United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Cibenze Services Plc v Revenue & Customs [2008] UKVAT V20637 (01 April 2008)
URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20637.html
Cite as: [2008] UKVAT V20637

[New search] [Printable RTF version] [Help]

Cibenze Services Plc v Revenue & Customs [2008] UKVAT V20637 (01 April 2008)

20637

Value Added Tax – Default Surcharge – Whether late payment shortly after banking hours by the appellant's bankers through CHAPS evidenced a reasonable excuse for late payment – Appeal dismissed.

LONDON TRIBUNAL CENTRE

CIBENZE SERVICES PLC

and

THE COMMISSIONERS FOR HER MAJESTY'S
REVENUE AND CUSTOMS

Appellant

Respondents

Tribunal: RODNEY P HUGGINS FCIArb (Chairman)

CAROLINE de ALBUQUERQUE

Sitting in public in London on 18 July 2007 and 19 March 2008

The Appellant was represented on the first day by Cecil Black, Financial Controller and on the second day by Tim Elster, interim Chief Executive.

Jonathan Holl, Advocate of HMRC's Solicitor's Office for the Respondents

© CROWN COPYRIGHT 2008

DECISION

5

10

15

20

25

30

35

40

5

10

15

20

25

30

35

40

5

10

15

20

25

30

35

40

5

10

15

20

25

30

35

40

5

10

15

20

25

30

35

40

5

10

15

20

25

30

The appeal

1. Cibenze Services Plc (the Appellant) appeals against a default surcharge penalty of £38,726 which was imposed because the value added tax due for the accounting period ending on 31 December 2006 which should have been received by 7 February 2007 was not received until a day later.

The legislation
2. Section 59 of the Value Added Tax Act 1994 (the 1994 Act) provides that where a value added tax return, or the tax due, is not received in time, the taxable person is in default. A surcharge is imposed for the second and subsequent defaults within a period of twelve months. This was the eighth default in the series. Section 59(7)(b) provides that, if a taxable person satisfies the tribunal that there was a reasonable excuse for the return or tax not being sent in time, then he is not liable to the surcharge. However, section 71(1)(b) provides that, 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 issue

3. Accordingly, the issue for determination in the appeal was whether there was a reasonable excuse for the late receipt by one day of the tax due for the accounting period ending on 31 December 2006.

The evidence

4. Oral evidence was given on behalf of the Appellant by Mr Cecil Black, the Financial Controller of the Appellant who also represented the Appellant at the first day's hearing. He was replaced by Mr Tim Elster, interim Chief Executive, on the second day. A bundle of documents was produced by Mr Jonathan Holl on behalf of the Commissioners.

The facts

5. From the evidence before us we find the following facts.

6. The Appellant (Services) operates a cleaning contractors business and it is very labour intensive. It has an annual turnover of approximately £6 million. It has an associated company known as Cibenze Interiors Limited (Interiors) which is a distinct and separate legal entity. They have separate accounts with the same bank.
7. Both Companies had the same tax periods for VAT purposes and paid their VAT through the CHAPS banking system. This enables a tax payer to inform their bank to make immediate payment of VAT and provided the tax payer initiates payments within the time specified by the Bank, the Commissioners receive same day value. When this system is employed a tax payer receives up to seven extra calendar days from the standard due date for the VAT return and payment to reach the Commissioners.

8. In 2007 both Services and Interiors were banking with the branch of Barclays Bank plc (Barclays) at Bedford Square, London. When a CHAPS payment was made via business master through the branch, the cut off time for receipt of funds for transfer to another source such as the Commissioners was 3.00 p.m.

9. Mr Black was the Appellant's Financial Controller since June 2006 and he had made arrangements with a finance company known as Close Invoice Finance (Close) to provide funds to Barclays to enable the VAT for the quarter ending 31 January 2007 for both Services and Interiors to be paid by the bank to the Commissioners' bank account.

10. The total amount agreed to be provided by Close to Services for this and other purposes was £450,000. Mr Black requested Close to make the transfer before 2.00 p.m. on Wednesday, 7 February 2007 which was the last day for settlement of the VAT under the CHAPS system for the period 12/06.

11. The total VAT due for this period from Services was £258,175.85. There was a smaller sum due from Interiors for the same period.

12. Previously, when the same CHAPS system was used. Close would make the transfer from their account to Barclays by 2.30 p.m. and the transfer to the Commissioners bank account would then be effected before 3.00 p.m. Just before that time on 7 February 2007, Mr Black checked the bank accounts of both Services and Interiors through Business Master and noticed that the transfer from Close had not been effected.

13. He immediately telephoned the bank's branch and as advised not to make any payments out of the bank accounts of the two companies until the Close funds arrived because if an attempt was made to make a transfer and failed because of lack of funds, the bank system would reject the transaction and try again the following day.

14. Mr Black was under the impression that the cut off point in time was at least 4.00 p.m. and he therefore checked the accounts again at about 3.50 p.m. by which time the Close monies had arrived. He then authorised the transfer to H M Revenue and Customs bank account but it was too late. The bank's deadline had not been met. The transfers for both companies VAT took place the following day (8 February 2007).

15. Because of the bad record of Services who had recorded against it twenty-one defaults from the tax period 11/92, the Commissioners made a Notice of Assessment of Surcharge dated 7 March 2007 in the sum of £38,726 calculated at 15% of the VAT due.

16. On 12 March 2007, Mr Black wrote to the Debt Management office of the Commissioners in Liverpool expressing surprise that his company was in default. He pointed out that they had instructed their bankers to make a telegraphic transfer on 7 February 2007 and enclosed a coy of the Barclay's Business Master's Instruction request. This revealed the position as outlined earlier in this decision. Mr Black asked for the surcharge to be waived.

