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United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Alliance Systems Ltd v Revenue & Customs [2008] UKVAT V20535 (16 January 2008)
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Cite as: [2008] UKVAT V20535
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Alliance Systems Ltd v Revenue & Customs [2008] UKVAT V20535 (16 January 2008)
    20535
    VAT – Default surcharge – Reasonable excuse for earlier default – Surcharge liability extension notice in respect of earlier default therefore treated as not served – Surcharge therefore not arising in respect of later default for which there was no reasonable excuse – Appeal allowed subject to HMRC further submissions

    LONDON TRIBUNAL CENTRE

    ALLIANCE SYSTEMS LTD Appellant
    • and –

    THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

    Tribunal: CHARLES HELLIER (Chairman)

    GEORGE MILES

    Sitting in public in Bristol on 22 November 2007

    David Oxley and Neil Hutchinson, directors of he Appellant, for the Appellant

    Pauline Crinnion, instructed by the Solicitor to HM Revenue & Customs, for the Respondents

    © CROWN COPYRIGHT 2007

     
    DECISION AND DIRECTIONS
  1. The Appellant appeals against a default surcharge imposed under section 59 VAT Act 1994 of £1,000.83 in respect of its VAT period ending 28 February 2007 (the "02/07" period).

  2. Section 59(1) VAT Act 1994 provides that a taxpayer is in `default' in respect of a period if either his return arrives late at HMRC or the VAT shown as payable on that return is received late.

  3. There is no dispute that the Appellant was in default within this meaning for the periods ending 31 January 2006 (`01/06'); 30 November 2006 (`11/06') and for 02/07. For 01/06 it paid its VAT 10 days late, for 11/06 it paid its VAT and submitted its return some four weeks late, and for 02/07 its VAT payment arrived at HMRC some 4-6 days late.

  4. Section 59(2) provides that if a person is in default in respect of a period the Commissioners may serve a Surcharge Liability Notice creating a "surcharge period" (ending 12 months after the end of the default period) within which a further default will give rise to a surcharge liability. If there is such a further default the surcharge period than in addition to a surcharge liability the surcharge period may be extended so that it ends 12 months after the end of the period of the further default. It is extended by a further surcharge liability notice (normally referred to as a "Surcharge Liability Extension Notice").

  5. There was no dispute that following the 01/06 default the Commissioners served a surcharge liability notice specifying a surcharge period ending on 31 January 2007 (although, curiously, that date seemed to have been omitted in our copy). There is also no dispute that following the 11/06 default (which fell within the surcharge period created by the first notice) the Commissioners served a surcharge liability extension notice extending the surcharge period to 30 November 2007.

  6. Section 59(4) provides that if a person is in default for a "period ending within the surcharge period specified in (or extended by)" a notice, then he shall be liable to a surcharge (our emphasis). The surcharge is broadly the greater of £30 and a percentage of the outstanding VAT. The percentage is 2%, 5%, 10% or 15% depending upon whether the default is the first, second, third or fourth or subsequent default in that period.

  7. Following the appellant's default in respect of the 11/06 period, the Commissioners did not assess the 2% surcharge (although they did notify the surcharge period extension to the taxpayer).

  8. Following the default in respect of the 02/07 period – which period ended "before the expiry of the surcharge period" extended by the notice referred to in paragraph 5 above: the period ending on 30 November 2007 – the Commissioners assessed the Appellant to a surcharge of 5% of the late paid VAT for the period, a surcharge of £1,000.83. The Appellant appeals against that surcharge.

  9. Section 59(7) provides that if a person satisfies the tribunal that `in the case of a default which is material to the surcharge:-

    10. (a) [which is immaterial for present purposes] or
    (b) there is a reasonable excuse for the return or the VAT not having been ['dispatched so that it was reasonable to expect that the Commissioners would receive it on time],

    he shall not be liable to the surcharge, and for the purposes of the preceding provision of this section he shall be treated as not having been in default in respect of the … period in question (and, accordingly any surcharge liability notice which depended upon the default shall be deemed not to have been served)."

