[2011] UKFTT 651 (TC)
TC01493
Appeal number: TC/2011/02441
VAT –
default surcharge – electronic return prepared and submitted on final day of
extended period – VAT payment initiated the same day once amount known –
whether despatched in sufficient time – held, no – whether reasonable excuse
for late despatch – held, no – appeal dismissed
FIRST-TIER TRIBUNAL
TAX
EYESTAR
CONSULTING LTD Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL: JOHN CLARK (TRIBUNAL JUDGE)
SUSAN
HEWETT
Sitting in public at Southampton on 8 June 2011
Christopher Lincoln-Jones,
Director, for the Appellant
David Lewis, Appeals Unit, HM
Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2011
DECISION
1. The
Appellant (“Eyestar”) appeals against the imposition of a default surcharge at
the rate of 15 per cent, amounting to £692.55, for the period 03/10.
The facts
2. Mr
Lincoln-Jones provided information in the course of his presentation, and was
cross-examined by Mr Lewis; we therefore treated Mr Lincoln-Jones’ statements
as evidence. Mr Lincoln-Jones also provided certain copy documents. In addition
the Respondents (“HMRC”) provided a bundle of documents. From the evidence we
make the following general findings; we deal with certain specific findings
later in this decision.
3. Mr
Lincoln-Jones filed the VAT return for Eyestar electronically on 7 May 2010.
His submission of the return was confirmed as having been successful at 09:33:47. The copy in HMRC’s records shows the due date and date of receipt as 7 May 2010. The
reason for submission on that date was not specified; see below. Having
calculated the VAT balance due to HMRC, Mr Lincoln-Jones initiated the bank
payment process.
4. The
payment was received by HMRC on 11 May 2010; the bank payment method used was
BACS.
5. Eyestar
had previously been in default for the period 06/09. No tax had been due to
HMRC for that period, the tax assessed being a credit balance of £8.16.
However, the VAT return had been received by HMRC on 12 August 2009. As a
consequence, HMRC had extended the surcharge period previously notified to
Eyestar (as a result of earlier defaults). The period of the extended notice
was until 30 June 2010, the rate being 15 per cent.
6. On
14 May 2010 HMRC notified Eyestar of a default for the period to 31 March 2010
(ie 03/10).
7. Mr
Lincoln-Jones took no action following the receipt of this notification until
he received a letter from HMRC’s DM [ie Debt Management] Office dated 9
November 2010. He stated:
“1. Thank you for [the letter dated 9 November
2010], although I must say it causes me some bafflement. It refers, I think, to
an automatically generated letter sent to me in May. This accused me of late
payment, I checked my records then and have done so again now to ascertain when
funds were transferred and I have a bank receipt of [number] dated 7 May 10.
2. I had ignored the reminder as it was obviously
generated without human intervention and, as you can see from the above, is
obviously a mistake. I do not resent this but would ask that you correct the
error so that your system stops sending me these letters.”
8. On
30 December 2010 HMRC’s Local Compliance office in Newcastle upon Tyne wrote to
explain the balance of £516.09 VAT outstanding to date. The table set out in
that letter showed that the surcharge assessment of £692.55 had been debited to
Eyestar’s account with HMRC on 14 May 2010. The return for period 07/10 [which
had not involved any default] resulted in a debit of £2,722.73. This increased
the debit balance to £3,415.28. A remittance of £2,722.73 had been received on
30 July 2010, bringing the debit balance back down to £692.55. On 4 November
2010 a payment had been authorised in the sum of £176.46, reducing the debit
balance to £516.09.
9. On
20 January 2011 Mr Lincoln-Jones wrote to HMRC’s Default Surcharge Review Team
“concerning a debt that HMRC erroneously believe is owed”. He enclosed proof of
a bank transfer to HMRC of 7 May 2010. He indicated that he [ie Eyestar] was
due to pay VAT at the end of the month, and stated that he would deduct the
balance shown in HMRC’s letter dated 30 December 2010, and that this would save
HMRC the trouble of a refund.
