18679

DEFAULT SURCHARGE – Reasonable excuse – Appellant accepted in credit transfer scheme – Appellant’s erroneous belief that seven days’ grace applied also to payment by cheque – Lack of communication within Appellant company – Whether reasonable excuse – No – Appeal dismissed – VATA 1994 s 59(7)

LONDON TRIBUNAL CENTRE

	JERVIS B WEBB COMPANY LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:        ANGUS NICOL   (Chairman)
						MRS E M MACLEOD CIPM 

Sitting in public in London on 2 June 2004

Terence Mahoney, director, for the Appellant 

Alistair Dougall, advocate, of the Office of the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	Jervis B Webb Co Ltd (the Appellant) is one of two companies which are the subsidiaries of an American parent, also called Jervis B Webb.  The Appellant carries on business since the 1960s first in Milton Keynes and more recently in Northampton.  It was known as the Southern Company.  The other subsidiary of the American parent is Europa Engineering Ltd (“Europa”) (known as the Northern Company) which carries on business manufacturing and installing fabricated metal work in Rotherham.  The Appellant’s business was that of manufacturing and installing conveyor systems for the automotive industry. It was acquired by the American parent in 1997, at which time it was a major subcontractor to the Appellant.  The Appellant and Europa together formed a VAT group registration.

2.	The appeal is against two default surcharges. The first is in respect of the period which ended on 31 December 2002. The due date for that period was 31 January 2003, and the Commissioners received the Appellant’s return on 4 February 2003.  The amount of tax declared due for that period was £102,970.41.  This being the fifth default during the extended surcharge liability period, a surcharge of 10 per cent was imposed, in the sum of £10,297.  The second surcharge under appeal relates to the period to 30 June 2003.  The tax declared due for that period was £264,095.23, and the surcharge, at 15 per cent, was £39,614.

Grounds of appeal

3.	The Appellant’s grounds of appeal gave a brief explanation of the working of the VAT group, and continued:

“(a)	. . .  Jervis B Webb having suffered several years of trading losses was restructured, almost all staff being made redundant.  The accounting function was at this point transferred to Europa Engineering Ltd.  We were informed by outgoing staff that an arrangement was in place that allowed seven days grace on payment of VAT.  Our belief that such an arrangement was in place appeared justified and we did our returns and payments on that basis.

(b)	We have subsequently received information from Customs and Excise that the agreement related to credit payments within this time frame.  As can be seen, with the exception of a mistake relating to the 6th December 2002 claim, these monies have been paid and received into their account within this time frame.  (See attached item 1(a)).”

Item 1(a) sets out particulars of the periods 3/03, 6/03 and 10/03 (the last must be an error for 9/03).  In respect of 6/03, the schedule shews that the tax was paid on 31 July 2003 by cheque, which was cleared by their bank on 5 August 2003.  The grounds of appeal continued:

“(c)	We had made every effort in raising these payments and the cheques have been drawn each month in line with the due dates.

(d)	We have never received the default notice, which related to the period March 2003.  If we had received it, it would immediately drawn our attention to the fact that our understanding of the payment routines was not the same as Customs and Excise.  We would have immediately sought clarification.  Our first knowledge was on receipt of a surcharge relating to the June 2003 period.  Customs and Excise failed to inform, us in writing on the first occasion, not until we received the June 2003 default surcharge and telephoned the Helpline did we find out about the March 2003 surcharge.  We had not received neither the default notice for March 2003 nor any subsequent correspondence or been chased for payment.

(e)	At no time was our intention to withhold funds from HM Customs and Excise.  We always had funds well in advance of payment dates and have evidence to show this.”

The references in paragraph (d) to March 2003 were mistakes, we were told, and should have read December 2002.  That is clearly so, since there was no default in the period 3/03.

The facts

4.	There was no dispute about the facts, and we find them to be as set out below.  In respect of the period 12/02, the return was signed on 29 January 2003.  That should have left enough time for it to be delivered on or before 31 January.  However, it was not received until 4 February 2003.  Mr Mahoney told us that it would be usual for the return to be posted on the day upon which it was signed, and he presumed that that had happened.  But he was unable to say if that had indeed been done, and he said that he did not actually know when it had been posted.  He agreed that the return for the period 6/03 had been posted on the due date and could not, therefore, have been received by the Commissioners on that date.  In each case the full amount of tax was enclosed with the return.