  10. The Appellant contends that it has a reasonable excuse for the 11/06 and 02/07 defaults. Section 59(7) provides conditions for a default being "material to a surcharge". It is plain that the 02/07 default falls within section 59(7)(a) and that the 11/06 falls within s.59(7)(b) on any view of its provisions. Thus the tribunal may consider whether there was a reasonable excuse for either or both of the defaults for the purposes of an appeal against the 02/07 surcharge. If the tribunal finds that there was a reasonable excuse for the 02/07 default then the Appellant will not be liable to the surcharge and the appeal will be allowed. If the tribunal finds that there is no reasonable excuse for the 02/07 surcharge, but there is an excuse for the 11/06 surcharge then our present view, for the reason in the following paragraph, is that this will result in the 02/07 surcharge being extinguished – with the result that the appeal would be allowed. If there is no reasonable excuse for either default the appeal would be dismissed. We indicate that this is our present view because we have not heard the Respondents' arguments upon the point (see paragraphs 30 to 32 below).

  11. Since the 11/06 default is material to the 02/07 surcharge, if there is a reasonable excuse for 11/06 then the effect of section 59(7) is that the Appellant "shall be treated as not having been in default in respect of the [11/06] period (and accordingly any surcharge liability action the service of which depended upon [the 11/06] default shall be deemed not to have been served)." Now, the 01/06 default surcharge notice specified a period ending on 31 January 2007. The 02/07 period ended one month later, on 28 February 2007. Thus any default in respect of the 02/07 period could not have been a default in respect of a period "ending within~" the period specified by the 01/06 notice. Hence absent any extension of the 01/06 notice no surcharge in respect of 02/07 can be assessed. But the 11/06 notice "depended upon" the 11/06 default, and the words in parentheses in section 59(7) quoted above require that (if there is a reasonable excuse for the 11/06 default) the 11/06 notice be treated as not served. Thus there would be no surcharge period in which the 02/07 period ends. Accordingly section 59(7) can impose no liability to a surcharge.

    12. The Evidence and the facts
  12. We heard evidence from Mr Oxley and Mr Hutchinson, and had before us various copy documents. We find as follows.

    13. The 02/07 default
  13. In December 2006 the Appellant had had problems with a senior member of its staff. The person concerned was dismissed and the Appellant apprehended that after his dismissal he was seeking to undermine the Appellant's business to poach its business. The Appellant's officers felt that they had to tread carefully with their clients and not press too hard for payment. We accept that this was a serious issue which would have reduced the flow of funds into the Appellant's bank account.

  14. When the time came to pay the VAT for 02/07, the Appellant's online bank balance did not show sufficient funds to make the requisite online BACS payment. On 5 April 2007 it had enough to pay £18,000 of the £20,016.66 which was due. 5 April 2007 was Maundy Thursday. It instigated an online payment of £18,000 on that day. The banks were closed on Friday, Saturday, Sunday and Monday. Tuesday 10 April was the next banking day. The funds arrived at the Respondents' bank on Wednesday 11 April. Had the Appellant arranged for a CHAPS payment it would have arrived on the day of instruction, 5 April 2007, on time.

  15. The payment, since it was made by electronic means was due to be received on or before 7 April 2007.

  16. The balance of the payment was instigated by an online instruction on 11 April and reached the Respondents' bank account on 13 April 2007.

  17. Whilst the Appellant's online bank balance showed insufficient funds to pay the VAT the later paper statements showed that there were sufficient funds for payment in full since these statements allowed for clearance of funds received at an earlier time which were not allowed for in the online balance.

  18. There was no evidence that the Appellant made any approach to its bank for an extension of its overdraft to pay the VAT. However, the Appellant's officers otherwise felt that in the circumstances it had done its best to pay as much as possible of the VAT on time.

  19. The Appellant was subject to the cash accounting scheme under which it became liable to pay VAT only in respect of those supplies for which it had received payment in the relevant VAT period.

    20. The 11/06 default
  20. The Appellant says that this default arose in connection with the arrangements under which its normal VAT period were changed. The Appellant's VAT periods had ended in the 1st, 4th, 7th and 10th months of each year, but its accounting reference date was the end of the 5th month. This lack of synchronicity had caused extra administrative cost, and on 30 October 2006 Neil Hutchinson signed a letter drafted and instigated by the Appellant's accountants asking for a change of period. The Respondents replied on 10 November approving the change and indicating that:

    21. "Your VAT returns will now end on the last days of:
    May, August, November and February.
    Before this change becomes effective you may receive a VAT return form under the old arrangements. If this happens you must complete it …"

    The Appellant completed and returned the VAT return for October 2006 and paid the tax due on time. As a result of the Respondents' letter of 10 November the next VAT period was that of one month ending on 30 November 2006.

