[2012] UKFTT 136 (TC)
TC01831
Appeal number:
TC/2011/02333
Default
Surcharge – late payment of tax – suggestion caused by illness – no real
evidence- no reasonable excuse – question whether penalty for following period disproportionate
– jurisdiction – not disproportionate in sense of “not merely harsh but plainly
unfair” – appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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MAD DOG CASTING
LTD
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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Judge Judith Powell
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Richard Thomas
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Sitting in public at 45 Bedford Square, London WC1 on 28 September 2011
Mr Peter Hooper, Adviser, for
the Appellant
Mr Hugh O’Leary Officer with
HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2012
DECISION
The Appeal
1.
This is an appeal against default surcharges for the periods 8/10 (the 3
months to 31st August 2010) and 11/10 (the 3 months to 30th
November 2010).
2.
In respect of the period 8/10 the Appellant says it has a reasonable
excuse for late payment of tax because of the illness of the director and only
person authorised to make payment. If the Appellant can demonstrate it has a
reasonable excuse for the late payment of tax then we can allow the appeal for
this quarter which would have an effect on the rate of default surcharges for
subsequent periods.
3.
In respect of the period 11/10 the Appellant says that if the rate of
surcharge is 10% (which it will be unless we allow the appeal against the
surcharge for the immediately preceding period) it is excessive and
disproportionate whereas if it is reduced to 5% they will withdraw their
appeal. There was some suggestion that they were also appealing against the
surcharge for 11/10 on the grounds that they did not have the necessary funds to
pay on time but they did not pursue that argument in front of us.
4.
We heard the evidence in respect of the period ending 8/10 and
concluded that the Appellant did not have a reasonable excuse for its failure
to pay the tax on time. We announced our conclusion at the end of the hearing
about that quarter and the Appellant asked us to consider the issue of
proportionality in respect of the period ending 11/10. We carefully listened
to what Mr O'Leary had to say on behalf of HMRC about our jurisdiction to hear
the argument about proportionality (which he argued we did not have) and his
submission that if we did have jurisdiction the penalty itself was not
disproportionate. We reserved judgement to consider these issues.
The period 8/10 and the excuse for late payment
Facts
5.
The Appellant’s business was to provide extras for films. At the time
the tax was due for the 8/10 quarter the only person able to authorise payment
by the Appellant was Mr Yazdanian who is a director of the Appellant company.
6.
Mr Hooper explained he was not present at a meeting of the Appellant
Company held on 6 October when it seems that Mr Yazdanian was taken ill nor did
he know the nature of the illness and he did not have any medical evidence
about it. Mr Yazdanian was not present to give evidence. Mr Yazdanian was
unable to authorise payment (he was the only person with the necessary
authorisation codes) until 8 October which mean that the payment could not be
made on the due date of 7 October.
The Law
7.
The effect of section 59(7) Value Added Tax Act 1994 is that if the
Appellant can show it has a reasonable excuse for its failure to pay the tax
for 8/10 on time its appeal will succeed and the penalty will not be payable.
This will also have the effect of reducing the penalty payable for the
following quarter.
Our Decision
8.
It is of course possible for illness to be a reasonable excuse for late
payment of tax in some circumstances. However in this case we were given only
a very scanty account of Mr Yazdanian’s illness and it was quite impossible for
us to conclude that his illness gave the Appellant a reasonable excuse for its
failure to pay tax on time in this case. We were not given any details of the
nature of the illness. We accept that Mr Hooper had tried without success to
get medical evidence and no one who was present at the meeting when Mr
Yazdanian was taken ill was available to elaborate on what happened. We accept
that a book keeper (who has now left the company) told the director that she
had spoken to someone at HMRC who told her that the penalty would not be
imposed since the tax was only one day late but because no trace of this
conversation can be found by HMRC within its records and the book keeper was
not present to elaborate we cannot accept that this was what she was told.
9.
We dismissed the appeal against the surcharge for the 08/10 period. No
issue of proportionality was put forward for that period.
The period 11/10 and proportionality
Facts
10.
The Appellant’s turnover increased significantly during the period
ending 11/10 because the company won a new contract in connection with a film
that required a large number of extras. The company faced cash flow issues at
the time the VAT was due to be paid and the Appellant was unable to make
payment on time. Mr Hooper was very straightforward in explaining that the
company knew when the VAT was due to be paid and had chosen to allocate its
funds in a way which left it unable to pay the VAT on time and we accept what
he said. He did not pursue any argument that the Appellant had a reasonable
excuse based on an underlying cause for its inability to pay. We accept that
the directors were influenced in making their decision to pay the VAT late (and
use available funds to pay other tax liabilities) because of the conversation
their then book keeper reported to them as having had with HMRC (that the
penalty for 8/10 would be waived) and their belief that the surcharge penalty
would be based on 5% rather than 10% of the unpaid tax for the 11/10 quarter.
The VAT was paid in stages and the final amount was paid some 69 days late.
Part (£101,345.78) was paid within 14 days of the due date, a further amount
(£81,697.12) was paid on 8 February a further amount (£70,000) was paid on 17
February and the balance (£40,000) was paid on 17 March.
Submissions
11.
The Appellant’s submission is simple. The penalty is disproportionate
to its underlying purpose of encouraging taxpayers pay on time in relation to a
case such as this where the tax due for a single quarter is unusually high
compared with the average taken over a year.
12.
