United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20735

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Sovereign Partners Ltd v Revenue & Customs [2008] UKVAT V20735 (04 July 2008)

20735

VAT default surcharge – Whether surcharge liability notices served on appellant

LONDON TRIBUNAL CENTRE

SOVEREIGN PARTNERS LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: CHARLES HELLIER (Chairman)

MRS R S JOHNSON

Sitting in public in London on 5 March 2008

Mrs Barbara Feldman, director, for the Appellant

Mrs Gloria Orimoloye, instructed by the solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Appellant appeals against default surcharges in relation to the periods from 01/06 to 04/07. We set out the background below but the central question for us was whether default surcharge liability notices were served upon the Appellant as required by section 59(4) VAT Act 1994. If they were not served then no liability to a default surcharge can arise; if they were served then the Appellant does not maintain that any of the other conditions for surcharge liability are failed, and the liability arises.

The Provisions of Section 59 VAT Act: the Default Surcharge

Section 59 VAT Act 1994 provides that there is a default if a person's VAT return is received late or if the VAT payable on a return is received late. Section 59(7) provides, broadly, that a default is not to be treated as such if there is a reasonable excuse for it, or if the return or the VAT, as the case may be, was so dispatched that it was reasonable to expect if to be received on time.

If a person is in default in respect of a VAT period, the Commissioners may serve a "surcharge liability notice" specifying a "Surcharge period" beginning on the date of the notice and ending 12 months after the end of the period of default. If there is another default in this period then one of the consequences is that the Commissioners may serve a further surcharge liability notice extending the surcharge period so it ends 12 months after the latest default period; and so on for further defaults.

The other consequence of the service of a surcharge notice (an initial one or one that extends the previously created surcharge period) is that a default in respect of a period ending within the surcharge period will give rise to a liability to a default surcharge.

But section 59(4) VAT Act is clear. A liability to a default surcharge arises only if the Commissioners serve a surcharge liability notice "on the taxable person". It is not enough for the notice to be sent: it must be served on the taxpayer.

Where the notice (or notices) have been served on the taxpayer and there is a default in the period, the default surcharge is set by section 59(5) at an escalating rate of the outstanding VAT for the period: 2%, 5%, 10%, 15% depending upon whether the later default is the first, second, third, or fourth or later default in the period.

The Facts and the Evidence

At the initial hearing we heard Mrs Feldman's oral evidence, had a bundle of copy correspondence before us and were provided with an unsigned witness statement from Frances Maria Sutton, one of the Respondents' officers.

It became clear to us at that hearing that the Appellant had not realised the potential importance of the evidence of Mrs Feldman's son, (Daniel Feldman), who was a co-director of the Appellant, in relation to the issue of whether or not the surcharge liability notices had been served on the Appellant. We therefore directed that the Appellant should serve a witness statement signed by Daniel Feldman dealing with the opening and distribution of the Appellant's post. We also directed that the Respondents should thereafter indicate whether they wished to cross-examine Mr Feldman.

The Appellant duly provided a witness statement signed by Mr Feldman. The Respondents did not notify the tribunal that they wished to cross examine Mr Feldman (indeed they gave no notification either way). The tribunal was content not to hear Mr Feldman in person.

From that evidence we find the facts as follows:

(1) The Appellant's VAT due for the periods 04/05, 01/06, 07/06, `10/06, 01/07 and 04/07 did not reach the Commissioners before the due date.

(2) The Appellant's VAT payments for 10/06 and 01/07 were CHAPS payments which reached the Commissioners' account on the 8^th of the relevant month – one day late.

The Appellant had requested its bank to make each of those payments by fax sent on the 7^th of the month. The fax for the 7 December 2006 payment was sent to the bank at 15.59 and that for the 7 March 2007 payment at 15.01. These instructions were received by the bank too late for the payments to be made the same day. The Appellant had expected those instructions to be effected on the 7^th in each case : it had not realised that its new bank had an earlier cut-off time for such payments than its previous bank.

(3) The Appellant's accounts staff had some difficulties with proper VAT compliance in the 12-18 months before June 2007. Mrs Feldman accepted that the relevant person did not understand the system properly and sent in late payments and occasionally somewhat erroneous returns.

(4) Following a visit by HMRC's officer Colin Worts on 18 June 2007, it became apparent by 25 July 2007 that there was some £88k of VAT and surcharges outstanding.

