[2009] UKFTT 233 (TC)

TC00182
Appeal number LON/2009/0401

VAT – default surcharge – reasonable excuse – dismissal of key employee – reliance on another person

FIRST-TIER TRIBUNAL

TAX 

	J. Z. MACHTECH LIMITED	Appellant

	- and -

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

				TRIBUNAL: 	ROGER BERNER (Judge)

Sitting in public in London on 27 May 2009

Jonas Zambakides, Managing Director, for the Appellant

Gloria Orimoloye, Advocate, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This is an appeal by J. Z. Machtech Limited (“the Appellant”) against a default surcharge assessed on the Appellant in respect of late payment of VAT for the quarterly period 1 August 2008 to 31 October 2008.  The tax outstanding on the due date was £33,492.88, and the surcharge was levied at the rate of 10%, giving a liability of £3,349.28.
2.	The surcharge arose because the default occurred in a surcharge period.  The surcharge period had been extended so as to include the date of the ending of the VAT period in question (31 October 2008) by a surcharge liability notice extension dated 12 September 2008 which emanated as a result of a default in respect of the period 1 May 2008 to 31 July 2008.  The surcharge period was extended to 31 July 2009.  If this surcharge liability notice extension was for any reason invalid, any default in respect of the period 1 August 2008 to 31 October 2008 would have been outside the surcharge period (the previous period would then have expired on 31 August 2008), and no surcharge would then be due.  For this reason Mrs Orimoloye, on behalf of HMRC, graciously said that, if having explored the circumstances of the September 2008 extension notice there were found to be grounds on which it could be overturned, she would not oppose my granting, to the extent necessary, leave to appeal against that notice out of time.  The appeal proceeded on that basis.
3.	The Appellant appeared through its managing director, Mr Jonas Zambakides, who also gave evidence for the Appellant and was cross-examined.  HMRC were represented by Mrs Gloria Orimoloye, Advocate.  Each party produced separate bundles of documents.
4.	In this decision I must refer to the actions of two individuals who worked for the Appellant at the relevant time, but who did not appear to give evidence.  Because in each case certain findings of fact have been made in respect of those individuals, and neither was present to contradict anything that was said, I do not in this decision refer to those individuals by name, but instead describe them as Employee A and Freelancer B respectively.
The Facts
5.	From the evidence before me I find the following facts:
(1)	By reason of it making its payments of VAT through the BACS system, the Appellant was permitted to file its returns and make payments of VAT up to seven days after the end of the month following the end of the quarterly period.  This was by virtue of para 21.3.1 of the VAT Guide (Notice 700), which also requires that if the 7th day falls on a weekend payment must be received by the previous Friday.  Thus, since 7 December 2008 fell on a Sunday, for the quarterly period 1 August 2008 to 31 October 2008 payment was due on Friday, 5 December 2008.
(2)	Payment in respect of the quarterly period to 31 October 2008 was received by HMRC on 8 December 2008.  It was not disputed by the Appellant that this was a late payment.
(3)	The Appellant is a small company, which employs less than 20 employees.
(4)	For about 6½ years up to 3 November 2008 the VAT accounting for the Appellant was carried out by a key member of staff, Employee A, who was also responsible for the accounts of the Appellant.  Employee A had received training in VAT accounting from the firm’s accountants, Williams Kennedy.  A serious incident arose in respect of Employee A, the details of which were explained to me but which are not themselves material to my decision, as a result of which a meeting was held on 30 October 2008 between Mr Zambakides and Employee A.  Employee A was then asked, by letter dated 31 October 2008, to attend a disciplinary hearing on 3 November 2008.  That disciplinary hearing took place, and by letter dated the same day Employee A was dismissed on grounds of gross misconduct.
(5)	Prior to the dismissal of Employee A, the internal VAT accounting system of the Appellant had been that Employee A would complete the proper VAT form for signature by Mr Zambakides.  This was usually prepared some time in advance of the filing date.  Since February 2007, when the Appellant switched to the BACS system for online payment of VAT, Employee A had been permitted to go online, but the final authorisation was done by Mr Zambakides.
