[2011] UKFTT 399 (TC)
TC01254
Appeal number: TC/2010/05998
VAT-
default surcharge – reasonable excuse- held no; proportionality issue:
adjourned.
FIRST-TIER TRIBUNAL
TAX
NESHAMA
MUSIC LTD Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
CHARLES HELLIER (TRIBUNAL JUDGE) HARVEY
ADAMS
Sitting in public at Holborn
Bars , London on 20 October 2010 and 31 march 2011
Danny Shine, company secretary
of the Appellant, for the Appellant
Jonathan Holl at the intial
hearing and Steve Brager at the resumed hearing for the Respondents
© CROWN COPYRIGHT
2011
DECISION
Introduction
1. The
Appellant appeals against a default surcharge of £1,147.84 imposed by the
Respondents in respect of the period 1 September 2008 to 31 November 2008 ( the
“11/08”period), being 10% of the VAT due for that period.
2. This
is the final and full decision of the tribunal in this appeal. At the intieial
hearing of the appeal the Appellant raised the question of whether the
surcharge was proportionate, At that time the tribunal had released a decision
in the case of Enersys Holding UK Limited in which it had held
that the surcharge in that case should be set aside because it was
disproportionate. HNRC had sought permission to appeal the dicision which had
been granted and the hearing of the appeal by the Upper Tribunal was awaited.
Having heard the parties on the other issues we adjourned the appeal and
prodiced a Direction in which we recorded the facts as we had found them and
our conclusions on the other issues and directed that the Appellant had leave
to argue the Proportionality issue after the Upper Tribunal had released its
decision in the Enersys appeal,.
3. But
HMRC later abandoned the Enersys appeal. The tribunal admisistration
therefore relisted the adjourned appeal so that we could hear the parties’
arguments on the proportionality issue. This decision is a full decision in the
appeal and replicates the passages in our earlier direction dealing with the
facts and the issues argued at the earlier appeal.
4. The
resumed hearing of the appeal was listed by the tribunal admisnistration for
hearing after 2pm on 31 March 2011. Another appeal was also listed for the same
time. We heard the other appeal first. Mr Braeger, who appeared fro HMRC at the
adjourned appeal told us that Mr Shine had turned up for the hearing but after
waiting a some time had left at about 3.15pm. We are sorry that Mr Shine had to
wait and was unable to stay until we had finished the first appeal, but in the
circumstances it seemed just to continue the resumed appeal.
The Provisions of VATA
5. Section
59 VATA provides for the imposition of a “default surcharge”. Mr Shine found
this terminology legalistic and confusing. We can quite see his point. The
surcharge is in layman’s terms a penalty or a fine. It is not called such for
rather arcane reasons. In this decision, so that our meaning may be clear to Mr
Shine and those who assist him, we call it a penalty. The relevant part of section
59 provides:
“(1) Subject [to a provision irrelevant to this case] 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…
(2) Subject to [irrelevant provisions], 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 from the purposes of this section as period ending ion 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
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 fro that period and £30.
[(5) sets the “specified percentage at 2%,5%,10%, or 15%
according as the relevant default is the first, second, or third , or fourth or
subsequent default in the surcharge period in relation to which VAT was paid
late.]
[(6) defines the “outstanding VAT – on which the penalty
is calculated by the application of the relevant percentage – ass the VAT due
for the period which has not been paid on time.]
(7) If a person who, apart form 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 a
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 the
VAT not having been so despatched,
he shall not be liable to the surcharge…”
6. Section
71 VATA restricts the scope of the phrase “reasonable excuse” by providing that
for the purposes of section 59 ( and other sections irrelevant to this appeal):
“(a) an insufficiency of funds to pay any VAT 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.
7. The
Court of Appeal made clear in the Steptoe case that the effect of
section 71 is not to prevent the reason for an insufficiency of funds or the
failure of a person relied upon constituting a reasonable excuse, although
whether it does will always depend upon the circumstances.