17. Mrs Duggan, a Review Officer of H M Revenue and Customs wrote to Services on 22 March 207 and, after setting out the facts, confirmed the surcharge. Mr Black sent another letter to Mrs Duggan on 26 March 2007 and said, "We had nothing to gain by delaying the payments to you by a day. This was clearly due to our bankers not able to act on our instructions in full before the cut off point for the day in question."

18. A final letter from Mrs Duggan of 3 April 2007 again said she found Services did not have a reasonable excuse for the default. She added as follows :

"Whilst I sympathise with the position you find yourself in, the facts
indicate that an insufficiency of funds prevented you from meeting your
statutory obligations to submit your return and full payment by the due date.
Section 71A of the VAT Act 1994 specifically excludes insufficiency of
funds from being a reasonable excuse for the late payment of VAT, This
being so the default must be maintained.

An appeal on the grounds of insufficiency of funds can only be considered
when a taxpayer is able to demonstrate that the circumstances that led to the
loss of income and subsequent default were unforeseen and outside their
influence and control. Although the problems you describe are by no means
minor the Commissioners consider they are no more than normal hazards of
trade and do not warrant exceptional discretion. Many traders are operating
in similar circumstances and in order to maintain the credibility of the
surcharge regime, the system must be seen to be equitable."
19. The Commissioners withdrew the surcharge against Interiors relating to the same period for two reasons. First, they only had three defaults recorded against it from tax period 12/05 and this compliance record was taken into account. Secondly, the Customs Officer reconsidering the Interiors default found that the company had received little or no guidance in respect of electronic payment and in line with internal guidance withdrew the default.

The arguments for the Appellant

20. For the Appellant, Mr Elster said that he had only been in the post for ten days and he had endeavoured to obtain from Close written confirmation as to the time when they transferred the £450,000 to Barclays bank but this had not been forthcoming. However, he said that he understood that Close had made arrangements to transfer the funds from their bank to Barclays by 2.30 p.m. at the latest. The delay had been between Close's bank and Barclays. He considered the Commissioners were seeking to impose an onerous penalty for what amounted to a short delay.

21. Services had made its best endeavour to effect payment on 7 February. It was through no fault of the Appellant that delay occurred in the banking systems. Neither company was now in arrears with payments of VAT. Services does not have the ability to pay the penalty which was significantly unrealistic.

The arguments for the Respondents

22. Mr Holl said that the Commissioners had to take into account the Appellant's bad history of defaults in reaching a decision to proceed with the surcharge. It was a large amount but because of previous defaults the rate of 15% had been reached for the earlier period of 09/06 as well.

23. The Appellant had sailed close to the line on 7 February by not arranging for the transfer of funds in sufficient time from Close. There was no evidence from Close as to when the transfer was effected although the tribunal had asked for this information in a Direction at the end of the first day's hearing.

24. Mr Holl cited the tribunal decision in Greengate Furniture Limited v Customs and Excise Commissioners [2003] VAT DR 178 (Greengate) as authority that the imposition of the surcharge contravened the legal principle of 'proportionality'.

25. He concluded by arguing that the Appellant was responsible for ensuring that the VAT reached the Commissioners' bank account on the seventh day after the due date and had not provided a reasonable excuse for the lateness.

Reasons for decision

26. In order to demonstrate "reasonable excuse" the onus is on the trader to provide an excuse for lateness in payment of VAT.

27. During the two hearings, the Appellant made varying assertions as to the exact time by which Barclays required funds to be paid into its branch in order for a transfer to be made to a non-Barclays account in another bank on the same day. At the first hearing, Mr Black maintained he thought the cut-off time was 4.00 p.m. He also said he was told by the Bank when he telephoned at 3.50p.m. that the last time was 4.30 p.m. However, he did agree normally VAT payments went through by 3.00 p.m.

28. On the other hand, Mr Elster maintained that the cut-off time was 3.30 p.m.

29. We have found as a fact in paragraph 8 of this decision that the cut-off time was 3.00 p.m. The reason for this is that the tribunal was supplied with a copy of a fax from "Farhart" of Barclays Bank dated 12 July 2007 addressed to Mr Black which reads as follows :

" As per telephone conversation if you made a manual CHAPS payment via
a branch the cut off times are 2.30 p.m. for non-barclays and 3.30 p.m. for
barclays to barclays.

If you made a payment via business master then the cut off time for non-
barclays is 3.00 p.m. and barclays to barclays is 4.00 p.m."

30. Mr Black should have been aware of this on 7 February 2007 and made arrangements for Close to send through the necessary funds earlier because the delay appears to have occurred in the transfer by Close previously through its bankers to Barclays as the monies did not arrive until 3.50 p.m. This error falls in our view into section 71(1)(b) of the 1994 Act. This provides that, 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. Close falls into such a category.

31. We accept that it is onerous for such a large surcharge to be imposed at the 15% rate when the payment was only late by a small margin. However, the legislation requires us only to address where there was a reasonable excuse for the late payment and not to the severity of the penalty. In view of the Appellant's past history of many similar defaults although not known to Mr Black who had only recently joined Services, the company should nevertheless have been paying close attention to making payments on time and not incurring an excessive penalty through an easily avoided slip.

32. We adopt the rationale in Greengate that the legal principle of proportionality does not apply in this instance.

Decision

33. Our decision on the issue for determination in the appeal is that there was not a reasonable excuse for the late receipt of the tax due for the accounting period ending on 31 December 2006.

34. The appeal is therefore dismissed and there will be no order as to costs.

35. In view of the current precarious financial position of the Appellant, the Commissioners are requested to assist the Appellant to have time to pay the surcharge.

Rodney P Huggins
Chairman

Release date : 1 April 2008

LON/07/0768