(6)	Following the dismissal of Employee A on 3 November 2008, the Appellant was then left with no cover for the VAT and other accounts functions.  To address this, Mr Zambakides first approached Williams Kennedy with a view to obtaining temporary cover, and was offered a junior for a two-week period at a rate of £170 per day.  Mr Zambakides did not take this offer up, but made enquiries of other contacts, as a result of which one of the investors in the Appellant suggested Freelancer B, who was a chartered accountant and available on a freelance basis.  Freelancer B started work for the Appellant about two weeks after 3 November 2008, and according to Mr Zambakides was able to get up to speed quite quickly with the administration, and with understanding the Appellant’s systems.  Freelancer B was given responsibility for preparing the VAT return for the period to 31 October 2008.
(7)	On 3 December 2008 Mr Zambakides was at a board meeting in London of a trade organisation, the Retail Motoring Industry Federation (“RMIF”), which was a long-standing engagement.  He received a text on that day from Freelancer B giving him the amount of VAT payable for the quarter ended 31 October 2008.  Once the RMIF meeting had concluded, Mr Zambakides had to catch up on his paperwork and at 18.39 hrs, according to the computer log, he attempted to action payment of the VAT amount through the BACS system.  This was the first time that Mr Zambakides had himself had to go online to make such a payment.   As the payment was being made after 3pm, the date for payment was specified on-screen as 8 December 2008.  Mr Zambakides considered whether he should make a priority payment, which would have been immediate, but this could also only be done up to 3pm.  Although it would have been possible for an immediate priority payment to have been made on the following day, Mr Zambakides had another pre-arranged meeting in Birmingham on that day.  Consequently, because of possible difficulty accessing a computer on the following day, Mr Zambakides decided to make the BACS payment effectively on 8 December 2008.
(8)	In making this decision, Mr Zambakides explained in evidence that he had been told by Freelancer B that payment up to 10 days after the end of the quarter (so in this case up to 10 December 2008) would be acceptable.  Although he very frankly admitted that he had some doubts about what Freelancer B had told him, Mr Zambakides had this in mind when he decided to go ahead with the payment on 8 December 2008.  In cross-examination, Mr Zambakides confirmed that he was familiar with the BACS system and the difference between that system and priority payments.
(9)	The VAT return for the period to 31 October 2008 was received by HMRC on 3 December 2008 and I infer from this, and find as a fact, that it was completed and posted to HMRC at least one day earlier.
(10)	Mr Zambakides said, and I accept, that he had not been aware of the surcharge liability notice extension dated 12 September 2008.  That extension had arisen as a result of late receipt by HMRC of the return in respect of the period 1 May 2008 to 31 July 2008; the return had been due by 7 September 2008 and had been received on 9 December 2008, even though the return itself was dated as signed by Mr Zambakides on 29 August 2008.  The VAT for that period was paid on time.
(11)	There was no evidence as to the date of despatch of the return for the period to 31 July 2008.  An HMRC notepad entry dated 19 September 2008 records, and I find as a fact, that Employee A telephoned HMRC to enquire the reason for the subsequent surcharge liability extension notice, and that Employee A had been informed that the return had been received on 9 September 2008.  There was no evidence that Employee A had followed this up in any way.
(12)	The late receipt of the return for the period to 31 July 2008 was not the first occasion on which a return of the Appellant had been received late.  This had previously occurred in relation to the returns for 1 September 2006 to 30 November 2006, for 1 March 2007 to 31 May 2007 and for 1 June 2007 to 31 August 2007.  For the period to 30 November 2006 the VAT return was dated 8 January 2007 and was received by HMRC on 11 January 2007.  For the period to 31 May 2007 the return was dated 6 July 2007 and was received on 19 July 2007.  For the period to 31 August 2007 the return was dated 3 October 2007 and was received on 10 October 2007; for that period, as for the period to 31 July 2008, the VAT was also paid on time.
The Law
6.	Section 59(1) of the Value added Tax Act 1983 (“VATA”) provides that if, by the last day on which a taxable person is required in accordance with regulations under VATA to furnish a return for a prescribed accounting period, either (a) HMRC have not received the return, or (b) HMRC have received the return but have not received the amount of VAT shown on the return as payable in respect of that period, the taxable person shall be regarded as being in default in respect of that period.
7.	Section 59(4) provides for a surcharge in respect of a default, and s 59(5) sets out the amount of the surcharge, being the specified percentage of the outstanding VAT for the prescribed period.  The specified percentage for the purpose of this appeal is 10%.