Our Findings of Fact
8. We
had before us a bundle prepared by HMRC which contained copies of
correspondence between the parties. We heard the evidence of Mr Shine. From
that evidence we find as follows.
9. The
Appellant was late in paying the VAT shown as due on its VAT returns for the
quarters 05/07, 11/07, 08/08, and 11/08. It was late in delivering its VAT
return for 08/07. The delay in its payment for the 11/08 quarter was five days:
the payment was made on 12 January 2009 by electronic means and was due on 7
January 2009.
10. On 13 July 2007
HMRC despatched a surcharge liability notice (see section59(2) VATA quoted
above; henceforth we abbreviate this to “SLN”) to the Appellant specifying a
surcharge period ending on 31 May 2007. HMRC despatched notices extending the
surcharge period (see section 59(3) VATA quoted above; we call these “SLEN”s)
following the late payments for 08/07, 11/07, and 08/08, which extended the
surcharge liability period so that it lasted until 31 August 2009.
11. We find that it
is likely that these documents were received by the Appellant. Mr Shine
recalled the receipt of at least one of them. In relation to the earlier part
of the period concerned Mr Shine told us that an accountant was engaged to deal
with VAT, and in the later part an employee had that task. We find it likely
that these notices were received by or entrusted to the accountant or the
employee.
12. Although the
service of the relevant SLN and SLENs created a surcharge period which entitled
HMRC to assess a penalty for each of the periods 08/07, 11/07, and 08/08, no
such penalty was assessed. HMRC have a policy of not assessing this penalty
when the amount of it would be less than £400 except where the 10% penalty rate
applies.
13. On 3 November
2008, 17 days before the end of the 11/08 period in relation to which the
penalty is under appeal, Mr Shine or someone on behalf of the Appellant,
telephoned HMRC’s National Advice Service. He said that he had received a
“surcharge liability notice extension for VAT for 08/08 and didn’t really
understand it. He was told that it meant that he “needed to be on time with
your returns and payments for the next four periods in order to avoid the
financial penalty.”. We conclude that Mr Shine or someone on behalf of the Appellant
made the call: HMRC’s summary of the call records “Daniel Shine (Comp Sec)” as
making the call on that day; in the transcript of the recorded conversation the
caller identifies him or herself as Sam, and says that he or she holds the
position of Company Secretary. Mr Shine explained to us that he was the company
Secretary of the Appellant. We find that the call was made by Mr Shine or
someone on behalf of the Appellant.
14. Mr Shine told
us, and we accept, that he found the language of the SLN and SLEN difficult to
understand. We accept that it does not have the immediate appeal of an
advertising billboard and requires careful reading.
15. The VAT returns
sent to the Appellant had on them an emboldened statement that the taxpayer
could be liable for a financial penalty if the return or the VAT payable was
late.
16. On the reverse
of each SLN and SLEN are notes which explain the penalty regime under headings:
“What is a default,…What will happen if I default…How is the surcharge
calculated [explaining the increase from 2% to 15%] …Is there a minimum amount
[explaining that assessments will not be issued for less than £400 except for
the 10% penalty]”.
17. The Appellant’s
employee who prepared the VAT return for 11/08 was on vacation during the
Christmas period during which the VAT return and payment would normally have
been finalised.
18. In late December
2008 Mr Shine’s eldest daughter was ill in hospital.
The Appellant’s submissions
19. Mr Shine’s
principle argument was that the imposition of the penalty was, in the
circumstances, unjust. The Appellant had been only a few days late in paying
its VAT for the 11/08 period. A penalty of 10% of the VAT for a few days delay
was unfair, uncommercial and disproportionate. Further the imposition of a
penalty required fair warning: the notices from HMRC were written in legal
goobledegook, not in language an ordinary person would understand: even the
word “default” was confusing – most people these days would understand
“default” to mean a position to which one returned if no change was made, as in
a default setting on a computer. Had he known that he would suffer a 10%
penalty for late payment he would have ensured (as he has since) that payment
was made on time.
20. In
correspondence with HMRC Mr Shine also relied upon the absence of the employee
who completed the VAT return and the illness of his daughter.
