United Kingdom VAT & Duties Tribunals Decisions

Colour Corporation Ltd v Revenue and Customs [2006] UKVAT V19495 (10 March 2006)

19495

Default surcharge – Reasonable excuse – Uncleared funds

LONDON TRIBUNAL CENTRE

COLOUR CORPORATION LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: JULIAN GHOSH (Chairman)

MRS SHAHWAR SADEQUE MBCS

Sitting in public in London on 7 December 2005

The Appellant in person

Mr Simon Chambers, Solicitor, for the Respondents

© CROWN COPYRIGHT 2006


 


DECISION
1. This is an appeal of a default surcharge issued by Her Majesty's Revenue and Customs Commissioners ('HMRC') on Colour Corporation Limited ('the Company'), a fashion company, on 11^th February 2005, with respect to the period from 1 October 2004 to 31 December 2004, and calculated at 15% of the £24,648.83 VAT outstanding at that date, that is £3,697.32.
2. The Company was represented by two directors of the company Ms Talita Dalmeda and Mr Paul Sexton. Ms Dalmeda and Mr Sexton also gave evidence. Mr Simon Chambers appeared for HMRC.

The Facts

3. The background to the default surcharge under appeal is as follows. The company has defaulted on its VAT payments on a number of occasions since 2002. The first default surcharge issued on the company was on 25 February 2002, when the company missed the due date of 31 January 2002 for the period ended 31 December 2001, and was issued with a default surcharge liability notice on 15 February 2002. No surcharge was imposed on that occasion but the company was warned that it may be liable to a surcharge if it defaulted during the prescribed accounting period starting with the date of that notice and ending 31 December 2002.
4. A surcharge liability notice extension was issued by HMRC on 15 November 2002, as the company had failed to pay VAT due in time for the period ended 30 September 2002. No charge was imposed but the surcharge period was extended from the date of the notice to 30 September 2003. The company was warned that it may become liable to a 5% surcharge on default within that period.
5. A surcharge liability notice extension was issued by HMRC on 16 May 2003, as the company had failed to pay its VAT in time for the period ended 31 March 2003. No charge was imposed but the surcharge period was extended from the date of the notice to 31 March 2004. The company was warned that it may become liable to a 10% surcharge on default within that period.
6. On 15 August 2003, HMRC issued a notice of assessment of surcharge on the company for its failure to pay VAT due for the period ended 30 June 2003. The surcharge was for £4,839.63, 10% of the VAT due for that period. The surcharge period was extended until 30 June 2004. By a letter from HMRC dated 20 August 2003, this was, on appeal, exceptionally subsequently reduced to £1,889.63
7. On 13 August 2004, HMRC issued a surcharge liability notice extension from the date of that notice to 30 June 2004, as the company had failed to pay VAT due in time for the period ended 30 June 2004. No charge was imposed but the company was warned that it may become liable to a 15% surcharge on default within that period.
8. On 12 November 2004, HMRC issued a surcharge liability notice extension from the date of that notice to 30 September 2005, as the company had failed to pay VAT due in time for the period ended 30 September 2004. No charge was imposed but the company was warned that it may become liable to a 15% surcharge on default within that period.
9. On 11 February 2005 HMRC issued the notice of assessment of surcharge that is the subject of the present appeal. The surcharge period was extended to 31 December 2005. The surcharge is 15% of £24,648.83 VAT due for the period ended 31 December 2004. By a letter dated 21 February 2005, the company appealed the assessment on the basis that it had a reasonable excuse for paying the VAT after the due date.
10. The due date for the period ended 31 December 2004 was 7 February 2005. On that date the directors of the company, Ms Dalmeda and Mr Sexton, attempted to make a CHAPS transfer of the £24,648.83 VAT due to HMRC. However the payment was not made by the due date for such payments, and was made the following day instead. In a letter dated 15 February 2005 to the company from a Commercial Manager at HSBC Bank ("the Bank"), Mr Brian Palmer, written at the request of the Company to explain the delay, it is stated by Mr Palmer that a request was made on 7 February 2005 at the Hampstead branch of HSBC to make a CHAPS payment to HMRC for the above sum. However, although sufficient funds to pay the VAT due were in the relevant account, there were not sufficient cleared funds in the Company's account at that time, and so the request was referred to Mr Palmer at the Commercial Centre. In his letter Mr Palmer states that "by the time I had returned to the office and authorised the payment, this was after our 3.30pm cut off time to send a same day payment". The VAT payment was processed and made to HMRC on the next day (8 February 2005).