8.	This is subject in each case to s 59(7), which reads as follows:
“If a person who, apart from this subsection, would be liable to a surcharge under [s 59(4)] satisfies the Commissioners or, on appeal, a tribunal that, in the case of a default which is material to the surcharge-
(a) the return or, as the case may be, the VAT shown on the return was despatched at such a time and in such a manner that it was reasonable to expect that it would be so 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 despatched.”
9.	A default is “material to the surcharge” if (s 59(8)):
(a) it is the default which, by virtue of [s 59(4)], gives rise to the surcharge; or
(b) it is a default which was taken into account in the service of the surcharge liability notice upon which the surcharge depends and the person concerned has not previously been liable to a surcharge in respect of a prescribed accounting period ending within the surcharge period specified in or extended by that notice.”
Accordingly both the default of the Appellant in respect of the late payment in respect of the quarterly period to 31 October 2008, and the default in respect of the late delivery of the return for the period to 31 July 2008, which gave rise to the surcharge liability extension notice dated 12 September 2008, were defaults material to the surcharge which is the subject of this appeal.
10.	Section 71 VATA contains further provision regarding reasonable excuse.  Of relevance to this appeal is s 71(1)(b) which 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.”
Discussion
The Return Default
11.	As I have described above, the Appellant was in default in respect of the late delivery of the return for the period to 31 July 2008, a default that was material (in that a surcharge liability extension notice had resulted from it) to the surcharge in issue in this appeal.  The question I have to address in this respect is whether, as described in s 59(7)(a), I am satisfied that the return was despatched at a time and in such a manner that it was reasonable to expect that it would be received by HMRC within the appropriate time limit.
12.	Having considered all the available evidence in this respect, I am not so satisfied.  The burden of proof is on the Appellant, and I cannot say on the balance of probability that the return was despatched at a time such that s 59(7)(a) would apply.  Mr Zambakides was unable to provide any evidence of actual despatch.  It was not possible for me to infer from the date on which the return had apparently been signed (29 August 2008) that its date of despatch was at any particular time.  There was evidence that the returns were typically prepared and signed in advance of despatch, and as I have found there was one earlier occasion (in July 2007) when the return was dated some 13 days prior to its receipt by HMRC.
13.	I also take into account the fact that Employee A, after having been informed by HMRC on 19 September 2008 that the reason for the issue of the surcharge liability extension notice was the late receipt of the return for the period to 31 July 2008, is not recorded as having objected that it was posted in good time, and apparently pursued the matter no further.  I regard it as more likely than not that if the return had been posted in good time at least some reference to that fact would have been made by Employee A.  I regard that omission as supportive of my finding that I am not satisfied that the return was despatched at such a time that it was reasonable to expect that it would be received by HMRC within the applicable time limit.
The Payment Default
14.	That leaves the default in payment of the VAT for the period to 31 October 2008 to be considered.  Here I must decide whether there is a reasonable excuse for the fact that the VAT was not despatched at such a time or in such a manner that it was reasonable to expect that it would be received by HMRC within the applicable time limit.
15.	In this appeal both the time and the manner of despatch of the VAT fall to be considered.  Put simply, if Mr Zambakides had either made the electronic BACS transfer at least one day earlier, or had used the priority payment system (which would have enabled an immediate transfer of funds to be made) up to 3pm on 5 December 2008, the payment would either have been received on time, or if not actually received it would have been reasonable to expect it to have been so received.  The reasons for these failures must be examined to determine whether they can constitute a reasonable excuse.
