[2009] UKFTT 98 (TC)

TC00066
Appeal number:  LON/09/0124

VAT – default surcharge – assessment not valid if based on incorrect specified percentage – assessment capable of amendment if specified percentage prima facie correct at time of issue – whether reasonable excuse- no – appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	JUPPON TRADING LTD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

				TRIBUNAL: 	Barbara Mosedale (Chairman)
                                                                         Lynneth Salisbury (Member)

Sitting in public in London on 1 April 2009

Mr Paul Bentley Director of the Appellant

Mr Jonathan Holl instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION
Introduction
1.	Juppon Trading Ltd appeals against a default surcharge imposed on it by an assessment dated 12 September 2008 for late payment of its VAT in period 07/08.  The surcharge as originally imposed was at 15% and amounted to £1585.83.  A recalculation of the amount due following late submission of the return meant HMRC amended the penalty to £1482.91.  HMRC then further amended it by letter of 16 March 2009 to a 10% penalty with a liability to £961.88.
The facts
2.	The facts as presented by HMRC were not disputed by the Appellant at the hearing and we find them to be as follows:
(1)	Appellant was in default for paying its VAT late (under the Value Added Tax Act 1994 (“VATA 94”) s59) for period 01/06 and was issued with a surcharge liability notice;
(2)	It was in default again for paying its VAT late for period 07/06 and was issued with a surcharge liability notice extension.  It was notified that it was liable to a 2% penalty but that HMRC were choosing to waive it;
(3)	It was in default again for paying its VAT late for period 01/07 and was issued with a surcharge liability notice extension.  It was notified that it was liable to a 5% penalty but that HMRC were choosing to waive it;
(4)	It was in default again for period 04/07 in that both VAT was paid late and the return submitted late but HMRC issued only a surcharge liability notice extension and did not assess a penalty.  HMRC’s explanation was that they overlooked the late VAT payment under a misapprehension that a payment for a different quarter related to this one;
(5)	The VAT was paid on time for period 10/07 but the return was 10 months late.  HMRC issued an estimated assessment but this was for a lower figure than the VAT that had been paid and was ultimately shown on the return as owing.  So for period 10/07 no penalty was either due or assessed;
(6)	Again for period 01/08 the VAT was paid on time but the return was made many months late.  As the return was not received, HMRC issued an estimated assessment.  This was for a greater figure than the VAT that had been paid and so a penalty was assessed – though only for £30.  Ultimately when the return was filed in September 2008 it was apparent that the full amount of VAT due as shown on the return had been paid on time and the assessment was amended by letter from HMRC to nil.
(7)	The return was late again for period 07/08.  This time, in addition, £9,618.85 of the total VAT liability of £11,594.86 was paid late.  The taxpayer was originally assessed to a 15% penalty based on assessed tax (as the return was late) resulting in a penalty of £1,585.83.  Once the return was submitted this was recalculated to be a penalty of £1,482.91.  Later it was reduced to 10% leading to a reduction to £961.88.  This is the penalty under appeal.
3.	Mr Bentley’s evidence, which we accept was as follows.  The Appellant had paid its VAT by BACS for some time.  In period 07/08, for the first time since it has used BACS, it had a quarterly VAT liability in excess of £10,000.  When on Wednesday 3 September 2008 Mr Bentley keyed in the instruction on his computer to send the VAT to HMRC the bank refused the instruction because it had a £10,000 limit on BACS transactions per day.  Mr Bentley therefore split it into two amounts (£1,741.69 & £10,000), in total an overpayment of the returned figure of £11,594.86.  He gave instructions to the bank to remit this by BACS over two days, £1,741.69 to go that day (3 September) and the £10,000 to go the day after (4 September).   The due date was Friday 5 September because electronic payments must be received by the seventh day of the month after the due date for the return. Banks are closed on Saturdays and Sundays which meant that for September 2008 the due date was Friday 5 September.  The £1,741.69 was received by HMRC on 5 September and the £10,000 was not received until Monday 8 September.  The penalty was calculated on a late payment of only £9618.85 as the taxpayer had a credit of £234.32 from a previous period as well as the £1,741.69 paid on time.