10. On 9 February
2011 HMRC’s Local Compliance Appeals and Reviews Unit based in Edinburgh responded with the results of the review. The conclusion was that HMRC did not
agree that payment was sent or initiated in time to reach HMRC by the due date.
Eyestar’s electronic payment for period 03/10 had not been received until 11
May 2010, whereas the due date for the payment was no later than 7 May 2010.
Accordingly, the default for period 03/10 would remain in force. If Eyestar
still disputed the decision, it had 30 days from the date of the review letter
in which to lodge an appeal to the First-tier Tribunal (Tax).
11. On the same date
Mr Lincoln-Jones wrote to both HMRC’s Default Surcharge Review Team and to
HMRC’s Local Compliance office in Newcastle to state that there had been no
response to his letter dated 20 January 2011. He referred to the most recent
VAT payment, which reduced the balance outstanding shown in HMRC’s letter dated
30 December 2010, while he awaited HMRC’s response.
12. On 25 February
2011 Mr Lincoln-Jones wrote both to the Tribunals Service and to HMRC’s Edinburgh office challenging the conclusion of the review letter.
13. HMRC’s Edinburgh office responded on 9 March 2011 to Eyestar’s request (in its letter dated 9
February 2011) for a further review, explaining that HMRC were only permitted
to carry out one review for each decision under dispute. The details of the
right to appeal and the contact address were repeated.
14. On 12 April 2011
HMRC’s Edinburgh office responded to Eyestar’s letter dated 25 February 2011
“in which you again request a further review of the default surcharges
applied to your VAT account”. This response repeated in bold type the statement
that HMRC were only permitted to carry out one review for each decision under
dispute and that such review would be based on all the evidence available to
the department at that time.
15. Mr Lincoln-Jones
replied to that letter on 23 April and explained that the case had gone to HM
Courts & Tribunal Service.
16. Eyestar’s Notice
of Appeal was dated 27 March 2011 and was received by the Tribunals Service on
29 March 2011. Eyestar explained in subsequent correspondence that it had
previously sent to the Tribunals Service a copy of its letter dated 25 February
2011, and questioned why its appeal was considered to have been made out of
time.
Decision on application for permission to appeal out of time
17. Eyestar’s
explanation for the late submission of the Notice of Appeal form is that HMRC’s
review letter dated 9 February 2011 had not stated that an appeal should be
lodged with the Tribunals Service on a particular form or where such a form
might be procured. Eyestar contended that in good faith an appeal had been
lodged in plenty of time, by means of its letter dated 25 February 2011
according to the best information available.
18. At the hearing
HMRC did not seek to challenge the appeal on the grounds that it had been made
late. However, in the interests of wider publication of the procedural
requirements, we feel it appropriate to make comments in respect of this issue.
19. The purpose of
requiring notice of appeal to be given on a specific form is to ensure that all
parties to appeals are treated on an equal and uniform basis. The Notice of
Appeal form and the supporting guidance are available from the “justice”
website, on the Appeals page of the Tax Tribunals section. They can also be
requested in hard copy from the Tribunals Service Tax office in Birmingham. Completing the official form ensures that all the appropriate information is
provided in order to enable the appeal process to be dealt with in the proper
way. Attempts to use an informal process can result in difficulty and possibly
lack of fairness to parties. It is therefore necessary for the official Notice
of Appeal form to be properly completed in accordance with the guidance and
submitted within the time limit, namely within 30 days of the HMRC decision
against which the applicant seeks to appeal.
20. We do consider
that there would be some merit in HMRC correspondence being amended to indicate
that the necessary form and guidance should be obtained from HM Courts and
Tribunals Service or from the relevant section of the “justice” website.
21. Our decision on
Eyestar’s application, which was implicit in our proceeding with the hearing of
the substantive appeal, is that despite the delay in submission of the formal
Notice of Appeal and the absence of any details at section 6 of that Notice, we
consider it to be in the interests of justice for the appeal to proceed
notwithstanding that, as a formal matter, it was out of time. Appellants should
not assume that such applications will automatically be granted; the view of
the particular tribunal considering any such application will be based on the
specific circumstances of the applicant in question. The current appeals system
is comparatively recent, having taken effect in April 2009, and as it matures
there may be less reason for tribunals to accept late appeals based on lack of
acquaintance with the proper procedures.