Discussion
21. We start by
considering the words of section 59. We will turn to Mr Shine’s submission that
it operates unjustly later.
22. It is clear to
us that the section imposes a 10% penalty if a taxpayer has been served with an
SLN and SLENs which create a surcharge period in which he is late in paying VAT
on three occasions, and that an SLN or SLEN may only be served if the taxpayer
has been late in paying VAT or in delivering his return.
23. We have found
that the Appellant was late in paying VAT or in delivering its return on a
number of occasions and that SLN and SLEN were served on him relating to those
events. A surcharge period was created and the late payment for 11/08 was the
third late payment in the period. As a result a penalty under section 59(4) is
assessable. There were three occasions on which VAT was paid late, so the rate
of penalty is 10%. The VAT due was £11,478.44, so the penalty is correctly
determined at £1,147.84.
24. As a result of
section 59(7) the penalty will not be assessable, and the default ignored if
the Appellant has a reasonable excuse for its failure.
25. We note that the
section speaks of a reasonable excuse for the VAT not having been despatched,
not a reasonable excuse for the taxpayer not having known about the penalty.
Thus whether or not the Appellant knew of or understood the penalty provisions
is irrelevant to determining whether or not it has a reasonable excuse.
Therefore the failure or otherwise of the notices to explain the penalty
provisions clearly is irrelevant to whether or not the Appellant had a reasonable
excuse for its failure to pay on time. Even if it were relevant, in our view it
would be reasonable for a taxpayer to consider those notices slowly and
carefully; on such careful consideration it would be reasonable for a taxpayer
to realise that penalties could accrue for future late payment. Further, in our
view, the notice on the VAT return itself gives a clear warning of a possible
penalty. Even if the taxpayer did not understand the SLN or SLEN form, the
conversation with HMRC’s National Advice Service contained a clear warning that
a penalty would be assessable if the next payment of VAT was late. We do not
therefore consider that the Appellant has a reasonable excuse on the grounds
that the forms were not well understood by the Appellant.
26. We do not
consider that the absence on vacation over the Christmas period of the employee
dealing with the VAT returns provides a reasonable excuse. It would have been
reasonable for a taxpayer to take steps to ensure that its VAT administration
was completed before the employee went on holiday or that someone else took
over the role during the period of the holiday.
27. The illness of a
relation could in our view, in appropriate circumstances give rise to a
reasonable excuse for a failure. In this case however, we did not find that the
illness of Mr Shine’s daughter in late December constituted such an excuse. The
evidence before us did not indicate that her illness had prevented the return
being completed either by Mr Shine or by an employee or an external accountant.
28. We are somewhat
perturbed by HMRC’s policy of not assessing small penalties. The legislation
provides initially for small penalties which later escalate for a good reason.
That is that the smaller penalties serve to make the taxpayer aware that delay
will cost him something – to provide a small shock so that a later large blow
may be avoided. We considered whether the failure to assess the 2% and 5%
penalties could constitute a reasonable excuse on the basis that it would lull
the taxpayer into a false sense of security, a feeling that despite his delays
no penalty would arise, that HMRC had acquiesced to his failures. However,
whilst it seems to us possible that, in appropriate circumstances, this might
be the case, Mr Shine’s evidence was, not that he construed the SLENs and the
notes on the back in this way, but that he did not understand them. He cannot
therefore have been led into a false sense of security. No reasonable excuse
therefore arises on this ground in this case.
29. We therefore
conclude that section 59(7) affords no escape for the Appellant and on the
words of section 59 the assessed penalty is payable.
Proportionality
30. We now address
the argument that the provisions of section 59 provide for a disproportionate
penalty in this case.
31. The relevant
principle is broadly this: provision in relation to VAT made by a member state
which deprives a citizen of his property may be struck down where it goes
further than is necessary in order to achieve its objective, but in considering
this question it must be recognised that member states have the widest possible
margin of appreciation for determining what penalties are appropriate to
underpin the functioning of the VAT system operating in their own country. The
test is expressed slightly differently in the various judgements: is the
penalty devoid of reasonable foundation? or is it not merely harsh but plainly
unfair?
