure to account for tax on the due date, and the Tribunal finds that it was not a reasonable excuse in this case.

22.  Mr McSherry had been unaware of the concession in the 2009 Budget.  However, this concession had been widely publicised, and the Tribunal does not accept as a reasonable excuse that he was unaware of this concession.

23.  The appeal against the aggregate surcharges of £5,016.32 and the further surcharge of £1,654.91 is accordingly dismissed.

24.  This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

MR JOHN M BARTON, WS

TRIBUNAL JUDGE

RELEASE DATE: 20 October 2010

© CROWN COPYRIGHT 2010