5.	Both Mr Mahoney and Mrs Pink, the Appellant’s financial manager, were under the impression that there was some kind of agreement in existence between the Appellant and the Commissioners under which the Appellant had seven days grace for the rendering of the VAT return and payment of tax. The Commissioners produced a letter dated 21 January 1997 to the Appellant saying that the Appellant’s application to join the credit transfer scheme had been accepted.  The letter continued:

“You therefore have a seven calendar day extension of due date, for both your VAT returns and any tax due, providing that you make your payments by credit transfer under the conditions set out in the form VAT 597.  Where appropriate, the extension applies also to VAT Payments on Account....

Please remember that if occasionally you decide to pay your VAT by cheque at the Department’s Offices, standard due dates will apply.”

Neither Mr Mahoney nor Mrs Pink had ever seen that letter before the assessments to the surcharges had been made.  A member of the Appellant’s staff, responsible for the VAT return, under Mrs pink’s supervision, had evidently never shewn the letter to her or to anyone else in authority in the Appellant company.  On no occasion was the VAT paid otherwise than by cheque.  It was also the case that the earlier notices of assessment of surcharge had been found in Mrs Pink’s file, but had never been brought to her attention, and she never saw it until her subordinate left the company in February 2003.  She was, therefore, unaware of what the true situation was.  There had been a structure for dealing with VAT returns, and a Mr C K Albon had signed the returns until he was made redundant and had left the Appellant in November 2002, having passed on no information.  This was all done at the Northampton office, and Mrs Pink spent one or two days a month at that office.  Both Mr Mahoney and Mrs Pink said that they had never seen the notice of assessment of surcharge for the period 12/02, and were adamant that it had never reached the Appellant.

6.	In a letter dated 24 September 2003 to the Default Surcharge Reconsideration Unit, Mr Mahoney mentioned the fact that the Appellant had suffered considerable losses and had been “downsized”, and that he had seen the letter of approval for the Appellant to join the credit transfer scheme.  He also mentioned that there was a direct debit in favour of the Commissioners which gave them access to the Appellant’s account.  He mentioned having asked the Helpline why the surcharge rate had gone up from 5 per cent to 15 per cent, and had been told that there had been another notice in April.  Nor, he said, had the Appellant ever received any follow-up call or notice.  The letter concluded with the following grounds for reconsideration:

	“I	There is doubt that an agreement to accept late payments has been mislaid or ignored.

	II	We did not receive a 10% surcharge assessment and still have no done so.

	III	We have acted in good faith and have not been contacted by an official to explain the situation.

	In the light of our genuine error I would ask you to review these assessments.”

7.	The Appellant provided a useful condensed account of the vicissitudes of the company.  It makes depressing reading.  To begin with, the automotive industry went through a period of years during which there were few contracts to be had.  The Appellant had, before that, been turning over some £15 million a year.  In the year 2000 the turnover was £14,509,106, in 2001 it was £8,942,673.  In 2002 it had halved to £4,825,880, and in 2003 had dwindled to £3,080,861.  Between 2000 and 2002 there were trading losses of between £3,961,031 and £2,350,162.  They reduced their staff from 269 employees to five over the years from 2000 to 2003.  The company was considerably in debt, with a £14 million overdraft, and was heavily dependent upon intercompany loans from the American parent.  The account also related that large losses were attributable to poor contract management.  Three examples were given of contracts the total value of which was £2,800,000, and the cost of carrying out the contracts amounted to £4,850,000.  This was due to failure to manage the basic contract documentation and the men on the site.  As a result the Appellant discontinued contract work and relied thereafter on the sale of spare parts.  Europa and the Appellant have now split.

The contentions

8.	The Appellant relied upon the fact that it had been genuinely mistaken in its belief that the effective due date for rendering returns and paying the tax due was seven days after the end of the month following the accounting period.  The Appellant also prayed in aid the fact that although there was a structure for dealing with VAT,  it had not been operated correctly by the company’s employees, and no information relating to VAT had filtered through to those in authority.   Otherwise, the Appellant relied upon the matters set out in the notice of appeal.

9.	Mr Dougall, who appeared for the Commissioners, said, first, that the problems relating to structural and financial management were internal problems within the Appellant’s control.  As to the matter of the seven days’ grace, the letter of 27 January 1997 made the position entirely clear, and that letter had been received by the Appellant.  The Appellant had made a request to join the credit transfer scheme, but had chosen not to use it and had paid by cheque.  The seven-day extension did therefore not apply.  There was no proof that the return for 12/02 had been posted on 29 January 2003.  Even if the surcharge notice for 12/02 had not been received, it was the fact that the VAT return for 6/03 had been received after the due date.  In all the circumstances the Appellant had not established that there was a reasonable excuse for either default.

