First-tier Tribunal (Tax)

[2012] UKFTT 136 (TC)

TC01831

Appeal number: TC/2011/02333

Default Surcharge – late payment of tax – suggestion caused by illness – no real evidence- no reasonable excuse – question whether penalty for following period disproportionate – jurisdiction – not disproportionate in sense of “not merely harsh but plainly unfair” – appeal dismissed

FIRST-TIER TRIBUNAL

TAX CHAMBER

Sitting in public at 45 Bedford Square, London WC1 on 28 September 2011

Mr Peter Hooper, Adviser, for the Appellant

Mr Hugh O’Leary Officer with HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2012

DECISION

The Appeal

1.           This is an appeal against default surcharges for the periods 8/10 (the 3 months to 31^st August 2010) and 11/10 (the 3 months to 30^th November 2010).

2.           In respect of the period 8/10 the Appellant says it has a reasonable excuse for late payment of tax because of the illness of the director and only person authorised to make payment.  If the Appellant can demonstrate it has a reasonable excuse for the late payment of tax then we can allow the appeal for this quarter which would have an effect on the rate of default surcharges for subsequent periods. 

3.           In respect of the period 11/10 the Appellant says that if the rate of surcharge is 10% (which it will be unless we allow the appeal against the surcharge for the immediately preceding period) it is excessive and disproportionate whereas if it is reduced to 5% they will withdraw their appeal.  There was some suggestion that they were also appealing against the surcharge for 11/10 on the grounds that they did not have the necessary funds to pay on time but they did not pursue that argument in front of us.

4.           We  heard the evidence in respect of the period ending 8/10 and concluded that the Appellant did not have a reasonable excuse for its failure to pay the tax on time.  We announced our conclusion at the end of the hearing about that quarter and the Appellant asked us to consider the issue of proportionality in respect of the period ending 11/10.  We carefully listened to what Mr O'Leary had to say on behalf of HMRC about our jurisdiction to hear the argument about proportionality (which he argued we did not have) and his submission that if we did have jurisdiction the penalty itself was not disproportionate.  We reserved judgement to consider these issues.

5.           The Appellant’s business was to provide extras for films.  At the time the tax was due for the 8/10 quarter the only person able to authorise payment by the Appellant was Mr Yazdanian who is a director of the Appellant company.

6.           Mr Hooper explained he was not present at a meeting of the Appellant Company held on 6 October when it seems that Mr Yazdanian was taken ill nor did he know the nature of the illness and he did not have any medical evidence about it.  Mr Yazdanian was not present to give evidence.  Mr Yazdanian was unable to authorise payment (he was the only person with the necessary authorisation codes) until 8 October which mean that the payment could not be made on the due date of 7 October.

7.           The effect of section 59(7) Value Added Tax Act 1994 is that if the Appellant can show it has a reasonable excuse for its failure to pay the tax for 8/10 on time its appeal will succeed and the penalty will not be payable.  This will also have the effect of reducing the penalty payable for the following quarter.

8.           It is of course possible for illness to be a reasonable excuse for late payment of tax in some circumstances.  However in this case we were given only a very scanty account of Mr Yazdanian’s illness and it was quite impossible for us to conclude that his illness gave the Appellant a reasonable excuse for its failure to pay tax on time in this case.  We were not given any details of the nature of the illness.  We accept that Mr Hooper had tried without success to get medical evidence and no one who was present at the meeting when Mr Yazdanian was taken ill was available to elaborate on what happened.  We accept that a book keeper (who has now left the company) told the director that she had spoken to someone at HMRC who told her that the penalty would not be imposed since the tax was only one day late but because no trace of this conversation can be found by HMRC within its records and the book keeper was not present to elaborate we cannot accept that this was what she was told.

9.           We dismissed the appeal against the surcharge for the 08/10 period.  No issue of proportionality was put forward for that period.

10.        The Appellant’s turnover increased significantly during the period ending 11/10 because the company won a new contract in connection with a film that required a large number of extras.  The company faced cash flow issues at the time the VAT was due to be paid and the Appellant was unable to make payment on time.  Mr Hooper was very straightforward in explaining that the company knew when the VAT was due to be paid and had chosen to allocate its funds in a way which left it unable to pay the VAT on time and we accept what he said.  He did not pursue  any argument that the Appellant had a reasonable excuse based on an underlying cause for its inability to pay.  We accept that the directors were influenced in making their decision to pay the VAT late (and use available funds to pay other tax liabilities) because of the conversation their then book keeper reported to them as having had with HMRC (that the penalty for 8/10 would be waived) and their belief that the surcharge penalty would be based on 5% rather than 10% of the unpaid tax for the 11/10 quarter.  The VAT was paid in stages and the final amount was paid some 69 days late.  Part (£101,345.78) was paid within 14 days of the due date, a further amount (£81,697.12) was paid on 8 February a further amount (£70,000) was paid on 17 February and the balance (£40,000) was paid on 17 March.