11. As we observe above, both Ms Dalmeda and Mr Sexton gave evidence for the Company. Both Ms Dalmeda and Mr Sexton were cross examined by Mr Chambers. During the course of that cross examination both Ms Dalmeda and Mr Sexton were taken to all of the letters to which we refer above. We find Ms Dalmeda and Mr Sexton to be reliable witnesses.
12. Ms Dalmeda acknowledged that as a director of the Company, she was responsible for the Company's compliance with its VAT obligations, including the Company completing its VAT return and paying its VAT on time. Ms Dalmeda was not aware of the details of the statutory mechanism for imposing and calculating a default surcharge. However Ms Dalmeda was aware that a surcharge was due if VAT was paid late. Ms Dalmeda was aware that the default surcharge in this case was 15% of the VAT paid late. Ms Dalmeda acknowledged that she was aware that the Company was in default to HMRC (having paid its VAT late) for a number of previous VAT periods.
13. Ms Dalmeda also acknowledged that she was aware some 4 to 5 days before the due date for payment of the VAT in this case (that is 4 to 5 days before 7 February 2005) of the Company's liability for the VAT due on 7 February 2005. In relation to the delay in making the payment of VAT, Ms Dalmeda had telephoned the Bank on 7 February 2005. Ms Dalmeda could not recall the exact time when she had telephoned the Bank and only recalled the Bank employee to whom she spoke as being called "Nicola". The Bank, in response to the telephone call had advised Ms Dalmeda of the funds in the account, which Ms Dalmeda had considered sufficient to pay the VAT to HMRC on that same day. But having subsequently faxed the Bank, instructing the Bank to make the payment of VAT to HMRC, Ms Dalmeda was informed that there was insufficient cleared funds to make the entire payment. Ms Dalmeda said the approximately one half of the funds required to make the VAT payment were not cleared funds.
14. In the course of cross examination Ms Dalmeda acknowledged that she had not clarified, in her earlier telephone conversation with the Bank, whether there were sufficient cleared funds to make the VAT payment that day. In relation to the funds which were cleared funds, equal to approximately one half of the VAT owed to HMRC on 7 February 2005, Ms Dalmeda acknowledged, in response to a question from the Tribunal Chairman, that approximately one half of the VAT payment to HMRC could have been made on 7 February on any view. Ms Dalmeda said that she had not considered making this partial payment because of the panic in which she found herself. Ms Dalmeda acknowledged that no part of the VAT payment was made (or was attempted to be made) until the following day (8 February 2005), when, having received authorisation from the Bank, the entire VAT payment was made to HMRC.
15. Ms Dalmeda said that she had not considered transferring funds from any other accounts to which she had access to make good the shortfall in the Company's account to ensure that the VAT could be paid on time on 7 February 2005. Neither had she considered, said Ms Dalmeda, transferring money from her own credit card account which she said she had previously done to meet a VAT shortfall. Ms Dalmeda said that she had relied on contacting the relevant Manager at the Bank in time to obtain authorisation for the payment to be made to HMRC on 7 February 2005. Ms Dalmeda said that she had not considered contacting HMRC to explain the potential delay as she was panicked by the circumstances.
16. Mr Sexton, in giving his evidence, stated that there was no intention on the part of the Company to pay the VAT due on 7 February 2005 late. Mr Chambers accepted this statement. Mr Sexton accepted that he was responsible (like Ms Dalmeda) to ensure that the Company fulfilled its VAT obligations. Mr Sexton accepted that the Company had left paying its VAT to the last minute in this case. Mr Sexton accepted that he had not checked whether there were sufficient cleared funds to pay the VAT due to HMRC on 7 February 2005. Mr Sexton accepted that it would have been sensible to check whether there were sufficient funds on a day earlier than the day on which the VAT had to be paid to HMRC.
17. Mr Sexton said that poor trading conditions had caused the Company to close a shop in July 2002. But Mr Sexton acknowledged that those poor trading conditions and the closure of the shop had not resulted in the Bank withdrawing any funding to the Company. Mr Sexton said that he had not considered paying the part of the VAT covered by cleared funds on 7 February 2005 because he was in a panic, like Ms Dalmeda.
18. We find, as facts:-

a. The Company (through Ms Dalmeda and Mr Sexton) relied on Ms Dalmeda's telephone call to the Bank on 7 February 2005 to ascertain whether the Company had sufficient funds due to HMRC on that date.

b. The Company did not (through either Ms Dalmeda or Mr Sexton) ascertain whether there were sufficient cleared funds to allow the entire VAT payment o be made on the due date.