Conclusions

10.	This is a very unfortunate case.  It would be difficult not to feel considerable sympathy for the Appellant in the circumstances of which we were told and which we have briefly outlined above.  These shew the transformation of a once prosperous and profitable company transformed to a mere shadow which was making substantial losses, for reasons which appear to have been internal, including the apparent syphoning off of large sums.  How such a state of affairs can have come to pass without the knowledge and intervention of the board is difficult to understand.  But it did come to pass.  A by-product of that situation was a series of defaults in rendering VAT returns and paying the VAT due by the due date.  Even more unfortunate is the fact that, as we understood it, the Appellant could without significant difficulty have rendered those returns with full payment of tax on or before the due dates.  It was only when the staff had been pruned to such a level that the management had to look at the details of the VAT position that that part of the matter became clear.

11.	Unlike other forms of indirect taxation, with VAT the taxpayer is also the tax collector.  The tax is paid to a trader by the customer with payment of the invoice, to put it very simply. The taxpayer is then entitled to do anything he wishes with that amount of tax, provided that he pays it to the Commissioners on or before the due date.  It is the responsibility of the taxpayer to render the return and pay the full amount of tax declared due on or before that date.  If he fails to do so, then, under section 59 of the Value Added Tax Act 1994, he is regarded as being in default, and if in default is liable to a surcharge.  That surcharge is the same whether the return is rendered one day late or ten years.  The rate of the surcharge increases, to a maximum of 15 per cent, depending upon the number of defaults within the surcharge liability period, which is twelve months from the end of the period in which any default occurs.  If a taxpayer is in default, he can escape liability for the surcharge in one of two ways.  First, if he can establish that the return and tax were despatched at such time and by such means that it was reasonable to expect that they would be received by the Commissioners on or before the due date: see section 59(7)(a).  The second, under section 59(7)(b), is if the taxpayer can establish that there was a reasonable excuse for the default.

12.	It is not disputed that the return and tax for the period 12/02 were received on 4 February 2003.  If posted on 29 January, there was no explanation for their having taken six days in the post.  There was no evidence that there had been any postal difficulty or industrial action in the Post Office which might have caused such a delay.  But unfortunately Mr Mahoney was unable to say when the return was actually posted; all that he could say was that it ought to have been posted on the day upon which the return was signed, 29 January.  There was no evidence that it was entered into a post book, or any other kind of record.  That being so, and the onus being upon the Appellant to establish the date of posting, we are unable to accept that the return was, on the balance of probabilities, posted on 29 January.  The return for 6/03 was admittedly posted on the due date itself, and could not, therefore, have reached the Commissioners on that date.  We find, therefore, that there is no escape for the Appellant under section 59(7)(a).

13.	We therefore consider whether there was a reasonable excuse for the defaults or either of them.  The circumstances put forward were the same in relation to each default.  Dealing first with the Appellant’s grave misfortunes, we have to say that, crippling though they were, they have little to do with these two defaults.  It is not argued that the losses created a financial situation such that the Appellant had not enough money to pay the tax due. They may have been hard put to it to do so, that was not mentioned, but with each return the full amount of tax was paid.  The cause of the default in each case seems to have been this gross error, in supposing that the due date was seven days later than it was.  But the letter explaining the credit transfer scheme was perfectly clear in its terms: if payment is made by credit transfer, an extra seven days are allowed; if by cheque then the normal due date applies.  There was, in our judgment, no room for mistake.  Whoever received that letter could not have failed to understand it.  Also, it appears, that whoever received that letter, and whoever had responsibility for the rendering of the VAT return, failed to observe that condition, and failed to impart that information to anyone else.  But at all times the information was in the hands of the Appellant and the Appellant could and should have acted upon it.  It is, in our view, no explanation to say, simply, that the employee charged with this responsibility failed to carry it out, much less a reasonable excuse.  A reasonable excuse, in this context, is usually some external occurrence which, outwith the control of the taxpayer, renders it so difficult to carry out his obligation regarding VAT that he should be excused the consequences of default.  No such circumstance has arisen in this case.  There may indeed have been a genuine error, as Mr Mahoney said, but the error was not unavoidable nor outwith the control of the Appellant. Nor does the non-receipt of the surcharge notice for 12/02 assist the Appellant; as Mr Dougall rightly said, the fact remains that the return was rendered and the tax paid after the due date.  

14.	 For the above reasons, we find that there was no reasonable excuse for either default, and this appeal must be dismissed.  

15.	As we have said, we have some sympathy with the Appellant.  We can do nothing to compel this, but we make the suggestion, of which the Commissioners may take notice, that the Commissioners may consider that in all the circumstances it would be a proper case in which to collect the surcharges, which together amount to £49,911, in instalments to ease the burden on an already overburdened company.

16.	We make no order as to costs.

ANGUS NICOL
CHAIRMAN

RELEASED:01/07/2004

LON/04/0002