MNG Mango Uk Ltd v Customs and Excise [2004] UKVAT V18694 (14 July 2004)
18694

03 166 MNG MANGO UK LIMITED Mr R L Barlow  Manchester 14 May Mr G Edwards of Messrs IRPC Taxation Services for the appellant Mr C Owen of the Solicitor's Office for Customs and Excise for the respondents RICHARD BARLOW
	DEFAULT SURCHARGE — reasonable excuse for default — appeal allowed

MANCHESTER TRIBUNAL CENTRE

 
 	
	MNG MANGO UK LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Mr R L Barlow (Chairman)

Sitting in public in Manchester on 14 May 2004

Mr G Edwards of Messrs IRPC Taxation Services for the appellant

Mr C Owen of the Solicitor's Office for Customs and Excise for the respondents

	© CROWN COPYRIGHT 2004

DECISION

1.	The appellant appeals against a default surcharge under section 59A of the Value Added Tax Act 1994 which was imposed by Customs and Excise by a notice dated 3 December 2002.  The alleged default relates to the prescribed accounting period of three months ending 30 September 2002 and the surcharge is 2% of the tax due for that period.  The tax due was £1,005,487 and the surcharge is £20,109
2.	The appellant is a retail trader and although it is a UK company it is owned by a Spanish company which trades in several different countries.  The appellant’s management and accounting are operated from Spain and its correspondence address in the UK was its retail shop at the Trafford Centre in Manchester but staff there only forwarded mail to Spain.
3.	The default alleged was in respect of the full amount of tax due for the period.  Two payments on account, required under section 28 of the Act because the appellant is a “large payer”, each in the sum of £140,083 were paid late.  The first was due by 31 August 2002 and the second by 30 September 2002 but both were paid on 22 October 2002.  The balancing sum of £865,404 was paid one day late.
4.	The liability to a surcharge also necessarily depends upon an earlier default within the preceding twelve months and Customs and Excise rely upon alleged failures to pay a payment on account in the accounting period ending March 2002 which was notified as a default by a surcharge liability notice dated 31 May 2002 and a failure to pay a payment on account in the accounting period ending 30 June 2002 notified by a surcharge liability extension notice dated 29 August 2002.  In respect of the later notice an assessment of a surcharge at 2% was also notified.
5.	By a letter dated 1 November 2002 Customs and Excise wrote to Alliots, chartered accountants, who had been instructed by the appellant after the imposition of the 2% penalty in respect of the period ending 30 June 2002, saying that they were prepared to cancel the surcharge “on this occasion only as a special one off concession” and stated that they were prepared to accept “that the company may not have fully understood the rules governing the [large payers] scheme”.  That concession followed representations made by Alliots.
6.	The letter also stated that the appellant was “still in the surcharge regime and should they default again up to and including the end of period 03/03 they will once again receive a 2% penalty”
7.	The letter of 1 November 2002 does not make it clear whether Customs and Excise accepted that the appellant had a reasonable excuse for the late payments in the period ending June 2002, or were simply making a concession, but the reference to the company not having understood the scheme appears to suggest that they were accepting there was a reasonable excuse.  Logically, if Customs and Excise had been making a concession about the surcharge rather than accepting there was a reasonable excuse for the defaults in the period ending June 2002 they should have said that the appellant was still in the penalty regime until period 06/03 because the default in period 06/02 would still give rise to a surcharge period or extension of a surcharge period if the default had not been cancelled by acceptance of a reasonable excuse.  The fact that the surcharge under appeal is at 2% also suggests that Customs and Excise had accepted a reasonable excuse for the June 2002 period because, if they had simply withdrawn the surcharge by way of a concession, there would have been two defaults in the 12 months before the period under appeal, namely the March and June periods, and the surcharge under appeal should have been at 5%.
8.	I therefore hold that Customs and Excise had accepted that there was a reasonable excuse for the defaults in the period ending June 2002 so that the liability to a surcharge for the period ending September 2002 depends upon the defaults in the period ending March 2002 being without reasonable excuse.
9.	The default alleged in the period ending March 2002 was that the second payment on account of £95,940 was not paid on time.  Mr Edwards of Messrs IRPC, who represented the appellant at the appeal, agreed that that payment was not made on time and indeed he pointed out that the first payment on account for that period had not been paid either.  In fact no payments on account were made until 22 October 2002 when Messrs Alliots had begun to assist the appellants with their VAT affairs.
