United Kingdom VAT & Duties Tribunals Decisions

CMS Peripherals Ltd v Revenue & Customs [2006] UKVAT V19910 (28 November 2006)

VAT – default surcharges – reasonable excuse? – no – appeal dismissed.

LONDON TRIBUNAL CENTRE

CMS PERIPHERALS LTD Appellant

and –

HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: Richard Barlow (Chairman) Elizabeth MacLeod

Sitting in public in London on 20 September 2006

Ms Elisa Holmes of counsel instructed by Messrs Baker Tilly for the Appellant

Mr Simon Chambers of the office of the solicitor and general counsel to the commissioners for the Respondents

© CROWN COPYRIGHT 2006
DECISION

1. The appellant appeals against its liability to two surcharges imposed in respect of prescribed accounting periods being a two month period ending 31 August 2005 and a three month period ending 30 November 2005. The surcharges were imposed under section 59A of the VAT Act 1994 which applied because the appellant was required to make payments on account.

2. An earlier period being a three month period ending 31 December 2004 is also relevant to this appeal because that is the period in which an earlier default led to the issue of a surcharge liability notice which in turn meant that the defaults for the later periods were potentially subject to the surcharges.

3. If the appellant has a reasonable excuse for the earliest relevant period (12/04) the surcharge for the second relevant period will be discharged and the rate of surcharge for the third relevant period will be reduced. If the appellant has a reasonable excuse for the earliest and the second relevant periods (12/04 and 11/05) the surcharge for the last period will be discharged as well.

4. The appellant does not offer any excuse in respect of the third period so we only have to consider the excuses put forward for the first two periods.

5. We heard evidence from Mr Nigel Watson, the appellant's financial controller, who had made a witness statement that was accepted as his evidence in chief though Ms Holmes asked a few supplementary questions and he was cross examined by Mr Chambers. We should say in fairness to Mr Watson that he only took up his position on 25 August 2005 and effectively only in early September 2005 because he had pre-booked holiday starting just after 25 August and that the relevant defaults were not caused by him because other members of staff dealt with the VAT return for period ending 08/05 even though he was in post by the time it was made.

6. The company trades in the wholesale supply of computer peripherals and other electronic products and had a turnover of £79 million in 2005. At the relevant time it employed a finance controller, a management accountant and seven other staff in the accounting department.

7. The appellant made two payments on account on time for the period ending 12/04 and the return was submitted on time. That return showed a sum of £2,213,095.70 due as net VAT payable in box 5 of the return. The description next to box 5 reads "Net VAT to be paid to Customs or reclaimed by you. (Difference between boxes 3 and 4)". A VAT return is required to be made by regulations made under paragraph 2 of Schedule 11 of the VAT Act and the form is prescribed by regulation 25 of the Value Added Tax Regulations 1995 and Form 4 in Schedule 1 to those Regulations. The return made in respect of period 12/04 complied with Form 4 which contains the words quoted.

8. In fact, the amount of tax due for the period was not £2,213,095.70 as a member of the appellant's staff realised soon after completing the return but before actually submitting it. That member of staff thought the amount was overstated by £1,029,536.33 by reason of "deferred VAT paid" and also deducted the two payments on account to arrive at a balancing figure of £690,043.37 and arranged for payment of that sum to be made through the banking system. The relevant amounts were written on the form outside any of the boxes and the amounts being deducted were shown in brackets.

9. Subsequently, a voluntary disclosure was made to Customs claiming that a correction of £1,029,536.33 was appropriate but on inquiry it turned out that that figure was overstated by £469,772.33.

10. A default arises for the purposes of the surcharge regime by reason of section 59(1) or by reason of a combination of that sub-section and section 59A(1) in the case of a trader making payments on account if the trader has not paid the amount "shown on the return as payable by him" and regulation 25 requires the return to show that amount. A person who under states the amount due may well be subject to other penalties but the default surcharge regime therefore focuses on the statement actually made on the return.

11. In this case it could be said that the amount stated was the lower amount actually paid which does appear on the form. We hold that the "amount stated" and referred to in the legislation is clearly intended to be the amount stated in box 5. There might be cases (we have reached no firm conclusion that there can be) where a sufficiently unambiguous statement elsewhere on the return would allow a taxpayer to argue that he had stated a different amount than that in box 5 so that payment of that different amount would not amount to a default. However, in this case we do not consider that the amount of £690,943.37 has been stated as the amount due in sufficiently unambiguous terms for it to have superseded the statement in box 5 and so we are satisfied that there has been a default in period 12/04.

