[2011] UKFTT 238 (TC)

TC01102

Appeal number:  TC/10/09424

Value Added Tax – Value Added Tax Act 1994, Sections 59 and 71 – default surcharge - whether absence of administrative assistant and upgrading of computer amounted to a reasonable excuse – Appeal dismissed.

FIRST-TIER TRIBUNAL

TAX 

	DIGITAL SOLUTIONS TECHNOLOGY LIMITED	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL JUDGE:	W Ruthven Gemmell, WS	

Sitting in public in Edinburgh on 24 March 2011

David O’Brien for the Appellants

Alan Donnachie, for the Respondents 

© CROWN COPYRIGHT 2011

DECISION
The Appeal

1.	This is an appeal against the imposition of a default surcharge penalty in an amount of £1,519.80 being 15% of the £10,132.01 due for the period ending on 31 July 2010 (07/10) which was imposed due to the late submission of the return and the late payment of the liability shown on the return.
2.	The return was due for submission on or before 31 August 2010 and was received on 7 September 2010 and the payment was due electronically on or before 7 September 2010 and was received on 10 September 2010.
3.	Mr O’Brien gave evidence for the Appellants and Mr Donnachie for the Respondents and both were credible.
Legislation
4.	Value Added Tax Act 1994 provides:- 
Section 59 The default surcharge.
(1) Subject to subsection (1A) below if, by the last day on which a taxable person is required in accordance with regulations under this Act to furnish a return for a prescribed accounting period—
(a) the Commissioners have not received that return, or
(b) the Commissioners have received that return but have not received the amount of VAT shown on the return as payable by him in respect of that period,
then that person shall be regarded for the purposes of this section as being in default in respect of that period.
(1A) A person shall not be regarded for the purposes of this section as being in default in respect of any prescribed accounting period if that period is one in respect of which he is required by virtue of any order under section 28 to make any payment on account of VAT.
(2) Subject to subsections (9) and (10) below, subsection (4) below applies in any case where—
(a) a taxable person is in default in respect of a prescribed accounting period; and
(b) the Commissioners serve notice on the taxable person (a “surcharge liability notice”) specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of the period referred to in paragraph (a) above and beginning, subject to subsection (3) below, on the date of the notice.
(3) If a surcharge liability notice is served by reason of a default in respect of a prescribed accounting period and that period ends at or before the expiry of an existing surcharge period already notified to the taxable person concerned, the surcharge period specified in that notice shall be expressed as a continuation of the existing surcharge period and, accordingly, for the purposes of this section, that existing period and its extension shall be regarded as a single surcharge period.
(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) For the purposes of subsections (4) and (5) above a person has outstanding VAT for a prescribed accounting period if some or all of the VAT for which he is liable in respect of that period has not been paid by the last day on which he is required (as mentioned in subsection (1) above) to make a return for that period; and the reference in subsection (4) above to a person’s outstanding VAT for a prescribed accounting period is to so much of the VAT for which he is so liable as has not been paid by that day.
(7) If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above 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 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,
he shall not be liable to the surcharge and for the purposes of the preceding provisions of this section he shall be treated as not having been in default in respect of the prescribed accounting period in question (and, accordingly, any surcharge liability notice the service of which depended upon that default shall be deemed not to have been served).

Section 71 Construction of sections 59 to 70.

(1) For the purpose of any provision of sections 59 to 70 which refers to a reasonable excuse for any conduct—
(a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and
(b) 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.
(2) In relation to a prescribed accounting period, any reference in sections 59 to 69 to credit for input tax includes a reference to any sum which, in a return for that period, is claimed as a deduction from VAT due.

