United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V20204

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Club Kaede Ltd v Revenue & Customs [2007] UKVAT V20204 (25 June 2007)

20204

Default surcharge – Section 59(7)(a) – Does it provide exemption if either limb is satisfied or does it depend on the default – Will prompt despatch of VAT mean that there is no default if the return is late? Held: it depends on the default – Reasonable excuse – Difficulties with landlord – Held: No reasonable excuse

LONDON TRIBUNAL CENTRE

CLUB KAEDE LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: CHARLES HELLIER (Chairman)

RACHEL ADAMS FCA, FTII

Sitting in public in London on 25 April 2007

Tony Ezedum, the company secretary of the Appellant, for the Appellant

Pauline Crinnion instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Club Kaede appeals against a default surcharge in respect of the 08/06 VAT period (the period ending on31 August 2006). The surcharge was 15 per cent of the VAT paid late for that quarter of £10,000.

Tony Ezedum presented the Appellant's case and gave evidence before us. We found him a capable advocate and a believable witness of fact. We find the following facts on the basis of that evidence and the copy documents before us.

The Appellant's business is the operation of a Japanese Style bar and restaurant. It runs the business from the basement of 61 Brewer Street London W1. These premises are let to it by KKTK Ltd which occupies other parts of that building. Mrs Kuzoko Quinn is the sole director of the Appellant; a Mr Kimura is a director of KKTK Ltd.

The Appellant's annual turnover in the relevant period was between about £400K and £450K. Approximately 90 per cent of its customers paid by credit or debit card. The Appellant's understanding of the claims of the card facility providers is that cleared funds in respect of sales paid for by such cards should normally be received some five days after the use of the card. In practice they generally receive them within eight days. There was an occasion in 2005 when the terminal used by the Appellant broke down and there were some further delays in receipt of funds, but in that case it appears that funds were received within a month after the use of the card. Some customers, mainly those attached to the larger Japanese corporations such as Nomura or Toyota are invoiced and pay sometime after the receive of the invoice.

The business is profitable. It made a net profit of £13K and £25K in the years ended 30 June 2005 and 2006 respectively.

Mrs Quinn took charge of the business (and we assume beneficial ownership of the Appellant's share capital) in 1999. She agreed at that time to a tenancy of the premises from KKTK Ltd at a rent of £4,000 per month. The business thrived.

At a later time Mr Kimura suggested to Mrs Quinn that he should take an interest in the company. Mrs Quinn said no. Mr Kimura then sought on behalf of KKTK Ltd an increased rent. The rent paid changed over time from £4K to £5K, £5.5K, £6K, and back to £5.5K per month. Mrs Quinn apparently felt obliged to pay the rent demanded because the topography of the premises meant that KKTK Ltd could lock Club Kaede out.

Apparently KKTK's correspondence with the local valuation office had caused some difficulties in the determination of the business rate attributable to the premises. It seems that there may have been some discrepancy between the rent paid and that disclosed to the valuation office.

Mr Ezedum was appointed in about 2003. On taking up his appointment he realised that the company had a number of problems. The books had not been kept properly. He appointed accountants to investigate. They reported unpaid PAYE and NI liabilities. Mr Ezedum organised their payment during 2004. He has been investigating the position in relation to the rent the Appellant should pay and its business rates liability. He is endeavouring to ensure that these are put on a sound footing for the future.

The management of the Appellant's cash flow was at material times disturbed by the effects of varying rentals payments and the occasional slow receipt of funds from credit or debit card transactions.

In respect of the quarterly VAT periods 02/00, 05/03 and 11/03, and each of the quarterly VAT periods from 05/04 to 05/06 the Appellant had either failed to secure that its VAT return reached the Respondents in time or failed to secure that payment of all the VAT payable in respect of the period reached the Respondents in time. The Respondents served surcharge liability notices, or surcharge liability extension notices in respect of each of these periods.

For the period 08/06 (the period under appeal) the VAT return was received on 12 September 2006, 18 days before the due date, but of the VAT shown as due on that return, only £3,618.73 was paid before the due date and the balance of £10,000 was paid after the due date.

The Applicable Provisions of the VAT Act 1994

Section 59 VATA 1994 provides so far as is relevant to this appeal:-

"59(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 …

[Subsection (2) and (3) concern the service of a surcharge liability notice or an extension of such a notice.]

(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.

[Subsections (5) and (6) concern the quantum of the surcharge liability.]

(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).

(8) For the purposes of subsection (7) above, a default is material to a surcharge if –

(a) it is the default which, by virtue of subsection (4) above, gives rise to the surcharge; or …

In this decision we use the phrase "despatched promptly" to paraphrase the words in subsection (7)(a): "dispatched at such time and in such a manner that it was reasonable to expect that it would be received … within the … time limit."

Section 71(1)VATA 1994 provides that for the purposes of section 59:-

(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.

The Parties' Arguments

Mr Ezedum advanced two arguments on behalf of the Appellant. First he said that properly construed the effect of section 59(7)(a) was that if the VAT return had been received in time there was no default. Second, he said that in any event the Appellant had a reasonable excuse for late payment.

(a) the Construction argument

Mr Ezedum notes that section 59(7)(a) effectively exempts a person from liability in respect of what would otherwise be a default if (with our emphasis):

"the return OR, as the case may be the VAT shown as due on the return was despatched [promptly]".

He says that the proper construction of these words means that if either the return or the VAT was promptly despatched then what would otherwise be a default is ignored. In relation to the words "as the case may be", he says that these refer to the circumstances of the case. If the case – the circumstances of the case – is such that they justify a conclusion that either the return was despatched promptly or that the VAT was despatched promptly then there is a no default.

The Respondents dispute this construction. In a letter written to the Appellant on 23 April 2007 and received by the Appellant after the hearing they say:

"It has been explained that not every return submitted to the Commissioners will be a payment return (as the case may be), it may be a repayment return and will not therefore be accompanied by payment. However, if it is a payment return that shows an amount of Value Added Tax (VAT) due, as such both the return and the payment must be received by the Commissioners by the due date."

Mr Ezedum says that the Respondents in this letter are saying that "as the case may be" is referring to a repayment return (ie a return which discloses an amount payable by the Commissioners rather than to them). But he says that the section is not that specific: it does not say:

"(a) as the case may be the repayment return, or as the case may be the VAT shown on the return was despatched …";

or even:

"(a) the repayment return or, as the case may be, the VAT return was despatched …".

The phrase in the section was "return" not "repayment return". And in any event in the case of a repayment return no surcharge could be exigible since any surcharge was computed by reference to the VAT due which had not been paid – which would be nil.