The issues
4.	There were two issues at the appeal.  The taxpayer claimed that it had a reasonable excuse for the late payment of the tax in period 07/08.  We gave our decision on this on the day of the hearing.  Secondly, at the hearing, HMRC quite properly raised an issue which had been raised in the immediately preceding case which was that if the reasoning in the decision in Dow Chemical Company Ltd (1995) VAT Decision 13954, a decision of the VAT &Duties tribunal, was applied in this case then the assessment might be void.  HMRC was of the opinion that the reasoning of Dow Chemical  was wrong and should not be applied in this case or that the two cases could be distinguished.  Mr Bentley for the taxpayer, not surprisingly, had no views on this as the matter was raised for the first time on the day.  On the day we reserved our decision on this issue.
Whether assessment void – the law
5.	Default surcharge penalties are assessed by multiplying the amount of VAT paid late by the “specified percentage”.  The specified percentage is determined by the number of earlier defaults in the same surcharge period.  The provisions are set out in the VATA 94 s59:
“(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.  
(5) Subject to subsections (7) to (10) below, the specified percentage referred to in subsection (4) above shall be determined in relation to a prescribed accounting period by reference to the number of such periods in respect of which the taxable person is in default during the surcharge period and for which he has outstanding VAT so that—
(a) in relation to the first such prescribed accounting period, the specified percentage is 2 per cent.;
(b) in relation to the second such period, the specified percentage is 5 per cent.;
(c) in relation to the third such period, the specified percentage is 10 per cent.; and
(d) in relation to each such period after the third, the specified percentage is 15 per cent.”
6.	As stated above the potential relevance of Dow Chemical Company Ltd (1995) was raised on the day by the representative of HMRC because it had been argued in the immediately preceeding case:  as in that case, HMRC’s representative both attempted to distinguish this case from that in Dow Chemical  and also challenged the reasoning in Dow Chemical.  It is therefore for this Tribunal to decide whether it thinks that reasoning should apply in this case, and if so, with what result.
7.	Before setting out the reasoning in Dow Chemcial, we include a short summary of the facts in that case without which it would be difficult to understand the decision.  In Dow Chemical, the Appellant appealed two default surcharge assessments.  It was decided (for reasons not relevant to this appeal) that a valid SLN had been issued to the Appellant for the period 05/94.  This was followed by three default surcharge assessments, the first at 2% (period 10/94), the next at 5% (period 11/94) and the last at 10% (period 3/95).  Later HM Customs & Excise withdrew the 2% penalty (presumably in recognition that they had specified the wrong accounting periods in the notice of assessment).  At the same time HMRC purported to amend by letter the two later assessments by reducing the percentages to 2% (period 11/94) and 5% (period 3/95) a re-alignment no doubt to reflect the withdrawal of the 2% penalty for 10/94.  Dow Chemical won its case on the grounds that the original assessments were wrong because they used the wrong specified percentages (5% instead of 2% for period 11/94 and 10% instead of 5% for period 3/95) and that Customs & Excise’s later attempt to amend them by substituting the lower specified percentages was ineffective.  
8.	The decision on the law on this point in Dow Chemical is divided into three propositions as follows:
“Ground 2: Decision
We think that the argument for Dow Chemicals is correct on this point. The Commissioners are wrong because Dow Chemicals was not in law liable to a 5 per cent surcharge in relation to the 11/94 period or to a 10 per cent surcharge in relation to the 03/95 period. The assessments purporting to make Dow Chemicals so liable were both wholly invalid and so could not be reduced either in pursuance of section 76(9) or, more accurately we think, in exercise of the Commissioners' inherent power to reduce assessments. Our conclusion is based on three propositions.