  21. Mr Hutchinson told us that the Appellant had not received a return for November. Had one been sent it would have been entered in his calendar. There was no entry. He said that their accountants had indicated, at or about the time of the request for the change of period, that the following return could be for a 4-month period. Normally a return was received 3 to 4 weeks before the return date – in fact at about the time of the letter from the Respondents acceding to the change in VAT period dates.

  22. On 19 January 2007 in response to the receipt of the default notice for 11/06 Michele Roberts, the Appellant's accounts manager, telephoned the VAT helpline and spoke to Michelle Slade. Michelle Slade made a note of the call in which she recorded that she had checked the Respondents' computer system "VISION" and that had indicated that a return had been sent out. Mrs Crinnion indicated that she had looked on the "VISION" system to check this but had been unable, despite familiarity with the system, to discover an entry upon it indicating that the return had been sent.

  23. We were grateful for and pay tribute to Mrs Crinnion's integrity and candour in this matter. This was in the best of the traditions of HMRC. Such an approach adds weight generally to the evidence of HMRC's officers.

  24. We conclude that it is more likely than not that the Appellant did not receive a VAT return for November 2006. Given that the VAT period date was changed at about the time a return would have been sent, it appears possible that the way in which the programming of the Respondents' computer was arranged, or the time at which the change of VAT period was entered into it may well have meant that no VAT return was sent to the Appellant for 11/06. Mrs Crinnion's statement suggests that it is possible that Michelle Slade was mistaken in her interrogation of the computer, and the Appellant's officers' evidence was robust and believable.

    25. Conclusion – Reasonable default
    The 11/06 default
  25. A taxpayer is not absolved from making a VAT return or paying his VAT for a quarter because he does not receive a VAT return. If returns are normally made for a period ending on a particular date but a return is not received, one would expect a taxpayer who paid reasonable attention to his duties under the VAT Act to request a return and in any event to pay the VAT. But this was not a case where it was or in our view should reasonably have been apparent to the Appellant that a return should have been received and submitted for November 2006. The absence of the receipt of a return for that one month period seems in our view to be a reasonable excuse for its failure to submit a return and pay the VAT for that period on time.

    26. The 02/07 default
  26. Whilst we accept that the Appellant's officers' concerns over the action of its estranged member of staff were serious, we did not think that the Appellant had a reasonable excuse for its late payment in respect of 02/07.

  27. Section 71 VAT Act 1994 provides that an insufficiency of funds to pay VAT is not a reasonable excuse. In Customs and Excise Commissioners v Steptoe [1992] STC 757 the Court of Appeal made clear that the reasons for the insufficiency could constitute a reasonable excuse whilst the mere insufficiency of funds could not.

  28. So far as the £18,000 is concerned there was no insufficiency. This could have been paid by CHAPS so as to reach the Respondents on time. It would not be unreasonable to expect such an action.

  29. In relation to the remainder of the payment, whilst we accept that cash accounting does not always mean that there can be no reasonable excuse related to lack of funds, the use of cash accounting means at least that the Appellant has received the funds with which it could potentially have paid the VAT. There was no evidence before us that the Appellant had sought to obtain a short term loan or otherwise temporarily to increase its facility with its bank to enable timeous payment. We did not think that the Appellant had taken such steps to ensure payment that one would expect for a reasonable businessman in the circumstances who was aware of his statutory obligations.

    30. The Result
  30. At the end of the hearing we announced our conclusion in relation to whether or not there was a reasonable excuse for 02/07 and 11/06. We then gave our preliminary view that our finding in relation to 11/06 meant, for the reasons now set out in greater detail in paragraphs 10 and 11 above, that we should allow the appeal. That conclusion depended upon there being no transitional provisions amending the effect of section 59(7) when VAT periods were changed. We found none at the hearing and have found none since.

  31. Mrs Crinnion asked for time for the Commissioners to consider the Tribunal's preliminary reasoning before making submissions upon it. We agreed.

  32. According we DIRECT as follows:-

    33. (1) This appeal be allowed UNLESS by within 21 days of the release of this decision the Respondents serve on the Tribunal and the Appellant their submissions stating their disagreement with paragraphs 10 and 11 above and their reasons therefore.
    (2) If the Respondents do so serve such submissions, then within14 days of receipt the Appellant serve any written response it wishes to make, and that this Tribunal will then consider both submissions before producing a final decision.
  33. Our decision was unanimous. We make no order as to costs.

    34. CHARLES HELLIER
    CHAIRMAN
    RELEASED: 16 January 2008

    LON 2007/1102

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