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United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Hylton Roofing Ltd v Revenue & Customs [2006] UKVAT V19577 (27 April 2006)
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Cite as: [2006] UKVAT V19577
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Hylton Roofing Ltd v Revenue & Customs [2006] UKVAT V19577 (27 April 2006)
    19577
    VAT DEFAULT SURCHARGE: reasonable excuse – book-keeper departed on one week notice – unable to find a replacement quickly which resulted in backlog of work and delay with VAT return – Appellant had three months to put in place cover arrangements which it failed to do –did not meet the standards of a prudent business person – no reasonable excuse – did the non-receipt of surcharge liability notice invalidate the default surcharge – Respondents not aware of this ground of Appeal until several days before the hearing – additional legal submissions invited on this ground of the Appeal – Appeal adjourned.

    MANCHESTER TRIBUNAL CENTRE

    HYLTON ROOFING LIMITED Appellant

    - and -

    HER MAJESTY'S REVENUE and CUSTOMS Respondents

    Tribunal: Michael Tildesley OBE (Chairman)

    Kathleen Ramm FCA

    Sitting in public in North Shields on 22 February 2006

    Yvonne Kellett, Company Director, for the Appellant

    Richard Mansell of the Solicitor's office of HM Revenue and Customs for the Respondents

    © CROWN COPYRIGHT 2006

     
    DECISION
    The Appeal
  1. The Appellant was appealing against the imposition of two default surcharges. The first was issued on 21 April 2005 in the sum of £3,323.10 relating to the period 1 December 2004 to 28 February 2005. The second was issued on the 14 October 2005 in the sum of £5,869.32 relating to the period 1 June 2005 to 31 August 2005.

  2. The Appellant's grounds of Appeal were set out in a letter dated 16 February 2006 which amended the grounds specified in the Notice of Appeal dated 28 November 2005. The grounds were:

    3. (1) The Appellant did not receive the surcharge liability notice issued on 16 July 2004, thus rendering invalid the surcharges imposed subsequently.
    (2) The Appellant had a reasonable excuse for the period ending 31 August 2005 in that its book–keeper left at short notice which created a backlog of work.
  3. The Appellant acknowledged in its letter dated 16 February 2006 that it did not wish to pursue its original ground of Appeal based on unexpected financial difficulty. The Appellant accepted that the default for the period ending 31 August 2005 was not caused by its inability to pay as it had more than enough funds via its agreed bank overdraft facility to meet any anticipated liability for the period.

  4. At the hearing the Respondents withdrew the default surcharge issued on 21 April 2005 in the sum of £3,323.10.

    5. The Facts Found in relation to the Outstanding Default Surcharge
  5. The Appellant was a family run company established in 1976 and trading as a roofing contractor. The Appellant was a highly reputable company in the North East with a client base of local authorities and public companies. The Appellant employed 27 members of staff, many of whom were long service employees. The Appellant's annual turnover was about £2.2 million, operating from two sites.

  6. The Appellant diversified into building projects which had not been a success. The diversification resulted in financial difficulties for the Appellant which required the directors to invest their personal money into the business to keep it afloat. The Appellant has since decided to abandon the building work, concentrating upon its roofing contracts.

  7. The Appellant's entry in the default surcharge scheme coincided with their financial difficulties arising from the building projects. The directors were genuinely embarrassed that default surcharges had been imposed upon the Appellant.

  8. The Appellant's VAT return for the period 1 June 2005 to 31 August 2005 and payment of £58,693 was received by the Respondents on 12 October 2005 which was after the due date of 30 September 2005. The Appellant was, therefore, 12 days late with its return which resulted in a default surcharge in the amount of £5,869.32, calculated at ten per cent of the tax due in view of previous defaults.

  9. Mrs Kellett gave evidence that the Appellant did not receive the surcharge liability notice dated 16 July 2004 which placed the Appellant in the default surcharge liability scheme. The effect of the notice was that the Appellant would be liable to a surcharge if it defaulted with its VAT payments in respect of a prescribed accounting period until 31 May 2005.

  10. Mrs Kellett explained that the Appellant's post was delivered at its offices at around 9.15am and received by the receptionist. Mrs Kellett or her brother also a director, would open the post. Letters relating to VAT would be placed in the VAT file. Mrs Kellett conducted a thorough search of the Appellants' VAT file but was unable to find the notice dated 16 July 2004. She located the rest of correspondence relating to the default surcharges.

  11. We are satisfied that the Appellant did not receive the surcharge liability notice dated 16 July 2004.

  12. Mrs Kellett accepted that the Appellant received the surcharge liability notice extensions dated 28 January 2005, 21 April 2005 and 14 October 2005 relating to periods ending November 2004, February 2005, and August 2005 respectively.