16.	Mr Zambakides argued that the sudden and unexpected dismissal of Employee A from the Appellant’s employment on 3 November 2008 constituted a reasonable excuse for the late payment.  Employee A was a key member of staff who had been responsible for the making of the VAT returns and for setting up the payments of VAT for authorisation by Mr Zambakides.  The loss of Employee A meant that Mr Zambakides himself, for the first time, had been required to initiate the electronic payment process. The VAT had only been finalised on 3 December 2008, and the amount had been sent to him by text message to his mobile telephone, and on this day he was attending an RMIF board meeting in London, and so it was not until after 3pm on that day that he had been able to access the electronic payment system. He had been misled by Freelancer B into thinking that payment up to 10 December 2008 would be acceptable, and consequently had thought that, although the BACS system would only permit a payment on 8 December 2008 at the time when Mr Zamabakides was accessing the system on 3 December 2008, such payment would be in time.
17.	In a number of Tribunal cases it has been held that a sudden loss of key personnel, in circumstances where there is no time to make arrangements to deal with the problem, can be a reasonable excuse.  Each case of course depends on its own facts.  I have decided that this case does not fall into that category.  Employee A was dismissed on 3 November 2008, leaving one month before the VAT had to be paid in for arrangements to be made to cover that loss and ensure that the VAT return and payment were properly made.  That, it seems to me, was sufficient time to deal with the problem of Employee A’s sudden departure.  
18.	In my view, the loss of Employee A, although it represents the context in which the default in payment for the period ending 31 October 2008 was made, was not the proximate cause of that default.  It is of course the case that if Employee A had remained in the Appellant’s employment the circumstances that gave rise to the default would not have arisen.  But that is not the test here.  The test is whether it is reasonable for the Appellant to rely on the loss of Employee A as an excuse for the late payment.  In my view, in relation to a payment of VAT required to be made one month after that loss, it is not.
19.	The proximate reasons for the late payment were, firstly, the fact that Mr Zambakides went online on 3 December 2008 after 3pm to pay using the BACS system, and secondly that, having been wrongly advised by Freelancer B that payment by 10 December 2008 would be acceptable, he went ahead with the BACS payment although he knew that this would result in payment on 8 December 2008, and did not adopt the alternative priority payment method on either of the following two days that should have resulted in payment being received by HMRC by 5 December 2008.  I consider each of those factors to determine whether in the circumstances there is a reasonable excuse.  In doing this I remind myself that the Appellant in this case is a limited company, and is not Mr Zambakides himself.  In so far as Mr Zambakides put forward reasons for his own failure to make the VAT payment on time, the Appellant is effectively arguing that those reasons represent a reasonable excuse for the Appellant’s default.  As I have set out, s 71 VATA provides that where reliance is placed on another person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon can be a reasonable excuse.  The Appellant cannot therefore simply point to the fact that Mr Zambakides and Freelancer B were relied upon to perform tasks in relation to the payment of the VAT.  But if there are reasons for the failure of those individuals to perform their respective tasks, those reasons may be capable of representing a reasonable excuse for the Appellant’s default.
20.	 Mr Zambakides put forward two reasons why he was online on 3 December 2008 after 3pm.  Firstly, he said that he was advised of the VAT figure by text only on that day.  I have no reason to doubt Mr Zambakides’ evidence to this effect, but it seems to me that the figure could have been provided to him at least one day earlier.  The VAT return was received by HMRC by post on 3 December 2008, and so must have been posted by 2 December 2008 at the latest.  If Mr Zambakides had been informed of the figure earlier he would at least have had the possibility of accessing the BACS system in time to make payment by 5 December 2008.  This is not therefore a reasonable excuse.  Secondly, Mr Zambakides was engaged at the RMIF meeting in London on that day.  I find that this was not a reasonable excuse as the meeting was a long-standing prior engagement, and could have been taken into account by Mr Zambakides in making his arrangements so that he would have been able to pay the VAT.
21.	Mr Zambakides decided to proceed with the BACS payment on 3 December 2008 in the knowledge that this would result in payment being received by HMRC on 8 December 2008, and in spite of his doubts whether this would be payment in due time.  He was aware of the priority payments system which could have enabled payment to be received by HMRC by 5 December 2008 if it had been used on 4 or 5 December 2008, but decided not to adopt this course having regard to his commitments on 4 December 2008 to the Birmingham meeting.  Again, I do not find this to be a reasonable excuse, as the Birmingham meeting, like the meeting in London, was a long-standing engagement which could have been taken into account by Mr Zambakides.