10.	The excuse put forward for the non-payment of the payment on account in the period ending March 2002 was that the appellant company’s managers did not understand the system.  The group which owns the appellant company has a large turnover and I was told that it operates in 19 countries.  The appellant itself clearly has a large turnover in the UK, as its VAT returns show, and I was told that it has 400 employees in this country, though all accounting is done in Spain.
11.	Any business setting up an establishment in the UK can be expected to ensure that it complies with the national rules for the operation of VAT and if it chooses to operate without local accounting staff and language problems cause difficulties then I have no hesitation in saying that those facts are most unlikely to amount to a reasonable excuse for late payment of VAT.  Local experts can always be employed to ensure compliance.
12.	 However, in this case the situation was complicated by a number of facts that the appellant says caused confusion about the situation when it tried to clarify what was required.
13.	It was agreed that the appellant first became liable to make payments on account in the period ending November 2001.  I was shown a record of ‘memos’ recording telephone, e-mail and fax communications between Customs and Excise and the appellant’s staff in Spain.  Difficulties of understanding clearly occurred but it is clear that Customs and Excise were making genuine attempts on the telephone and by fax to assist the appellant.
14.	The only late payment now relied upon by Customs and Excise as instigating the requisite surcharge liability period is the payment on account for February 2002 due on 31 March 2002.
15.	On 6 March 2002 the memo document already referred to shows that a customs officer spoke to Ellie in the appellant’s office in Spain but that she needed an interpreter.  The officer then spoke to Sandra in the same office who could speak English and spoke to her again later that day.  The memo records that advice was given about payment on account dates.  However, on 7 March 2002 Customs and Excise wrote to the appellant cancelling an earlier default surcharge which had been imposed in error and another because it was accepted that the appellant had misunderstood the system.  That letter also refers to the payment due by 28 March (which would be the date by which instructions would have to be given to ensure payment by 31 March).
16.	It is true therefore that before 31 March 2002 the appellant had been given information that would have enabled it to understand what was required, if that letter had been read and understood.  The letter is written in difficult rather technical English.  Had it not been for the fact that Customs and Excise accepted that for a period later than this one there was a reasonable excuse based on the appellant’s misunderstanding of the position; I might well have concluded that the appellant did not have an excuse for the late payment of the March 2002 instalment.  I do not regard Customs and Excise’s attitude to that later period as being irrelevant to the issue, though the decision about the default for period ending March 2002, for which Customs and Excise did not accept a reasonable excuse is mine.  Mr Owen, representing the Commissioners, accepted that difficulty of understanding is capable of being a reasonable excuse.
17.	On balance, I hold that there was a reasonable excuse.  I am persuaded to that view partly by the clear evidence of difficulties of understanding in the telephone conversations and the difficult language adopted in the letter of 7 March 2002 and the fact that that letter cancels earlier defaults and admits that some were in error, possibly suggesting that the appellant had acted correctly; and by Customs’ own attitude to the later period.
18.	Mr Owen said, rightly in my opinion, that eventually difficulties in understanding must cease to be a reasonable excuse and, as I have said above, traders can be expected to make the necessary enquiries if they choose to trade in the UK.  I do not consider that the appellant had a reasonable excuse for the defaults in the period ending September 2002 because by then the further defaults in the period ending June 2002, albeit they were later withdrawn, had given further notice that corrective action was required by the appellant.  In addition it was admitted that there was no excuse for the late payment of the balancing amount for the period ending September.
19.	It follows that the appeal is allowed but only because the earlier default was excusable, with the consequence that the defaults in the September period are not subject to the 2% surcharge.
20.	Mr Edwards applied for costs but in all the circumstances my direction is that there should be no order in respect of either party’s costs.

MR R L BARLOW
CHAIRMAN
Release date:14/07/2004
MAN/03/166