c. The Company was aware (through Ms Dalmeda) that it had a VAT liability of £24,648.83, some 4 to 5 days before the due date of 7 February 2005.

d. The Company did not (through either Ms Dalmeda or Mr Sexton) make any attempt to ensure that it could meet its VAT liability on 7 February 2005, other than Ms Dalmeda's telephone call to the Bank on 7 February 2005 and Ms Dalmeda and Mr Sexton trying to contact the Bank for authorisation for the Company to make the entire payment of VAT despite the Company having insufficient cleared funds over the course of 7 February 2005 .

e. The Company (through Ms Dalmeda and Mr Sexton), in relation to fulfilling its VAT obligations, relied on trying to contact an appropriate manager at the Bank to obtain authorisation to make the VAT payment.

f. The Company did not (either through Ms Dalmeda or Mr Sexton) try to contact HMRC at all over the course of 7 February 2005 to explain the potential delay of the payment of the VAT.

g. The Company did not pay the VAT it owed to HMRC to the extent that the Company did have cleared funds on 7 February 2005 (nor did the Company attempt to do so). The only cause of the omission to make the payment of VAT, to the extent that the Company did have cleared funds on 7 February 2005, was the panic in which Ms Dalmeda and Mr Sexton found themselves.

h. We further find, as facts, by inference:-

i. In relation to the VAT due which was not covered by cleared funds, the immediate cause of the late payment of VAT was the insufficiency of cleared funds on the part of the Company.

ii. Two contributory causes to the late VAT payment were, firstly, the reliance on the part of the Company (through Ms Dalmeda and Mr Sexton) on Ms Dalmeda's telephone call to the Bank, in which telephone call Ms Dalmeda omitted to ensure that the funds in the Company's were cleared funds and secondly the Company's reliance (again though Ms Dalmeda and Mr Sexton) on the Bank authorising the Company to make the payment of the entire VAT despite the partial insufficiency of funds. We make this second finding by inference from the terms of Mr Palmer's letter of 15 February 2005, which strongly suggests to us that had the Company (through Ms Dalmeda or Mr Sexton) contacted the Bank early enough (either earlier on 7 February 2005 or on an earlier day) the required authorisation to enable the entire payment of VAT to be made would have been given by the Bank. Neither party suggested otherwise during the course of the hearing. It follows (by inference) that the cause of the late payment cannot be placed at the door of the Bank but rather at the door of the Company which failed to contact the Bank early enough to allow the payment of the VAT to be made in time on 7 February 2005.

iii. No other causes were responsible for the Company's late payment of VAT (no evidence was led by either party to suggest otherwise).

The legislation

19. The relevant legislative provisions on default surcharges are contained in s 59 of the VAT Act 1994. A taxable person is liable to a default surcharge if he fulfils the conditions in s 59(4):

(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.

20. Thus, in order for the company to be liable to a surcharge, it is necessary for a surcharge liability notice to have been served on the company, for the company to have defaulted "in respect of a prescribed accounting period ending within the surcharge period specified in (or extended by) that notice" and for there to have been outstanding VAT in that prescribed period. Section 59(5) sets out the "specified percentage" of the outstanding VAT for which the company will be liable in the event of its meeting the conditions laid down in s 59(4):

(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.

21. "Outstanding VAT" is defined in s 59(6):

(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.

22. A "default" for the purposes of s 59 is defined at s 59(1):

(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.

23. Section 59(2) to (3) contains a mechanism for setting and extending the period ("the surcharge period") in which a surcharge notice may be served.

(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.

24. As is apparent from the background to this case, the surcharge period has been extended on a number of occasions as a result of persistent defaults on the part of the company.
25. Section 59(7) provides a defence to a surcharge notice on the basis of reasonable excuse.

(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).

26. Section 71 of the VAT Act 1994 provides the following guidance as to what constitutes, or rather does not constitute, a reasonable excuse.

(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.

The parties' contentions

27. The Company contends that it has a reasonable excuse for having defaulted in relation to its payment of VAT for the period ended 30 December 2004, namely that it issued instructions to the Bank to make a CHAPS payment for the VAT due on the due date itself (7 February 2005), but that the Bank did not make the CHAPS payment until the following day.
28. HMRC contends that this does not constitute a reasonable excuse as the reason that the branch of the company's bank did not make the CHAPS payment on the due date was that cleared funds were not available on the company's account. In any event s 71 provides that neither insufficiency of funds nor reliance on a dilatory third party constitute reasonable excuses for the purposes of s 59.