  13. The surcharge liability notice extensions contained the following words in bold:

    14. "If no surcharge period has been notified to you previously, the period beginning on the date of this notice and ending on ….. is hereby specified as a surcharge period for the purposes of Section 59 or 59A of the VAT Act 1994".
  14. The notices specified the following dates for the ending of the surcharge period, namely 30 November 2005, 28 February 2006 and 31 August 2006, which was 12 months from the accounting period of the default.

  15. The notices also specified that the Appellant was in default which was defined by note 1 as:

    16. "you will be in default if your VAT return or the VAT shown on that return as payable is not received in the VCU by the due date".
  16. We are satisfied that the Appellant had been notified that it was in the surcharge liability scheme until 28 February 2006 which covered the default surcharge imposed on 14 October 2005 in the sum of £5,869.32 for the period ending 31 August 2005.

  17. We are satisfied that the notice of 14 October 2005 specified the reason for the default as set out in note 1 of the notice.

  18. On 21 June 2005 the Appellant's book-keeper gave one weeks notice to Mrs Kellett terminating her employment. The book-keeper agreed to stay until 15 July 2005 to assist with the processing of the accounts. Within the Appellant company the book-keeper was the sole person responsible for the keeping of the accounts and the only person within the company with detailed knowledge of how the accounting processes worked.

  19. On 24 June 2005 the Appellant enlisted the support of its accountants with the recruitment of a new book-keeper. The recruitment process took about six to eight weeks and was complicated by unsuitable candidates applying for the position and some candidates not attending for interview when requested. The new book-keeper was appointed in mid August 2005 and started her employment on 19 September 2005 because she was required to give notice to her existing employers.

  20. In the interim period the Appellant engaged its accountants to assist with payroll services and the processing of accounting information onto the accounting system. The accountants visited the Appellant's office two to three days a week during this period. The accountants performed the minimum amount of duties that were essential to the continued operation of the company in an attempt to keep their costs down because they were aware of the Appellant's cash flow difficulties. Their costs for the period June 2005 to September 2005 amounted to £6,430.

  21. During the interim period Mrs Kellett concentrated on the sales invoices. The accountants' efforts were focussed on the year end accounts. The accountant compiled the VAT return for period ending 31 May 2005 which was received by the Respondents on time. The purchase invoices were left until the new book-keeper commenced her employment on 19 September 2005. Unfortunately when she started a backlog of work had built up including 350 purchase invoices to be inputted onto the computer. As a consequence the Appellant's VAT return and payment for the period ending 31 August 2005 was received by the Respondents on 12 October 2005, 12 days after the due date of 30 September 2005.

  22. Mrs Kellett was not aware that the Appellant could have included estimated figures for the Appellant's purchases in the VAT return. There was no evidence given on behalf of the Appellant that its directors or members of staff had sought advice from HM Revenue and Customs about what steps it could have taken to ensure that the return for the period ending 31 August 2005 was received the due date by the Respondents.

    23. Reasons for Our Decision
    Whether the departure of the book-keeper and the ensuing consequences amounted to a reasonable excuse?
  23. Section 59 of the VAT Act 1994 requires the Appellant to furnish VAT returns and pay the outstanding VAT within one month of the relevant accounting period. The Appellant failed to pay the VAT due within one month for the accounting period ending 31 August 2005.

  24. The Appellant can avoid the default surcharge if it can satisfy the Tribunal on a balance of probabilities that it had a reasonable excuse for not furnishing the VAT payment on time. Insufficiency of funds to pay any VAT due or reliance upon another to perform any task cannot in law amount to a reasonable excuse (section 71(1)(a)(b) of the VAT Act 1994).

  25. The VAT and Duties Tribunal in Greengate Furniture Ltd v Commissioners of Customs and Excise [2003] V & DR 178 described default surcharges as a blunt instrument which only took limited account of the blameworthiness of the trader. The purpose of the default surcharge legislation was to ensure compliance with the payment of VAT with the result that the circumstances that could amount to a reasonable excuse were strictly limited. Essentially the Appellant would have to demonstrate that it met the standards of a prudent business person exercising reasonable foresight and due diligence with proper regard for its obligations to pay VAT on time.

  26. We accept that the Appellant was placed in a difficult position by the sudden departure of its book-keeper. We also accept that the Appellant used its best endeavours to replace its book-keeper and despite its best endeavours was unable to fill the position quickly. The Appellant, however, had over three months from the 21 June 2005 when the book-keeper gave notice to terminate her employment to put in place arrangements to ensure the submission of the VAT return and payment by 30 September 2005.