32. In Enersys
Holdings UK Ltd TC00385, the tribunal held that a penalty was
disproportionate could and should be set aside, without concluding that the
surcharge system as a whole was defective. In that case it struck down a
default surcharge on the grounds that it was wholly disproportionate to the
gravity of the offence, not merely harsh but plainly unfair. Its imposition
went further than was necessary, even allowing a wide margin of appreciation to
achieve the objectives of the state. In that case the taxpayer made a mistake
and paid one day late and, as a result incurred a penalty of some £130,000.
33. In Kaisen
Search Limited TC/2010/09331 the tribunal said at [29]:
“We note that in Enersys the conclusion that the
default surcharge in that case was “wholly disproportionate to the gravity of
the offence” (paragraph 69) shows that the Tribunal considered, as we do, that
in deciding whether a penalty is disproportionate it is necessary to do what
the default surcharge regime does not, which is to consider:
The “gravity of the default: in particular to what extent
the taxpayer was at fault;
How long the VAT was outstanding;
The amount of the surcharge relative to the wealth of the
defaulter”
34. We find this
list helpful. Whilst the issues to be considered on any occasion may not be
limited to those listed, the list is a good starting point
35. How grave was
the Appellant’s default? It had been late in paying VAT on three previous
occasions and had been notified that if it defaulted again it could be liable
to a penalty. It found the notices difficult to understand, but did not attempt
to remedy that by careful study. There had been confirmation of the possibility
of a penalty in a telephone conversation with HMRC. The Appellant must have
known that it was important to pay its VAT on time. But there was no suggestion
that it took any extra care to make sure its VAT was paid on time in the
relevant quarter. The employee who prepared the VAT return was on holiday in
the relevant period. The delay was not caused by a simple mistake but was
attributable to the failure of the Appellant to take reasonable steps to ensure
that previous defaults were not repeated. The failure was not deliberate, and
Mr Shine may have been somewhat preoccupied by his daughter’s illness: it was
not a very serious failure but there was a degree of culpable negligence in the
Appellant’s lack of action.
36. How long was the
VAT outstanding? In this case it was paid five days late. This was not a
deliberate delay but it was not the case of a slip which was rectified the next
day, or of a failure to push the right key on the computer to transmit the
funds until one minute past midnight. The delay was not neglible.
37. How harshly does
the penalty bear upon the Appellant? Its VAT returns disclose the following
turnover and net liabilities:
|
VAT Period
|
Turnover
|
Net VAT due
|
|
05/07
|
50,318
|
7,966
|
|
08/07
|
49,752
|
6,891
|
|
11/07
|
63,703
|
9,885
|
|
08/08
|
34,634
|
4,987
|
|
11/08
|
87,125
|
11,478
|
38. From these we
conclude that the Appellant had an annual turnover of some £220K. Clearly its
profit would have been smaller, but in the context of a business of this size
it did not seem to us that a penalty of £1,147 was clearly excessive.
39. Because the
Appellant’s VAT liability for 11/08 was some 50% higher than the average for
other quarters, the size of the penalty (being a percentage of the VAT
liability) was greater than it would have been for a default in similar
circumstances in other quarters. To that extent the penalty bore harshly upon
the Appellant. But this was not a case where the VAT liability was many times
that for other quarters ( as might perhaps be the case for a seasonal
business), where perhaps it might be the case that the penalty was
plainly unfair.
40. We conclude that
the penalty was not plainly unfair even though it might have borne heavily on
the Appellant. It was not in our view devoid of reasonable foundation.
Conclusion
41. The Appellant
defaulted, there was no reasonable excuse for its default, the penalty was
properly levied and was not disproportionate in the circumstances. We dismiss
the appeal.
Right to Appeal
42. 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.
Charles Hellier
TRIBUNAL JUDGE
RELEASE DATE: 21 JUNE 2011
