United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V20409

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Vital Touch Ltd v Revenue & Customs [2007] UKVAT V20409 (24 October 2007)

20409

VAT – default surcharge – section 59 VATA 1994 – mistake by Appellant in setting the date for internet banking transfer – reasonable excuse – appeal dismissed

LONDON TRIBUNAL CENTRE

VITAL TOUCH LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: CHARLES HELLIER (Chairman)

RICHARD CORKE FCA

Sitting in public in Plymouth on 6 September 2007

Martin Oakes-Monger, director of the Appellant, for the Appellant

Gloria Orimoloye, solicitor, instructed by the Acting solicitor for HMRC, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Vital Touch Ltd appeals against a default surcharge of £638.65 imposed in respect of the 01/07 quarter, that is to say the quarter ending 31 January 2007, and being 5% of the VAT payable in respect of that quarter.

The Statutory Provisions

Section 59 VAT Act 1994 provides for the imposition of default surcharges. Subsection (1) provides that if the VAT due for a quarter or the VAT return for a quarter is received late, the taxpayer is to be regarded as being in default for that quarter. If a person is in default in respect of a quarter then the Commissioners may serve a Surcharge Liability Notice. This notice specifies a surcharge period of 12 months from the end of that quarter. If the taxpayer defaults again for a quarter ending within those 12 months then two consequences follow. First the Commissioners may serve a further notice extending the surcharge period by a further period of 12 months from the end of the quarter for which the later default occurred; and second, the taxpayer may become liable to a surcharge (subsection (4)). The surcharge is calculated as 2%, 5%, 10%, or 15% of the VAT paid late for the quarter of the later default, the percentage depending upon whether the later default was the first, second, third, or fourth or subsequent default in the surcharge period.

Subsection (7) however provides some measure of relief from this surcharge regime. It provides that if a person who would otherwise be liable to surcharge satisfies the Commissioners, or on appeal the tribunal, that in the case of a default material to the surcharge:-

"(a) the return, or as the case may be, the VAT shown on the return, was dispatched 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 dispatched."

then he shall not be liable to the surcharge and shall be treated as not having been in default in respect of the period in question.

Section 71 VAT Act 1994 limits the circumstances which can give rise to a "reasonable excuse" by providing that:

(a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and

(b) where reliance is placed on any 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."

Section 25 of the VAT Act requires a taxable person to "account for and pay VAT " as shall be prescribed in Regulation. The VAT Regulation 1995 make the following provision:-

(i) Regulation 25(1) requires a person who accounts quarterly to make his return no later than the last day of the month after the end of each VAT period. Regulations 25(4A) to (4K) permit a return to be made by certain electronic means. Regulation 25(4L) provides that

"Additional time is allowed to make a return for which any related payment is made solely by means of electronic communications … That additional time is only as the Commissioners may allow in a specific or general direction, and such a direction may allow different times for different means of payment."

(ii) Regulation 40(2) requires the VAT payable for the period to which a return relates to be paid no later than the date on which the return is required to be made. Where a return is made by electronic means Regulation 40(2A) requires the payment of the VAT to be made by acceptable electronic means. Regulation 40(3) permits the Commissioners to allow or direct otherwise, and Regulation 40(4) makes clear that such a direction may allow additional time for a payment made by electronic means.

The Commissioners' directions

In the VAT Guide (April 2002) which is published by the Commissioners, at paragraph 21.3.1 it is stated:-

"If you chose to pay the VAT shown as due on your return by Bankers Automated Clearing System (BACS), Bank Giro Credit Transfer, or Clearing House Automated Payment System (CHAPS), you may receive up to 7 extra calendar days for the return and the payment to reach us. Here are some important facts you need to know if you want to benefit from this concession –

…

- Payment must be in our bank account on or before the 7^th calendar day. If the 7^th day falls on a weekend, we must receive payment by the Friday …

- To make sure that your payment reaches us in time, you should check with your bank how many days they need to complete the transaction …"

It seems to us that this is properly to be construed as a general direction given by the Commissioners pursuant to their powers in Regulations 25 and 40. The effect of the direction is therefore that an electronic payment will be treated as made in time if it "reaches" the Commissioners' bank account by the 7^th day after the end of the month following the last day of the VAT period in question.

The Commissioners are empowered to make other specific or general directions. There was no evidence before us of any other general direction which would affect the import of the direction in the VAT Guide as it applied to the Appellant. The only evidence before us which might theoretically at least be regarded as containing a specific direction applicable to the Appellant was that of Mr Oakes-Monger's telephone call with the Respondents' telephone helpline. Mr Oakes-Monger did not contend before us that a relevant direction was given in that telephone call: he was sensible not to do so – there was nothing in the transcript which indicated any direction as to timing which departed from that in the VAT Guide.