  27. We are satisfied that during the interim three month period the Appellant did not give sufficient priority to its legal responsibilities to pay the VAT on time. The facts showed that the Appellant concentrated on its year end accounts and processing sales invoices. The Appellant did not commission its accountants to complete the VAT return for the period ending 31 August 2005 which was at odds with its practice the previous quarter when the accountants compiled the Appellant's return. The Appellant did not seek the advice of HM Revenue and Customs about options for completing the return which could have alerted the Appellant to the possibility of including estimated figures in its VAT return.

  28. The Appellant, in our view, was awaiting the start of the new book-keeper to put its accounts in order. In the interim three month period the Appellant had no effective arrangements in place to ensure compliance with its VAT responsibilities. We do not consider that the actions of the Appellant met the standards of a prudent business person exercising reasonable foresight and due diligence with proper regard for its obligations to pay VAT on time.

  29. We would also add that a prudent business person would have plans in place dealing with the departure of a key member of staff. The Appellant appeared to have no contingency for the loss of its book-keeper who had sole responsibility within the Appellant company for the accounts. Her contract of employment allowed her to give notice of just one week to terminate her employment.

  30. We, therefore, find that the departure of the book-keeper did not amount to a reasonable excuse for the Appellant not submitting on time its VAT return and payment for the period ending 31 August 2005.

    31. Did the non receipt of the surcharge liability notice of dated 16 July2004 invalidate the default surcharge for the period ending 31 August 2005?
  31. The Appellant in its letter dated 16 February 2006 contended that it did not receive the surcharge liability notice issued on 16 July 2004, in which case all surcharges imposed on it including the one issued for the period ending 31 August 2005 were invalid. The Appellant cited in support of its submission, Medway Draughting and Technical Services Ltd [1989] STC 346 and Adplates Offset Limited [1989] STC 346. The Appellant made a supplementary submission based on the Tribunal decision in Coleman Machines Ltd MAN/88/437 (3196) regarding whether the notice gave the correct reason for the default.

  32. We found that the Appellant did not receive the surcharge liability notice dated 16 July 2004.

  33. We also found that the Appellant received the surcharge liability notice extensions dated 28 January 2005, 15 April 2005 and 14 October 2005 relating to periods ending November 2004, February 2005, and August 2005 respectively.

  34. At the hearing the Respondents withdrew the default surcharge issued on 21 April 2005 in the sum of £3,323.10 relating to the period 1 December 2004 to 28 February 2005. The Respondents' decision to withdraw the surcharge was influenced by the Appellant's evidence about not receiving the surcharge liability notice dated 16 July 2004.

  35. The Respondents submitted that the surcharge liability extension notices took effect as the original surcharge liability notice which gave us jurisdiction to deal with the default surcharge for the period ending 31 August 2005. The Respondents relied on the Tribunal decision in Goldfinch Transport Ltd v C & E Commissioners [1996] V&DR 484.

  36. At the hearing we did not hear full legal argument on this ground of Appeal. Also the transcripts of the various authorities and Tribunal decisions cited were not submitted at the hearing. We consider that we cannot do justice to this ground of Appeal without receiving further legal argument.

  37. We direct that the Respondents provide the Tribunal and the Appellant with written submissions together with authorities within 28 days from release of this decision. The written submissions to cover the following areas:

    38. (1) What is the legal effect of our finding that the Appellant did not receive the surcharge liability notice dated 16 July 2004 on the validity of the default surcharges imposed on 28 January 2005 and 14 October 2005?
    (2) Although there has been no Appeal against the 28 January 2005 surcharge, does the non-receipt of 16 July 2004 notice render invalid the surcharge liability extension notice issued on 28 January 2005?
    (3) If the surcharge liability extension notice issued on 28 January 2005 is invalid, are the requirements of section 59A(2) met in respect of the default surcharge imposed on 14 October 2005?
    (4) What are the legal consequences of the Respondents withdrawing the default surcharge imposed on 21 April 2005 in respect of the validity of the extension notice issued the same date?
    (5) Does the withdrawal of the 21 April 2005 default surcharge mean the 14 October 2005 assessment of the surcharge at the rate of ten per cent is wrong in accordance with the Tribunal decision in Dow Chemical Company Ltd v C & E Commissioners [1996] V & DR 52.
    (6) The Respondents will address the issues arising from the Tribunal decision in Coleman Machines Ltd MAN/88/437 (3196) raised by the Appellant
  38. The Appellant shall have the right of response which will be served upon the Tribunal and the Respondents within 28 days of receipt of the Respondents' written submission.

  39. Within 28 days of receipt of the parties' written submissions, we shall determine whether to resolve the Appeal without a further hearing.

    40. Decision
  40. We, therefore, adjourn our final determination of the Appeal pending further legal argument.

    41. MICHAEL TILDESLEY
    CHAIRMAN
    Release Date: 27 April 2006

    MAN/05/0832

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