Arguments for Eyestar
22. Mr Lincoln-Jones
explained that his business affairs were interfered with by his military
commitments. His lifestyle was “a bit chaotic”. He described himself as the
only competent member of his organisation.
23. The action of
filing the return was also the calculation of money owing either way, whether
to HMRC or Eyestar. Eyestar’s turnover was just large enough to be within the
charge to VAT [ie for Eyestar to be registrable on the basis of its turnover].
The process was for him to fill in the online form, see how much needed to be
paid, and then to go to the internet bank account.
24. On 7 May 2010 he
had carried out the calculation and then immediately made the payment. He
commented that he could not get it to HMRC any earlier. He contended that it
was unreasonable not to accept that he had paid the tax on the day when he had
filed the return.
25. He had been sent
advice on how to avoid default surcharges. This explained that an extra seven
days was allowed for electronic submission. In the third paragraph the note
stated that where direct debit was involved, HMRC collected funds three days
after the return date. He therefore questioned why it was unreasonable for him
to say that the VAT was paid on the day of filing. In the absence of a
completed return he would have to guess the amount payable. The note did not
state that it was necessary to allow five days for payment to be received by HMRC.
He contended that he could not file the return before 7 May 2010. He referred
to a letter dated 27 May 2011 which he had sent to a Mr Foster at HMRC’s
Belfast Local Compliance Appeals and Reviews Unit office, a copy of which he
handed in during the hearing.
26. HMRC had argued
at the hearing that the return should be submitted earlier so that the funds
could reach HMRC in time. If this was the case, why was this not stated in
HMRC’s notices and guidance? The return was due on the due date. This was also
the date on which the calculation of the VAT due could be performed. Otherwise,
Mr Lincoln-Jones could not pay the VAT unless he guessed what was due.
Arguments for HMRC
27. Mr Lewis
referred to the relevant legislation, ss 59, 59A and 59B of the Value Added Tax
Act 1994 (“VATA 1994”), as well as s 71 dealing with reasonable excuse. It was
clear that Eyestar had paid late. Eyestar had previously been within the
default surcharge regime. The guidance referred to the time required for
payments to reach HMRC’s bank account. In the present case the payment had not
done so until 11 May 2010.
28. HMRC submitted
that there was no reasonable excuse for the late arrival of Eyestar’s VAT
payment. HMRC’s Notice 700/50 “Default Surcharge” stated at the end of
paragraph 3.1:
Please remember whether you pay electronically or by
cheque you must allow enough time for payment to clear our bank account by the
due date. Contact your bank well before the due date if you are in any doubt
about how long the transfer of funds will take.”
29. Mr Lincoln-Jones
had referred to not knowing how much VAT to pay until he had completed the
return. The normal due date for VAT returns, one month after the end of the VAT
period, allowed a full month to complete the return. Mr Lincoln-Jones should
have completed it earlier. The “faster payments” service could not be used for
payments to HMRC’s account. On behalf of Eyestar, Mr Lincoln-Jones should have
allowed three days for the payment to reach that account.
30. Mr Lewis
referred to Slough Motor Co (1994) VAT Decision 11818. In Eyestar’s
case, the period under appeal was its fifth default; it had been in the default
surcharge regime since 2005.
31. The surcharge
was not excessive; Eyestar should have been aware of the way in which default
surcharge was calculated. Instigating the transfer of the funds on the due date
did not mean that they would be received on the due date. Eyestar should have
made arrangements to ensure that the VAT amount was paid and received on time.