Decision

29. Section 59 and section 71 say this: if VAT is paid late in circumstances in which a default surcharge is properly imposed (which is the case here: the Company does not suggest that its late payment of VAT falls outside the terms of section 59(4), or that the "specified percentage" under section 59(5) is anything other than 15%), the default surcharge is payable in addition to the outstanding VAT unless there is a "reasonable excuse" within section 59(7) and section 71. The intention to pay VAT late (or an absence of any intention to pay VAT late) is irrelevant to the liability to a default surcharge. As we observe above, Section 71(1) (a) and (b) expressly provide that neither insufficiency of funds nor any reliance on a dilatory or inaccurate third party constitute reasonable excuses.
30. In relation to monies in the Company's account which were cleared funds equal to approximately one half of the VAT due to HMRC, which could have been paid to HMRC on 7 February 2005, there is no "excuse" (within the meaning of section 59(7)(b) and section 71) at all for paying the VAT late. To the extent that the Company had cleared funds, the failure of the Company was entirely due to the panic in which Ms Dalmeda and Mr Sexton found themselves in, in relation to the VAT due which was not covered by cleared funds. The amount equal to the cleared funds could have been paid to HMRC on 7 February 2005 without any difficulty at all
31. In relation to the VAT not covered by cleared funds, the reason why the CHAPS payment was not made on 7 February 2005, and was referred to the Commercial Centre of HSBC, is that, according to Mr Palmer's 15 February 2005 letter, "cleared funds were not available" in the Company's account at that time to meet the entire VAT payment. This was confirmed by both Ms Dalmeda and Mr Sexton in evidence. Such insufficiency cannot be a reasonable excuse: section 71(1)(a).
32. Even if the Bank as a whole, or Mr Palmer in particular were dilatory in carrying out the Company's instructions (which we do not find to be the case), this cannot constitute a reasonable excuse for late payment: section 71(1)(b). As it happens, there was no evidence led by either party that the Bank or Mr Palmer was so dilatory. In any event the cause of the Company paying its VAT late (in so far as the VAT was not covered by cleared funds on 7 February 2005) was not, on the facts as we have found them in this case, any dilatoriness on the part of the Bank but the omission by the Company to ascertain in time that it had sufficient funds to pay its VAT on time and a failure by the Company to contact the Bank sufficiently early to obtain the necessary authorization to allow the Company to pay the entire VAT it was due on 7 February 2005, despite an insufficiency of [cleared] funds. We find (by inference) that had the Company contacted the Bank sufficiently early, prior to 7 February 2005, authorization would have been given for the payment of the VAT to be made despite the lack of cleared funds for approximately one half of the payment.
33. We should say that we consider that to ascertain whether the Company had sufficient cleared funds to meet its VAT liability on 7 February 2005 early enough to remedy any insufficiency by contacting the Bank is obviously not just good business practice but that such administration is required to reach a minimum standard of even adequate business practice.
34. In relation to the VAT covered by cleared funds on 7 February 2005, the Company has no "excuse" for late payment at all. In relation to the balance of the VAT owed to HMRC on 7 February 2005, the omission on the part of the Company to pay its VAT on time cannot be explained by any reason outside the Company's control (sudden or otherwise) which could not, by the adoption of good business practice by the Company, have been avoided. The causes were an insufficiency of funds and the reliance by the Company on the Bank to authorize a payment despite an insufficiency of funds. Both of these "excuses" are "excuses" which the statute expressly excludes as legitimate reasons for the late payment of VAT, so as to avoid a liability to a default surcharge.
35. We find that the Company does not have a reasonable excuse for failing to pay the VAT due on 7 February 2005. The appeal is dismissed.
36. However we should add this: we found that both Ms Dalmeda and Mr Sexton to be not only reliable witnesses but also that they (jointly) presented their case in a coherent and balanced manner, for which we are grateful. We repeat that Mr Chambers accepts (as we do) that there was no intention on the part of the Company to pay its VAT late. We also record that Mr Sexton handed up copies of literature which acknowledged the Company's contribution to its industry sector (design), which we have read. However, unfortunately, it remains that the only relevant facts in this appeal are the causes of the late payment of VAT (which, in relation to the VAT which was covered by cleared funds on 7 February 2005, was ascribable solely to the panic on the part of Ms Dalmeda and Mr Sexton and in relation to the balance of the VAT, not covered by cleared funds, was ascribable to the Company's lack of sufficient funds and otherwise to the Company's omissions to remedy this insufficiency in time) and the absence of a reasonable excuse for such late payment within the meaning of section 59(7) and section 71. That is why we dismiss the appeal.
JULIAN GHOSH CHAIRMAN RELEASED: 10 March2006

LON/05/545