11.        The Appellant’s submission is simple.  The penalty is disproportionate to its underlying purpose of encouraging taxpayers pay on time in relation to a case such as this where the tax due for a single quarter is unusually high compared with the average taken over a year.

12.        Mr O’Leary spoke from notes about the question of the Tribunal’s jurisdiction to hear this submission but was not able to elaborate upon them; in essence he submitted that the decision of the Tribunal in Enersys Holdings UK Ltd v Revenue and Customs Commissioners [2010] UKFTT 20(TC) (which decided it did have jurisdiction) was wrong and was not binding upon us.  If, contrary to what he said about jurisdiction, the Tribunal did have jurisdiction to consider proportionality then he submitted that the present case could be distinguished from Enersys (where there was a delay of one day caused by a human error in timing) since in the present case there was a 69 day delay before the tax was paid in full and the failure to pay tax resulted from a conscious decision of the taxpayer to pay other liabilities first.  He noted there was neither a prior agreement between the Appellant and HMRC to pay late or any record of the payment problems being discussed between them before the due date.  He agreed that although every conversation between taxpayers and HMRC’s National Advice Service about default surcharges are supposed to be recorded it is always possible for the occasional conversation to be missed.  He added that because it is also their usual practice to ask any taxpayer who asks for a penalty to be waived to write in with a formal request to that effect setting out the facts it is unlikely that someone at the Service waived the penalty for the 8/10 period over the phone without making a record of the conversation. 

Our Decision

13.        We conclude it is unlikely that any conversation between the book keeper and HMRC resulted in an agreement to waive the 8/10 penalty. We moved on to consider the issue of proportionality. 

14.        It is not disputed that if we have jurisdiction to hear the proportionality argument then there are only two outcomes.  One is that we dismiss the argument in which case the appeal fails and the penalty is payable in full.  The other is that we find that the penalty is disproportionate and allow the appeal on that ground in which case no penalty is payable.  We do not have power to mitigate the penalty as, perhaps, the Appellant was inviting us to do. 

15.        We read the Respondents written submissions on the question of proportionality.  Mr O’Leary was frank in saying that he could not elaborate on these and Mr Hooper confessed that he struggled to follow them.  We found the submissions focussed mainly on the question of our jurisdiction to consider whether the system as a whole was flawed rather than whether, whilst accepting that the system itself was not flawed, we might consider the proportionality of an individual penalty.  There was some passing reference to jurisdiction in individual cases and in this context to the Human Rights Act as well as the status of the tribunal as an "appropriate court or tribunal" but as I have already said Mr O'Leary was not able to expand upon this argument.

16.        We considered the cases to which the written submissions referred and particularly to the cases of Barnes v Hilton Main Construction [2005] EWHC 1355 (Ch) Enderbey Properties v HMRC [2010] UKFTT 85(TC) Enersys and Greengate Furniture Ltd Customs and Excise Comis [2003] V&DR 178.  We found the following extract from Enersys the most relevant particularly on the question whether the tribunal could consider the proportionality argument in respect of an individual penalty.

“[55]…..Taken together, the observations of the tribunal in Greengate Furniture too show that it was considering both the system and the penalties imposed on the individual appellant.  Its comment that ‘there may be cases where a surcharge does meet the test in Roth’ is in my view incapable of being read in a way which is consistent with the proposition that only an attack on the whole system will suffice.  Of course, the system is not irrelevant to the enquiry since its objective is an important factor, perhaps the most important factor, but I am satisfied that it is open to me to consider the individual penalty without having first concluded that the system, as a whole, is disproportionate.”  

17.        We note that the decision in Enersys is not binding upon us.  We took particular note of what the President said in Enersys that

18.        We respectfully agree with the conclusion of the Tribunal about our jurisdiction and consider that we can look at the individual penalty and determine whether it does meet the test in Roth that it is not merely harsh but plainly unfair. 

19.        In Enersys the tribunal remarked

20.        In this context we considered the facts of the present case.  The penalty, calculated at the 10% rate is just under £30,000.  This penalty is calculated with reference to the entire amount of tax unpaid on the due date  and it is irrelevant that some of the unpaid tax was paid at different times after that date and that only some of it remained outstanding for 69 days.  The amount of the penalty charged here is less than the amount in Enersys (as is the amount of unpaid tax) but importantly, the reason for the late payment is different; the Appellant made the deliberate decision to delay payment and use its available funds to pay other liabilities.  This shows that the Appellant regarded the penalty as something they were prepared to incur so that they could use available monies elsewhere.  If the purpose of the surcharge is to encourage taxpayers to pay on time it failed in its objective in this case.  Whether the Appellant would have taken the same decision if it had been clear it was 10% remains a matter of conjecture.  This is not a case where there is a single day’s delay due to a human error nor are there any other features that make the penalty plainly unfair. The amount of the penalty might be described as harsh but we conclude that in this case it is not “plainly unfair”; indeed we wonder if it is unfair at all.  Accordingly we dismiss the appeal.

21.        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.