The evidence and the facts

We had before us copies of correspondence between the Respondents and the Appellant, a listing of the Appellant's receipts and payments in the period 23 February 2007 to 2 March 2007, and a transcript of a telephone conversation between a telephone advice operator of the Respondents, Justin Gough, and Mr Oakes-Monger. We heard oral evidence from Mr Oakes-Monger whom we found to be a candid and honest witness.

The transcript of the telephone conversation played a crucial role in our decision making. It was produced at the hearing by the Respondents and had not previously been shown to the Appellant although it had been referred to in a letter from the Respondents to the Appellant. When it was produced by the Respondents Mr Oakes-Monger read it. Having done so he told us that it was "pretty much right".

We make the following findings of fact:-

(1) The Appellant has been in business for 5 or 6 years. It markets aromatherapy products. Its directors are Mr Oakes-Monger, his wife and a third person who takes little active part in the business. Mr Oakes-Monger deals with the VAT returns;

(ii) For the periods ending 31 January 2006 ("01/06") onwards the Appellant has submitted its VAT returns electronically. Mr Oakes-Monger normally arranges electronic payment of the VAT via the Appellant's internet banking facility at the same time as he electronically submits the return for a period.

(iii) For the period 01/06 the VAT return was submitted electronically on 7 March 2006; it was thus received within the 7 days extension allowed by the Commissioners pursuant to Regulation 40 and was on time. The VAT however, although its payment was initiated on the same day as the return, did not reach the Respondents' account until 9 March 2006 because the banking system did not provide same day credit for internet banking payments between different banks. It was therefore 2 days late. The Commissioners, however, did not serve a Surcharge Liability Notice in respect of this default, instead they wrote to the Appellant suggesting that it sought help and warning of the possibility of the surcharge regime applying in future. The letter noted the possibility of the Appellant being eligible for the cash accounting scheme.

(iv) For the period 04/06, the VAT return was submitted electronically on 9 June 2006, 2 days late, and the VAT payment reached the Commissioners on 13 June 2006. (The extra delay in the receipt of the payment was again due to the time taken for the banking system to clear the payment to the Commissioners' account.)

The reasons for the delay in the submission of the return and the electronic order to pay the VAT were these:

(a) Mr Oakes-Monger paid the VAT (via the internet facility) at the same time as he made the electronic filing of the return;

(b) at the end of May 2006 the business had cashflow problems: it had spent a lot of money developing the business;

(c) eventually Mr Oakes-Monger made a personal advance to the Appellant of £5k: his payment cleared on 9 June 2006;

(d) only after this was the Appellant able to pay the VAT, and it made the internet banking transfer on the same day, submitting the VAT return at the same time.

The Respondents issued a surcharge liability notice in respect of this period specifying the period ending 12 months after 30 April 2006. That notice referred to the possibility that the Appellant might use the cash accounting scheme.

(v) The Appellant's return for 10/06 was submitted on 4 December 2006, 3 days before the deadline. Mr Oakes-Monger initiated the internet banking funds transfer to pay the VAT on the same day but the cleared funds were received on 8 December 2006, one day late again because of the vagaries of the banking system.

The Respondents issue a notice extending the surcharge period but did not assess the 2% surcharge. In their notice they said "The Commissioners do not propose to surcharge you on this occasion … If you default again … you may become liable to a surcharge assessment calculations at the rate of 5%." Again the notice referred to schemes which might ease the burden on the Appellant.

(vi) The Appellant's return for the following period, 01/07 was submitted electronically on 28 February 2007, 7 days early. Its payment of the VAT did not however reach the Commissioner's bank account until 8 March 2007, one day late. The Commissioners assessed a default surcharge of 5%.

During February 2007 the Appellant had been expecting a cheque for £23k from its largest customer. That customer usually paid on time but this month it was late. Without that receipt the Appellant did not have the funds to make the VAT payment. The money was received by cheque on 28 February. Mr Oakes-Monger then knew that when that cheque had cleared he would have the funds to pay the VAT. He checked with his bank and learned that he should allow 5 working days for the cheque to clear. He submitted his VAT return that very day. He gave instructions for the VAT payment to be made from the bank account on 6 March. This VAT payment took 2 days to clear and arrived at HMRC's bank account on 8 March.

(vii) On Friday, 2 March 2007 Mr Oakes-Monger telephoned the VAT telephone helpline. He explained that he could not make the VAT payment before Tuesday 6 March because he was waiting for a cheque to clear and that he usually paid by internet banking. This was the telephone conversation referred to in paragraph 8 above. Justin Gough advised Mr Oakes-Monger to make the payment by a CHAPS transfer: such a transfer he indicated would ensure that the funds arrived at the Commissioner's account on the same day they left the Appellant's account. He said that if the funds got there by Wednesday 7 March, the receipt would be on time.