The first of these propositions is that each liability occasioned by each default is separate. A liability resulting from a second default in a surcharge period is distinct from a liability resulting from a third default. To use the words of Macpherson of Cluny J in Commissioners of Customs and Excise v Medway Draughting and Technical Services Limited [1989] STC 346 at p 351j, each "penalty" imposed by section 59, is "quite separate". Subsection (4) read in conjunction with subsection (5) contains a set of graduated liabilities each of which depends on a different set of circumstances. For example, a separate and distinct liability arises on account of the second default for a prescribed accounting period falling within a surcharge period. In that situation the liability is "to a surcharge equal to the greater of the specified percentage of his outstanding VAT for that prescribed accounting period and £30"; the specified percentage is found in subsection (5) and depends on the number of other defaults during the surcharge period. If the assessment is based on the wrong liability, for example because the number of other defaults is wrong, it will be ineffective.
The second proposition is that only properly notified defaults for a prescribed accounting period count; (and they drop out of account if a reasonable excuse defence is sustained). For purposes of the liability to surcharge imposed by subsection (4) a default in question must have satisfied the two requirements set out in subsection (2). There must have been a default in respect of a prescribed accounting period (see paragraph (a)) and the Commissioners must have served a notice specifying a surcharge period or an extended surcharge period being "the period ending with the first anniversary of the last day of the period referred to in paragraph (a) above" (paragraph (b)). In other words it is not enough for the Commissioners simply to point to a default, whether admitted by the taxpayer or not; there has to be a valid SLN or SLNE that specifically relates to that default. Without the notice, the taxpayer would have no opportunity to appeal on grounds for reasonable excuse or otherwise.
The third proposition is that while the Commissioners and the tribunal have power to reduce an assessment, this power exists where the assessment is excessive because, for example, it is based on an overstatement of the outstanding VAT; but the power does not exist where the assessment is ineffective because the liability is of the wrong type, for example it assesses a third default liability where it ought to have assessed a second default liability. The Commissioners have an inherent power to reduce an assessment; this is recognised by section 76(9) which reads as follows:
"(9) If an amount is an assessed and notified to any person under this section, then unless, or except to the extent that, the assessment is withdrawn or reduced, that amount should be recoverable as if it were VAT due from him."
The tribunal has power to reduce a surcharge assessment on appeal (and so reduce it to the amount that is appropriate under section 59); this is recognised by section 84(6) which reads as follows:-
"(6) Without prejudice to section 70, nothing in section 83(q) shall be taken to confer on a tribunal any power to vary an amount assessed by way of penalty, interest or surcharge except in so far as it is necessary to reduce it to the amount which is appropriate ."
But in neither instance can the power be exercised where the assessment itself is ineffective and so void ab initio. (This is different from the position that obtains where a taxable person establishes the defence of reasonable excuse under section 59(7); the subsection itself appears to contemplate that the specified percentages for subsequent defaults will be adjusted accordingly.)”
9.	Our summary of the three principles set out above in  that decision is as follows:
(1)	To be valid, an assessment to a surcharge liability under s59 must be based on the correct specified percentage.  This we will refer to as first proposition  from Ground 2 of the Dow Chemical judgment;
(2)	The defaults which ‘count’ towards calculating the correct specified percentage for a later default are only those which are properly notified.  This is the second proposition referred to in  Ground 2 of the Dow Chemical judgment.
(3)	HMRC do have power to amend an assessment to a default surcharge but this power cannot be exercised to make an invalid or void assessment effective:  in other words only an assessment valid at the time it was issued can be later reduced.  This it seems to us is a summary of the third proposition.
10.	We now consider whether we should apply the same reasoning in this case and if so, whether we find that the assessment under appeal was ineffective.
11.	Proposition one:  this seems plainly right.  The power of HMRC to assess is under VATA 1994 s76(1) and it is a power to “assess the amount due by way of penalty…” The amount due is set out in s59(4) and it is the “the specified percentage of his outstanding VAT for that prescribed accounting period”.  So there is no right to issue an assessment where the specified percentage used to calculate the penalty is greater than the one to which the taxpayer is liable under S59(5). 