Discussion and conclusions
32. As Mr Lewis
indicated, the normal time limit for making VAT returns is by or on the last
day of the month next following the end of the period to which the return
relates (VAT Regulations 1995, SI 1995/2518 reg 25(1)). However, HMRC are
entitled to extend the time limits under which a registered person may submit
his returns. A person making payment by electronic means (BACS, Bank Giro
Credit Transfer, CHAPS, card payment, National Direct Debit or Online VAT
Direct Debit) will receive an automatic extension of seven days to the time
limit for both making payment and submitting his return. This is pursuant to a
direction made by HMRC in accordance with SI 1995 reg 25A(20).
33. Although the
time limits for making the return and making payment are both extended, the
obligation on the registered taxable person is to make the electronic payment
in time for the cleared funds to reach HMRC’s account before the extended
period comes to an end. This obligation is made clear in the VAT Regulations 1995
reg 40(2B)-(2D) (inserted with effect from 1 December 2009 but applying to
payments made from 1 April 2010 onwards) when dealing with cheque payments; it
is less clear in relation to electronic payments. However, we can see no basis
for construing the VAT Regulations differently in respect of different methods
of payment, as the underlying policy for traders’ compliance obligations is to
ensure that payment to HMRC is made on time. This must denote receipt by HMRC
rather than initiation of the payment process by the trader.
34. In any event,
the requirement under the VAT Regulations 1995 reg 40(2) and (2A) is as follows:
“(2) Any person required to make a return shall pay
to the Controller such amount of VAT as is payable by him in respect of the
period to which the return relates not later than the last day on which he is
required to make that return.
(2A) Where a return is made or is required to be
made in accordance with regulations 25 and 25A above using an electronic return
system, the relevant payment to the Controller required by paragraph (2) above
shall be made solely by means of electronic communications that are acceptable
to the Commissioners for this purpose.”
35. Details of the requirements
imposed by HMRC pursuant to the direction referred to above are contained in
HMRC’s VAT Notices. We have set out above the extract from Notice 700/50
Default Surcharge. We should point out that the version of the Notice from
which this is taken is that dated July 2010, which was later than the events
resulting in the imposition of the default surcharge on Eyestar. There is a
similar statement at paragraph 21.3.2 of Notice 700 (“The VAT Guide”). We
consider that these statements, made in VAT notices which all traders should
read and take into account, make clear the obligation to ensure that electronic
payments reach HMRC on time.
36. As a
consequence, allowance must be made for the time taken by the banking system
for funds to move from the trader’s account and be transmitted into HMRC’s
account. It is therefore insufficient for funds merely to have left the trader’s
account; this does not amount to payment to HMRC. The funds must be received by
HMRC within the extended time limit; failure to ensure this may result in the
trader falling within the default surcharge regime.
37. In order to
comply with its payment obligations, the trader needs to pay the amount of VAT
actually due. This requires a proper calculation of the amount due. We accept
Mr Lincoln-Jones’ argument that in practical terms this requires completion of
the VAT return in order to establish what is due from the trader to HMRC, or
what is due from HMRC to the trader. However, we do not accept his argument
that, as the final date for submission of the electronic return is seven
calendar days after the end of the month following the VAT period, this
prevents calculation of the VAT before that stage and therefore makes it
impossible to initiate the payment process until that date. The extended time
limit for the return is the final date for its submission, not the only or
required date.
38. The period
covered by the return ends one month and seven calendar days before that final
date. This gives a significant period for the necessary information to be
collected and checked and the return to be prepared and finalised for
submission. We are aware that many traders carry out this process well before
the relevant time limit has expired. Although submission of the return on the
final date meets the obligation in respect of its submission, it does not
enable the correctly calculated amount of VAT due to be paid in such a manner
as to give time for it to reach HMRC’s account by the due date.
39. Section 59(7) of
the Value Added Tax Act 1994 provides:
“(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 . . .”
40. Thus there are
two separate questions to be considered in Eyestar’s case. The first is whether
the VAT shown on the return was despatched at such a time that it was
reasonable to expect it to have been received by HMRC within the extended time
limit of seven calendar days after the normal due date. If the answer to this
first question is no, then was there a reasonable excuse for the VAT not having
been despatched in time?