Mr O’Leary spoke from notes about the question of the Tribunal’s
jurisdiction to hear this submission but was not able to elaborate upon them;
in essence he submitted that the decision of the Tribunal in Enersys
Holdings UK Ltd v Revenue and Customs Commissioners [2010] UKFTT 20(TC) (which
decided it did have jurisdiction) was wrong and was not binding upon us. If,
contrary to what he said about jurisdiction, the Tribunal did have jurisdiction
to consider proportionality then he submitted that the present case could be
distinguished from Enersys (where there was a delay of one day caused by
a human error in timing) since in the present case there was a 69 day delay
before the tax was paid in full and the failure to pay tax resulted from a
conscious decision of the taxpayer to pay other liabilities first. He noted
there was neither a prior agreement between the Appellant and HMRC to pay late
or any record of the payment problems being discussed between them before the
due date. He agreed that although every conversation between taxpayers and
HMRC’s National Advice Service about default surcharges are supposed to be
recorded it is always possible for the occasional conversation to be missed.
He added that because it is also their usual practice to ask any taxpayer who
asks for a penalty to be waived to write in with a formal request to that
effect setting out the facts it is unlikely that someone at the Service waived
the penalty for the 8/10 period over the phone without making a record of the
conversation.
Our Decision
13.
We conclude it is unlikely that any conversation between the book keeper
and HMRC resulted in an agreement to waive the 8/10 penalty. We moved on to
consider the issue of proportionality.
14.
It is not disputed that if we have jurisdiction to hear the
proportionality argument then there are only two outcomes. One is that we
dismiss the argument in which case the appeal fails and the penalty is payable
in full. The other is that we find that the penalty is disproportionate and
allow the appeal on that ground in which case no penalty is payable. We do not
have power to mitigate the penalty as, perhaps, the Appellant was inviting us
to do.
15.
We read the Respondents written submissions on the question of
proportionality. Mr O’Leary was frank in saying that he could not elaborate on
these and Mr Hooper confessed that he struggled to follow them. We found the
submissions focussed mainly on the question of our jurisdiction to consider
whether the system as a whole was flawed rather than whether, whilst accepting
that the system itself was not flawed, we might consider the proportionality of
an individual penalty. There was some passing reference to jurisdiction in
individual cases and in this context to the Human Rights Act as well as the
status of the tribunal as an "appropriate court or tribunal" but as I
have already said Mr O'Leary was not able to expand upon this argument.
16.
We considered the cases to which the written submissions referred and
particularly to the cases of Barnes v Hilton Main Construction [2005] EWHC 1355 (Ch) Enderbey Properties v HMRC [2010] UKFTT 85(TC) Enersys
and Greengate Furniture Ltd Customs and Excise Comis [2003]
V&DR 178. We found the following extract from Enersys the most
relevant particularly on the question whether the tribunal could consider the
proportionality argument in respect of an individual penalty.
“[55]…..Taken
together, the observations of the tribunal in Greengate Furniture too
show that it was considering both the system and the penalties imposed on the
individual appellant. Its comment that ‘there may be cases where a surcharge
does meet the test in Roth’ is in my view incapable of being read in a
way which is consistent with the proposition that only an attack on the whole
system will suffice. Of course, the system is not irrelevant to the enquiry
since its objective is an important factor, perhaps the most important factor,
but I am satisfied that it is open to me to consider the individual penalty
without having first concluded that the system, as a whole, is disproportionate.”
17.
We note that the decision in Enersys is not binding upon us. We
took particular note of what the President said in Enersys that
“[69] I am quite willing to accept – indeed
experiences of its operation tells me - that the default surcharge regime, by
and large, produces a fair penalty, or at least one which is not obviously
disproportionate to the offence albeit that I have particular misgivings about
the absence of any correlation between the period of the delay and the amount
of the penalty. But as I have indicated, the penalty imposed in the case is in
my view wholly disproportionate to the gravity of the offence - it is, as Simon
Brown LJ put it in Roth ‘not merely harsh but plainly unfair’ and
I am not persuaded, in the absence of any justification of it that it can be
saved by the State’s margin of appreciation. It is in my view one of those
exceptional cases which the tribunal had in mind in Greengate Furniture.”
18.
We respectfully agree with the conclusion of the Tribunal about our
jurisdiction and consider that we can look at the individual penalty and
determine whether it does meet the test in Roth that it is not merely
harsh but plainly unfair.
19.
In Enersys the tribunal remarked
“[61]….A pertinent question to ask is whether, if the
penalty were not determined mechanically but by a court or tribunal with the
power to set any monetary penalty it chose without statutory constraint, that
court or tribunal, exercising ordinary judicial discretion would impose a
penalty of as much as £130,000 for an error of this kind. In my view the
answer is obvious: it is unimaginable that such a high penalty would be
imposed. Taking the penalty imposed in this case in isolation though against
the background of the public interest in the prompt payment of taxes it seems
to me that it is an inescapable conclusion that it is disproportionate”.
20.
In this context we considered the facts of the present case. The
penalty, calculated at the 10% rate is just under £30,000. This penalty is
calculated with reference to the entire amount of tax unpaid on the due date and
it is irrelevant that some of the unpaid tax was paid at different times after
that date and that only some of it remained outstanding for 69 days. The
amount of the penalty charged here is less than the amount in Enersys (as
is the amount of unpaid tax) but importantly, the reason for the late payment
is different; the Appellant made the deliberate decision to delay payment and
use its available funds to pay other liabilities. This shows that the
Appellant regarded the penalty as something they were prepared to incur so that
they could use available monies elsewhere. If the purpose of the surcharge is
to encourage taxpayers to pay on time it failed in its objective in this case.
Whether the Appellant would have taken the same decision if it had been clear
it was 10% remains a matter of conjecture. This is not a case where there is a
single day’s delay due to a human error nor are there any other features that
make the penalty plainly unfair. The amount of the penalty might be described
as harsh but we conclude that in this case it is not “plainly unfair”; indeed we
wonder if it is unfair at all. Accordingly we dismiss the appeal.
21.
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.
Judith Powell
TRIBUNAL JUDGE
RELEASE DATE: 16 February 2012