(5) HMRC say they did not receive VAT returns for 01/06, 04/06, 07/06, 10/06, 01/07 and 04/07 on time. They raised this issue with the Appellant at the 18 June 2007 visit and the Appellant completed substitute returns for each of the periods which were received by HMRC on 22 June 2007. The returns were completed from the Appellant's records: it did not keep copies of its VAT returns.

(6) The Appellant made VAT payments in respect of three quarters generally a few days after the due date in amounts which generally were of the amounts disclosed as due in the substitute returns.

Mrs Feldman makes a strong point about these payments: given that they reflected the VAT which was reflected in their records as being due there would have been no point in their failing to submit returns for these periods: thus they are evidence that the returns were despatched by the Appellant.

We pause at this stage to indicate the effect of these facts and section 59. If the VAT returns for these periods were not received by HMRC then the Appellant was, unless section 59(7) applies, in default for each period. If the returns were received in time (or section 59(7) applies in relation to them) then because the VAT shown on the returns for each period other than 04/06 was received late, then for each of those periods the Appellant was in default (again unless section 59(7) applies).

In relation to the late payments we do not find that section 59(7) applies to exculpate the Appellant: there was no evidence that the payments were despatched in such a way that it was reasonable to expect receipt by the Commissioners on time, and there was in our view no reasonable excuse for the late payment. In particular we do not find that the change of bank to one with an earlier cut-off time for CHAPs instruction affords a reasonable excuse.

Thus we find that whether or not the returns were received by HMRC the Appellant was in default for 04/05, 01/06, 07/06, 10/06, 01/07 and 04/07.

For 04/06 the question as to whether the Appellant was in default depends solely on the question of whether the VAT return was received or whether s.59(7) applies. On the evidence we conclude that it is more likely than not that the return was not received and that it was not so despatched that it could reasonably be expected to have been received on time. We reach the latter conclusion with some hesitation in view of Mrs Feldman's argument that payment of the amount of VAT shown on the substitute return was made in time, but take into consideration on the other hand her admission that the Appellant's accounts staff had some difficulty with the VAT compliance system, and that it is in our view unlikely that six returns were despatched but not received.

We therefore conclude that the Appellant was in default in respect of each of the relevant periods.

That brings us to the question of the surcharge liability notices. If the relevant notices were not served on the Appellant no default surcharge can be assessed even though the Appellant was in default. The evidence before us on this issue was the following:-

(1) Mrs Feldman explained that the Appellant's post was opened by her or by Mr Daniel Feldman. If Mrs Feldman opened the post she would look at anything from HMRC before passing it on to the finance department; if Mr Feldman opened the post she said that he would leave anything to do with VAT for her to consider. The Surcharge Liability notices are printed on yellow paper. Mrs Feldman had no recollection of seeing any of those alleged to have been served on the company in the period June 2005 to 27 June 2007. We accept that she had no such recollection.

(2) The Respondents produced records (computer generated records rather than facsimiles) of the surcharge liability notices they allege were served on 17/6/05. 17/3/06. 16/6/06, 15/9/06, 15/12/06, 16/3/07 and 15/6/07. They also produced copies of a six supplementary surcharge assessment notices all dated 27/6/07. All were addressed to the Appellant's address.

(3) Ms Sutton's evidence was that the Appellant's computer system indicated that the notices had been despatched and of the checks operated to ensure that notices instigated by the computer system were correctly despatched.

(4) Mrs Feldman told us that had she known of the surcharges and the surcharge liability period notices she would have done something about the problems. We accept that evidence. It was clear to us that she was a very competent and determined businessman. It was clear that once the problem was brought to her attention in June 2007 she took effective steps to sort it out: we are clear that she would have done so before then had she been aware.

(5) Mr Feldman's witness statement indicates that once Mrs Feldman became aware that there was a problem in June 2007 she asked for "everything to do with VAT no matter what … to be left on her desk. [Six] of the Surcharge Notices … are all dated 27 June 2007 and so would have been received after that time and would not have been handed to anyone else in the company than [Mrs Feldman]."

We noted that Mr Feldman's evidence did not deal clearly with the surcharge liability period notices alleged to have been served before 28 June 2007, or the position in relation to VAT correspondence received prior to June 2007.

We conclude that in the period before June 2007 it is more likely that these notices were received and were passed directly to the accounting department and were not seen (or considered) by Mrs Feldman, and that the accounting department did not bring them to Mrs Feldman's attention.

We therefore find that all the requisite conditions for the imposition of a default surcharge liability for those periods were satisfied and dismiss the appeal.

Our decision was unanimous.

CHARLES HELLIER

CHAIRMAN

RELEASED: 4 July 2008

LON 2007/1942