12.	Proposition two:  the second proposition raises two issues.  Does a default have to be “properly notified” in order to count towards the specified percentage and, if so, what does “properly notified” mean?  Fortunately, as we did not hear full argument on Dow Chemical, it seems to us for the reasons given below that we do not need to decide our view of proposition two in order to decide this appeal.  
13.	Although not relevant in Dow Chemical, we must also mention that in order to be a default which counts towards the specified percentage it must be a default with outstanding VAT:  this is set out in s59(5) cited above which says “…the specified percentage…shall be determined…by reference to the number of such periods [ie prescribed accounting periods] in respect of which the taxable person is in default during the surcharge period and for which he has outstanding VAT….”  So although a failure to submit a return on time is a default (s59(1)) unless there is also outstanding VAT for that period, it is not a default which counts towards the specified percentage.  This is relevant in this case to the default in period 01/08.
14.	Proposition three:  Proposition three was that assessments which were wrong from the start (“void ab initio”) cannot be amended.  The implications are that some assessments can be amended – such as where the assessment was excessive because it was based on an overstatement of the outstanding VAT.   But  - with an exception discussed below - assessments which use the wrong specified percentage are wrong from the start and cannot be amended.  The only way to correct the position would be to issue a new assessment (assuming time limits permit).  The exception which Dow Chemical envisaged (see the words in parenthesis at the end of the quotation from the judgment above) was where subsequent to the assessment the taxpayer was able to show a reasonable excuse for one of the defaults on which the specified percentage was based:  in such a case the assessment could be adjusted to reflect the new lower percentage and was not void.  This exception was not actually part of the decision in Dow Chemical as it was not relevant on the facts.  In that case it was decided that the reason the earlier default should not have been counted towards the specified percentage was that that the assessment for that earlier default was bad from the start as it mis-described the period to which it purported to relate.
15.	We also looked at the VAT & Duties Tribunal decision in the case of S S R Group Services Limited (1999) VAT Tribunal 16033, as this seems to be one of the few  cases in which Dow Chemical has been considered.  However, we would note that it was not cited to us at the hearing, is not binding on us, nor, as the Tribunal in that case records, it did it have the benefit of full argument as the Dow Chemical point was raised as a new issue by the taxpayer on the morning of the hearing. 
16.	In S S R Group the taxpayer won on the defence of due despatch but the Tribunal indicated that they did not consider Dow Chemical would have helped the taxpayer had they not won on due despatch.  This was because the Tribunal in S S R Group thought the exception noted above in Dow Chemical should be extended as suggested to it by the representative for Customs & Excise (Mr Holl in that case as in this case).  The Tribunal considered that a right to amend the specified percentage in a penalty assessment would exist in a case where the due despatch defence was established for an earlier default, as that defence, like the reasonable excuse defence, is also contained in s59(7).  
17.	It must be right that assessments can be amended when information not available to HMRC at the time they made the assessment comes to light, such as a taxpayer later establishing a defence of reasonable excuse to a default which counted towards the specified percentage.  But assessments which were always wrong cannot be so amended and HMRC’s only course would be to issue a new assessment if timelimits permitted.  
18.	Therefore, we agree with proposition 3 of Dow Chemical but we think that this indicates a general principle that an assessment using the wrong specified percentage is not wrong from the start and can be later amended to correct the specified percentage if at the time it was made, it was made on a proper count of what appeared to be actual defaults  – prima facie defaults – even though the taxpayer later shows some defence to the assessment of a penalty in respect of one or more of these prima facie defaults.
Whether assessment void – decision on the facts
19.	In this case, the disputed assessment for 07/08 was made with a specified percentage of 15% under s59(5)(d).  The argument based on Dow Chemical which the taxpayer could have put forward on its behalf, and which HMRC were effectively putting forward on its behalf, was that this assessment should have used the specified percentage of 10% under s59(5)(c) as there were only two previous defaults which should have been counted.  