22.	Mr Zambakides said that he was not familiar with the payment requirements.  On this I accept that Mr Zambakides was not as familiar with the making of VAT payments as Employee A had been; his role had hitherto been limited to authorisation of the payments.  However, Mr Zambakides was not totally unfamiliar with the payment system, and indeed successfully made the payment, albeit late.  Mr Zambakides had been aware of the switch to the BACS system in February 2007, and was sufficiently knowledgeable to have had doubts about the advice as to payment date he had received from Freelancer B, but did not make further enquiries.  I find that Mr Zambakides’ inexperience of VAT payment procedures is not a reasonable excuse; even if Mr Zambakides had been so inexperienced as not to have been able to make the payment on time, this would not be a reasonable excuse as the Appellant ought then to have been aware of these shortcomings and made arrangements, which it had the time and opportunity to do, to ensure that the VAT was paid when it was due.
23.	Mr Zambakides had relied upon Freelancer B in two respects.  First, he relied upon Freelancer B to provide him with the VAT figure for payment.  In examining whether this can be a reasonable excuse for Mr Zambakides’ failure to pay on time, and thus for the Appellant, s 71 again applies.  Mere reliance on Freelancer B cannot be a reasonable excuse.  I have described above my finding that the VAT figure could have been provided earlier.  Accordingly, I find that Freelancer B had been dilatory in performing that task.  No reason was advanced for the failure on the part of Freelancer B to provide the VAT figure earlier, and there is no reasonable excuse for that failure.  That failure cannot therefore constitute a reasonable excuse for the failure of Mr Zambakides, or the default of the Appellant.
24.	Mr Zambakides also relied upon the assertion by Freelancer B that payment by 10 December 2008 would be acceptable.  In this connection I have to consider whether the fact that Mr Zambakides relied upon advice which proved to be wrong can represent a reasonable excuse for him and thus for the Appellant.  The advice given was an inaccuracy on the part of Freelancer B, and I decide that, by virtue of s 71(1)(b) VATA, such an inaccuracy in Freelancer B’s advice cannot be relied upon as a reasonable excuse by Mr Zambakides for the late payment of the VAT, or for the default of the Appellant.  This case is distinguishable from that decided by the VAT and Duties Tribunal in Enterprise Safety Coaches Ltd (Decision No 5391) where the taxpayer, through its employee, relied on external accounting advice and it was held that merely acting in good faith on erroneous advice was not precluded by what is now s 71 VATA from being a reasonable excuse.  Here the advice was not external advice but advice given by one person engaged in the Appellant’s service to another.  In those circumstances, because a taxpayer would not be able to rely on the actions of the first such person if that person had himself undertaken the task, it cannot be right that the position would be different merely because that person wrongly advises another such person in the organisation who then performs the task.  Nor does it matter that in this case Freelancer B was not an employee but was engaged on a freelance basis.  The advice proffered by Freelancer B does not represent external advice of the nature considered in Enterprise Safety Coaches Ltd. 
Fairness
25.	Mr Zambakides complained that, given that the VAT payment was a mere one working day late, a surcharge at the rate of 10% was harsh.  The Tribunal has no power to mitigate a default surcharge.  Mrs Orimoloye referred me to a decision of the VAT and Duties Tribunal in Greengate Furniture Ltd v Customs & Excise Commissioners (2003, unreported) where the Tribunal had considered the question of whether the default surcharge infringes the principle of proportionality.  In that case the Tribunal had the benefit of argument by counsel instructed by the Treasury Solicitor to act as advocate to the Tribunal.  The Tribunal decided that it was unable to conclude that the default surcharge system as a whole was “devoid of reasonable foundation” or “not merely harsh but plainly unfair” (see International Transport Roth GmbH v Home Secretary [2002] 3 WLR 344, at para 26), and that the system did not offend against the principle of proportionality.  I find therefore that this is not a ground that can support the Appellant’s appeal in this case.
Decision
26.	For these reasons I dismiss this appeal.  There was no application for costs.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First0tier Tribunal) (Tax Chamber) Rules 2009.  The parties are referred to “Guidance to accompany a Decision of the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 19 June 2009