41. The day on which
Mr Lincoln-Jones gave instructions to Eyestar’s bank to make payment was the
seventh day after the normal due date. As a result, the only way in which
payment to HMRC could have been effected so as to reach HMRC on time was some
form of instantaneous transfer, such as a CHAPS transfer. The actual method
used as a result of Mr Lincoln-Jones’ internet instruction to the bank was
BACS, which is not an instantaneous method. The information sheet entitled
“Advice to help you avoid a Default Surcharge”, which we find that Mr
Lincoln-Jones would have seen previously following earlier defaults of Eyestar,
refers to one of the electronic payment methods as “BACS Direct Credit (via
telephone banking, internet banking, or in person at the bank) . . .” It also
indicates, after explaining that payments due on the seventh day need to be
made earlier where that day falls on a weekend or bank holiday (in which case
the payment must reach HMRC’s account by the last working day beforehand) that
the trader should: “Check with your bank to see how long it will take them to
process payments.” There was no evidence that Mr Lincoln-Jones had made any
such check with the Appellant’s bank.
42. We therefore
find that the VAT due from Eyestar to HMRC in respect of period 03/10 was not
despatched at such a time that it was reasonable to expect it to reach HMRC’s
account within the extended time limit.
43. Did Eyestar have
a reasonable excuse for the late despatch of the VAT? We do not think so. Mr
Lincoln-Jones did not explain why his calculation of the VAT due from Eyestar
could not be performed until the final due date for submission of the return.
As we have pointed out above, that date is one month and seven days after the
end of the VAT period. Without further explanation, none having been given in
the course of the correspondence or before us, we cannot see any reason for the
calculation having been made at the latest possible stage, given the need to
ensure that the VAT reached HMRC’s account in time.
44. Mr Lincoln-Jones
did refer to his military commitments, which involved him being absent from his
business for periods of two weeks at a time. When Mr Lewis asked him whether he
had been away between March and May 2010, Mr Lincoln-Jones was unsure whether
he had. In the absence of evidence to suggest that his military commitments had
prevented him from dealing with the VAT return at an earlier stage, we find
that they had not. His insistent response was that he always used the seventh
day for making the return.
45. Mr Lincoln-Jones
referred to passages in the VAT Notices and other documents suggesting that VAT
would be collected three days after the seventh day. However, this fails to
take account of the full information set out by HMRC. Notice 700/50 Default
Surcharge at paragraph 3.1.1 states:
“If you pay by:
an electronic method other than direct
debit you will normally get up to seven extra calendar days in which to
submit your return and payment
Online Direct Debit you will normally
get an extra seven calendar days to submit your return. We will collect
payment from your bank account on the third bank working day after the
extended due date for your return.
If the due date falls on a weekend or bank holiday,
you must ensure that cleared funds reach our bank account by the last bank
working day beforehand.”
46. The reference to
the further three days is clearly restricted to payment made by Online Direct
Debit, which was not the method adopted by Mr Lincoln-Jones on behalf of
Eyestar. This extract also makes clear that HMRC’s requirement is for cleared
funds to reach their account by the final day of the extra seven day period, or
before then if that day is not a business day.
47. We therefore
hold that Eyestar was in default for VAT period 03/10 because the VAT due to
HMRC was not despatched at a time and in a manner that it was reasonable to
expect that it would be received by HMRC within the appropriate time limit. We
further hold that there was no reasonable excuse for this default. Eyestar’s
appeal is therefore dismissed.
48. We would like to
make comments on the format of the explanation at the end of paragraph 3.1.2 of
Notice 700/50. The final section of this paragraph is as we have set out at
paragraph 28 above. However, this passage is part of paragraph 3.1.2 of the
Notice, headed “3.1.2 Paying by cheque.” To make the position clear to traders,
we recommend that it should be set out under a separate paragraph number and
heading, such as “Ensuring that payments reach us in time”. It might also be
advisable for the passage to be printed in bold type.
Right to apply for permission to appeal
49. 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.
JOHN CLARK
TRIBUNAL JUDGE
RELEASE DATE: 28 July 2011