As we have said we found Mr Oakes-Monger candid and honest. He told us that unfortunately this advice, which he recalled, had gone in one ear and out of the other. He didn't fully take on board the effect and different nature of a CHAPS payment. He admitted that this was his fault but said that he had diligently tried to get the payment there on time.

We accept that Mr Oakes-Monger and through him the Appellant had no intention to defraud the Commissioners or delay their receipt of the VAT, that he acted honestly at all times and that he did take steps to try to get the payment to the Commissioners on time.

The Parties' Arguments

Mr Oakes-Monger says that in relation to the 01/07 he made a mistake and was only one day late. That surely was enough to say that he had a reasonable excuse.

Mrs Orimoloye says first in relation to 04/06 the cashflow shortage was a hazard of the decision to expand the business and was not the kind of exceptional circumstance which could support a reasonable excuse. It was a risk accepted by the trader as part of carrying on the trade.

In relation to 01/07 Mrs Orimoloye says that:

(i) the fact that Mr Oakes-Monger mistook the advice to pay by CHAPS – even though it might be a genuine mistake made when acting in good faith – was not enough to support a reasonable excuse;

(ii) the Appellant had been notified of two previous defaults which had arisen because his internet banking payments had taken several days to clear. It must have been aware that internet banking payments had that result and that the method actually adopted would result in late payment;

(iii) the Appellant had been alerted to the cash accounting scheme on several occasions. The use of that scheme would have avoided the problems with the 01/07 VAT payment. The Appellant by not taking up that scheme was the author of its own misfortune. That was not a reasonable excuse;

(iv) the late payment by the particular customer was a normal hazard of business and not so sudden or exceptional to support a finding of reasonable excuse; and

(v) before a trader can submit returns online it has to accept (by clicking a button) the Terms and Conditions of internet payment. Those make clear that a CHAPS payment is the only method of electronic payment which secures same day receipt.

Discussion and Decision

We considered first the 04/06 delay. If there was a reasonable excuse for this and if it was 'material' to the surcharge under appeal, then the surcharge liability notice served in respect of it would be deemed not to have been served. As a result any surcharge for 01/07 would have depended only upon the notice served in respect of the 10/06 default, and the rate of surcharge for 01/07 would have been 2% rather than 5%.

We did not consider that the cashflow difficulties which gave rise to the delay in the 04/06 payment were a reasonable excuse for that delay. The Appellant decided to undertake the extra business development expenditure. The exercise of reasonable planning and foresight should have indicated that the timing of extra expenditure needed to be considered alongside the timing of VAT payments. The Appellant could reasonably have been expected to take action to ensure timely VAT payment. We find that the Appellant had no reasonable excuse for the 04/06 default.

In relation to the 01/07 late payment we had considerable sympathy for Mr Oakes-Monger. Having survived the late receipt from the customer, then to miss the deadline by only a day because of the mode of his payment seemed quite harsh. But neither the Commissioners nor this Tribunal have any power to reduce the surcharge to reflect the circumstances: our duty is to quash it or affirm it.

We have concluded that the Appellant did not have a reasonable excuse for the late 01/07 payment.

Had Mr Oakes-Monger been told during his telephone conversation that an internet banking (or BACS) payment on 6 March would have been satisfactory then at the very least we believe that he would have had a reasonable excuse (and at its highest such advice could well be allowing or directing a later payment date as envisaged by the Regulation, so that the payment would not have been late at all). But Mr Justin Gough was clear: he said a CHAPS payment would be needed; he said that he thought that such a payment could not be made via the internet and that the Appellant would have to go to the bank to get a CHAPS payment rather than 3 day BACS payment which normally flowed from internet banking.

Mr Oakes-Monger misunderstood the importance of what he had been told. Was it reasonable for him to misunderstand it? We do not think so. Although running a business was a fairly new activity for him, he was by 2007 no novice. He seemed to us to be a capable man and not to suffer from any disability which would have provided reasons for his mistake. We all make mistakes at some time or other. Sometimes there are sufficient reasons to excuse our mistakes; at other times there are not. Making a mistake is not by itself a reasonable excuse for a failure: the reasons for the mistake must be considered. Here we saw no reason which enabled the mistake to be categorised as a reasonable excuse.

The Appellant's mistake was precipitated by the late payment by one customer. Had the Appellant pursued the suggestions in the Commissioners' letters that it investigate the cash accounting scheme the conditions precipitating the mistake could have been avoided. It would in our view have been reasonable to suppose that the Appellant would have pursued those suggestions. It's failure so to do confirms us in our view that it had no reasonable excuse for this default.

We therefore dismiss the appeal. We were disappointed by the late production of the transcript of Mr Oakes-Monger's telephone conversation with the VAT helpline. It seems to us that had he been reminded of the detail of that conversation at an earlier stage he may well have considered his appeal less meretricious.

CHARLES HELLIER

CHAIRMAN

RELEASED: 24 October 2007

LON/2007/0770