20.	We have agreed with proposition 1 from Dow Chemical which is that to be valid an assessment must use the correct specified percentage.  What was the correct specified percentage?  That depends on the number of previous defaults in the same surcharge liability period.  Proposition two was that only properly notified defaults should count.  As we noted above, to decide this appeal we do not need to decide our view of whether the defaults should be properly notified in order to count.  This is because of the facts.  The defaults which potentially could have been counted are as follows:
(1)	07/06 – 2% - default notified but not assessed;
(2)	01/07 – 5% - default notified but not assessed;
(3)	04/07 – default not notified;
(4)	01/08 – 10% - default assessed but assessment was later withdrawn when return submitted showing no VAT outstanding.
21.	 If we were to decide that Dow Chemical was wrong to require that in order to count towards the specified percentage the default had to be properly notified, then the default in 04/07 could have properly been taken into account by HMRC.  That would mean the right specified percentage for 07/08 would have been 15% whether or not there was a default in 01/08 and therefore the original assessment used the correct specified percentage and could be upheld (albeit in the figure to which HMRC have reduced it by their letter of 16 March 2009).
22.	 But we do not need to decide our view of whether a default must be properly notified to count because we come to the conclusion – explained below – that irrespective of whether the 04/07 default should have been counted, the 07/08 assessment was not wrong from the start and could be and was validly amended.  
23.	On the facts of this case, at the time of the 07/08 penalty assessment the taxpayer had – ignoring period 04/07 - three prima facie defaults.  There were the notified defaults with outstanding VAT for periods 07/06 and 01/07 and the taxpayer has not challenged these.  The taxpayer had also been assessed to a penalty in respect of period 01/08 as he was prima facie in default with outstanding VAT.  HMRC issued an estimated assessment because the taxpayer had not filed its return:  the taxpayer had not paid the full amount shown in this estimated assessment.  Therefore, prima facie, he was in default with outstanding VAT.  And this prima facie default with outstanding VAT continued until the taxpayer did submit its return for period 01/08 which was on 18 September 2008.  But this was after HMRC issued on 12 September 2008 the penalty assessment for period 07/08.
24.	So at the time the assessment under appeal was issued it was on the face of it using the correct specified percentage of 15%.  Later (in fact only a few days later) the taxpayer filed its belated return for period 01/08 which showed that there was no outstanding VAT in that period:  in our opinion this meant that HMRC could and did validly amend the assessment to reduce the specified percentage to 10% (clearly choosing not to take the 04/07 default into account presumably because it was not notified).
25.	Another way of putting this is that the assessment under appeal was not wrong from the start (and could be amended) because the 01/08 penalty assessment was not wrong from the start.  We therefore resolve the question of whether the assessment in respect of period 07/08 was valid in favour of HMRC.
Whether taxpayer had a reasonable excuse
26.	The taxpayer believed that he had a reasonable excuse for his late payment in period 07/08.  He had not realised until he keyed in the instructions to his bank that there was a £10,000 transaction limit on BACS.  He rarely used BACS other than to pay HMRC and had never before attempted to make a payment over £10,000.  He thought that it was reasonable not to have anticipated the problem that had materialised on the day.  With hindsight he realised he could have overcome the problem by arranging a CHAPS payment to HMRC but it had not occurred to him at the time
27.	HMRC did not consider that the taxpayer had a reasonable excuse.  In HMRC’s view it is normal for banks to have limits on BACS transfers.  Once Mr Bentley’s computer told him that he could not make the full BACS transfer to HMRC, Mr Bentley should have made another arrangement to get the money to HMRC on time and not just have left instructions to the bank to transfer the majority of the VAT payment a day later, resulting in a default.
28.	We decided that the Appellant did not have a reasonable excuse.   We think that when faced with the problem that the bank would not accept an instruction to make a BACS payment of more than £10,000, the prudent businessman would have contacted the bank to arrange another sort of payment which would have reached HMRC in time, such as a CHAPS payment.    We also thought that when choosing to continue to use BACS, Mr Bentley could have ensured that it was the £10,000 which was sent first and only the balance late.
29.	We dismiss the appeal.
30.	The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules.   The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

Barbara Mosedale
TRIBUNAL JUDGE
RELEASE DATE: 13 May 2009