The Facts and Submissions
5.	The Appellants were in a default position for the period 01/09 which had a payment due date of 28 February 2009.  This was the first default and was caused by the late submission of the return and payment.
6.	Payment was received on 17 March 2009.  
7.	A Notice of Assessment of Tax Surcharge Liability Notice (VAT 165) was served on the Appellants on 13 March 2009 setting out the details of the default stating that the Appellants may be liable for a surcharge if they were in default in respect of the prescribed accounting period ending within the surcharge period which ran from the date of the notice until 31 January 2010.
8.	The notice then goes on to explain what a default is, what would happen if there was a further default and how the surcharge was calculated.  In particular, it stated that the rate of surcharge would increase progressively starting at 2% for the first payment default, increasing progressively to 5%, 10% and 15% for further payment defaults in a surcharge period.
9.	A further default took place in the period ended 04/09 which resulted in a Notice of Assessment of Tax Surcharge Liability Notice Extension extending the surcharge period to 30 April 2010 and stating that the surcharge assessment rate would be calculated at 5%.  The note attached to this notice set out the explanation of what constituted a default and what would happen in the event of a default and of the rate charged. 
10.	For the periods ended 07/09 and 10/09 central assessments were levied in the absence of the Respondents receiving VAT returns by the due date.  This resulted in a six month return being initially returned by the Appellants for the period from 1 May 2009 to 31 October 2009 and then subsequently a return was filed for the period from 1 May 2009 to the period 31 July 2009.
11.	A number of adjustments took place in relation to the actual amount of tax due but for the purposes of the default surcharge a surcharge of 5% of the tax due was charged in respect of the period ending 07/09 and a surcharge at the rate of 10% amounting to £700.40 for the VAT period ending 10/09.
12.	For the tax quarter ended 01/10, the return was submitted on time by 28 February 2010 but payment was not received, and then by means of a voluntary disclosure, until 5 October 2010.  A surcharge was imposed at the rate of 15% amounting to £978.07.
13.	For the quarter 07/10 the tax due on 31 August 2010 was received on 10 September and is the subject of the Appeal.
14.	At that time, the surcharge rate was 15% as stated in a Notice of Assessment of Surcharge and Surcharge Liability Notice Extension issued on 17 September 2010.
15.	The Respondents issued a decision letter on 15 November 2010 and a review took place on 10 January 2011 maintaining the decision of 15 November 2010 and stating that the Respondents did not accept that the Applicants had a reasonable excuse for the defaults.
16.	The Appellants’ submissions leading up to that appeal were that they had to upgrade the hardware and software within their administration department.  The Appellants stated that the work started on 31 August and that they had been assured by the supplier that it would take no longer than two days.  
17.	As at 20 September 2010, the Appellants claimed the work was still continuing and that the systems, while operating, were only running at about 60% of capability.
18.	The Appellants also stated that the individual who was responsible for their administration was absent from work on “6, 7 and 8 August” to attend an autism course in relation to her son.  This was prearranged and agreed and something that the Appellants said could not be avoided.
19.	The employee returned to work “on 9 August” and the company managed to get the files returned and Mr O’Brien paid the sum due the next morning.
20.	It is clear from this letter that the Respondents may when carrying out the review have been of the view that the absence from work was one month prior to the date when payment was being processed and may therefore have seemed unrelated to the period when the tax was actually due which was by 10 September 2010.
21.	The Appellants’ letter, stating the dates of absence as having taken place in August, was written on 28 September.
22.	At the hearing, however, the Appellants led evidence that the administrative assistant was not available at the time payment was due, that is to say at the beginning of September 2010 and this evidence was not contested or disputed.
23.	The Tribunal’s view based on Mr O’Brien’s evidence at the hearing is that the employee was absent at the beginning of September rather than at the beginning of August.
24.	The Respondents’ letter of 10 January 2011 dealing with the internal appeal set out the Respondents’ conclusion, reiterated at the hearing, that the absence of the administrator was foreseen and alternative arrangements could have been expected to have been put in place and, similarly, that the upgrade of the IT systems was also a foreseeable and planned event and that contingency plans should have been put in place in case of any problems.
25.	The Respondents carried out a review of their decision on 13 December 2010 stating that overlooking the payment was classed as a genuine mistake but for surcharge purposes this was not acceptable as a reasonable excuse.
26.	The Appellants say that the information for the return was available on time but that payment was late because of the computer problems and the absence of key staff, both of which were responsible for the late submission of the return and payment.
Findings
27.	The Tribunal, based on the evidence, found that, notwithstanding the difficult circumstances surrounding the absence of the administrator, reliance on third parties did not constitute a reasonable excuse.  In relation to the computer software problems, this was known in advance and contingency plans or a change of date should have been considered.  Accordingly, this did not constitute a reasonable excuse.
28.	The Appeal is accordingly refused. 
29.	This document contains full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

W RUTHVEN GEMMELL, WS
TRIBUNAL JUDGE

RELEASE DATE:  11 APRIL 2011

Amended pursuant to Rule 37 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules on 14 April 2011.