12. Ms Holmes did not in fact argue to the contrary.

13. The appellant's case as far as period 11/04 is concerned is that it has a reasonable excuse for the error that gave rise to the underpayment.

14. A new member of staff prepared the return and it was the first time she had done so. That member of staff realised after completing the return that deductions relating to importations had not been taken into account and adjusted the payment accordingly but incorrectly, as it later transpired, as explained above. The appellant puts forward as the reasonable excuse for that default that it was reasonable for the member of staff concerned to withhold payment of a sum which she thought exceeded a million pounds rather than to make an overpayment of that amount.

15. Mr Watson said when he was cross examined that two members of staff had been involved in making the return. The lady who signed it had joined the company on 29 September 2004 and the other member of staff was a man who had joined on 17 March 2003. They had therefore been in post four months and ten months respectively when the return was submitted. The lady was at least part qualified as an accountant and the man was the financial controller at the time.

16. We find that the appellants did not have a reasonable excuse on that basis. A company with a turnover as large as the appellant should, indeed must, employ staff who are capable of calculating its VAT liabilities correctly. We acknowledge that anyone can make a mistake. We might well have held that it would be reasonable for someone who has made a mistake that would lead to a large overpayment of VAT to correct it by a manual amendment to the return. We do not agree that a 'correction' that led to an underpayment of nearly £470,000 can be excused on the grounds that if no correction had been made there would have been an overpayment. Taxpayers are rightly regarded as being under a duty to declare the correct amount of tax (and are required by law to do so). To adopt the attitude that they would make a hasty correction to avoid overpaying when that gave rise to a significant underpayment is, we conclude, not reasonable.

17. Period 12/04 therefore established a default surcharge period though it attracted no surcharge as it was not a second default within any default surcharge period.

18. In order to avoid the 2% surcharge for period 08/05 and therefore to reduce the rate of surcharge for 11/05 from 5% to 2% the appellant must show that there is a reasonable excuse for the default in period 08/05.

19. That period was a two month period because a member of staff had requested a change of period ends to bring them in line with the appellant's own accounting year end.

20. The appellant accepts that its return was submitted five days late and that the balancing payment was made five days late. The second payment on account was also one day late. The return and balancing payment should have been in the Commissioners possession by 30 September 2005.

21. The appellant asserts that it has a reasonable excuse for those defaults because of a turnover of staff which was described by Ms Holmes as unexpected. What had happened was that the financial controller who had been in post from March 2003 was replaced from 18 July 2005 by a new controller, though there was a short overlap when both were working for the appellant. The new controller left on 22 September 2005 having served for just over two months and by that date Mr Watson had been in post for nearly a month and the lady who had partly dealt with the 12/04 return was still in post.

22. We accept that the new financial controller left unexpectedly and Mr Watson told us that he considered the lady who was still working for the appellants was not very competent and he ascribed the defaults to those factors. Even if he is right we do not accept those facts are a reasonable excuse. The controller left eight days before the return was due to be made. The appellant's accounting department still had the lady working in it at the relevant time who had previously dealt with VAT returns and indeed signed them (she signed the return for 12/04) and if she was not competent the appellant should have ensured that someone who was competent dealt with the VAT return. A company with the appellant's resources and, we would add, with its responsibilities can be expected to ensure that it has the necessary staff with the necessary expertise in place to deal with changes and if the lady was incompetent (about which we make no finding) then the appellant had had ample opportunity to replace her. Also a company with the appellant's resources should have been able to call its own accountants in or obtain other alternative cover if a short term staff problem made that necessary.

23. No excuse has been put forward for the defaults in period 11/05 and we have found that the excuses put forward for the two relevant periods are not reasonable excuses. It follows that the appeal is dismissed and that surcharges of £12,661 and £98,317.70 are payable in respect of periods 08/05 and 11/05 respectively.

24. The respondents did not ask for costs and we make no award of costs.

CHAIRMAN
RELEASED:28 November 2006

LON/06/0686