19009
DEFAULT SURCHARGE – Reasonable excuse – Trader’s bank late in providing accurate statements showing trade receipts – Whether reasonable excuse – No 

LONDON TRIBUNAL CENTRE

	McCREE MUSIC LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC (Chairman)
						R S SURI

Sitting in public in London on 16 March 2005

Nathan McCree, director, for the Appellant 

Phillip Webb for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	McCree Music Ltd appeals against a 10 per cent default surcharge (for £234) imposed for the period 5/04.  The due date for payment was 30 June 2004 and the tax was received by the Commissioners on 10 August.

2.	Mr Nathan McCree, who represented the Appellant, attended and gave evidence.  He contended that there was a reasonable excuse for the late payment based on the reason that McCree Music’s bank had not provided a proper bank statement to enable McCree Music’s Vat liability to be computed.  

3.	McCree Music carries on business as a music and sound production company.  Its clients make computer games and McCree Music provides the specifications for the audio content of the product.  It also creates music and sound effects.  

4.	At the start of 2004 McCree Music had been in serious financial difficulties.  We were not given full details, nor did we know the full extent of the problem.  Their bank had closed McCree Music’s business account and transferred responsibility to their debt recovery unit.  The account managed by the debt recovery unit did not, apparently, provide McCree Music with regular bank statements.  Mr McCree told us that the account had been moved three times during the course of 2004.  

5.	Mr McCree told us that the figure for VAT outputs in each return was assembled by McCree Music’s accountants and the accountants had used, as a source of information for outputs, the receipts shown in the bank statements.  Mr McCree showed us no other records showing receipts from clients.  He was asked whether acknowledgements of payments by clients were issued and recorded in McCree Music’s own books and he said – No.  

6.	By the first week of June McCree Music had received, from the bank, ledger statements for March and April.  These had been sent to the accountants.  Nothing had been received for May.  Some time in the third week of June, Mr McCree asked the bank what the position was and the bank’s response was that it would have difficulty in producing the May statement.  The bank said that it would need about ten days to produce one.  

7.	Mr McCree said that he then spoke to the Customs and Excise and told them about the problem.  The response from the Customs, he said, was – “No problem.”    The Info Log Entry produced by the Customs shows that Mr McCree did indeed contact the Southampton Debt Management Unit on three occasions in June 2004.  The only relevant entry relates to a call on 10 June 2004.  It reads as follows:

“Call from trader advising he has just finished on phone to bank and awaiting statements to come though in order to complete all VAT paperwork this will take up to three days to come through having given until 21st to submit form and advised if he can’t meet deadline to call before the 21st.”

We are not satisfied from the evidence that Mr McCree was given the assurance that he alleged, i.e. “No problem”.  

8.	As it turned out the bank took one month, and not ten days, in which to produce a revised statement.  Mr McCree passed this on to the accountants.  He found the statement difficult to interpret and had to ring the bank to get guidance.  Mr McCree said that the bank statement was found to be erroneous and was substituted by two further bank statements on 3 August.  We were shown these.  

9.	On 10 August McCree Music paid the VAT.  The default surcharge appealed against had already been received,  Mr McCree wrote to the bank and asked them to provide an explanation which was duly provided in a letter from the bank dated 31 August 2004 to the Commissioners.  This states:

“The company requested copy bank statements from ourselves to complete their return.  As there was a delay by the bank in providing the copy statements to the company the company have accordingly incurred a surcharge of £234.37.  In view of this delay by the bank I would be grateful if you would arrange to cancel the surcharge.”

10.	Mr McCree conceded that, such were the financial pressures on McCree Music, the VAT received from clients enabled the company to stay afloat and pay other urgent expenses.  He also said, and we accept this, that he could only tell if he had been paid an amount by any particular client by checking the balance at the bank.  He said that, at the time when the 5/04 return was due in, the bank was exceedingly difficult to make contact with.  They had given him an 0800 number to call if he needed any information.  Nonetheless, he had difficulty in getting through the people at the bank who were concerned with his account.  

11.	Essentially, Mr McCree said, the system had let him down and the bank had admitted that it had been the bank’s fault.  On that basis he invited us to conclude that he had a reasonable excuse for his late payment. 

12.	Mr Webb for the Commissioners contended that McCree Music should have made better arrangements to enable their accountants to get the return in in time.  The problem, Mr Webb observed, had been building up over a period and the real cause was the underlying financial difficulties encountered by McCree Music.  He said they might have contacted the Commissioners early and obtained instructions as to how the 5/04 return should be submitted.  Moreover, Mr Webb argued, McCree Music could not put forward as a reasonable excuse the fact that it had been relying on the bank to provide statements in time.  This, it was argued, followed from VAT Act 1994 section 71(1)(b) which excludes from “reasonable excuse” the situation where reliance has been placed on any other person to perform any task; in that event neither the fact of reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.

13.	We have some difficulty in accepting Mr Webb’s contention to the effect that section 71(1)(b) prevents McCree Music, as a matter of principle, from relying on the failure on the part of the bank to provide it statements in time.  We do not think that the subsection can be read in as wide terms as that.  If it were, then a culpable failure on the part of  a bank to clear a cheque, for example, would be disqualified from ranking as a reasonable excuse.  It seems to us that section 71(1)(b) is more directed at the actions of the people on whom the trader relies to carry out his compliance obligations.  It covers, for example, the situation of the persons who are directly relied upon to keep the accounts of the trader from which VAT returns are compiled, and it applies to prevent a trader from relying on his accountant’s failure to prepare a return in time.

14.	Nonetheless, taking all the evidence that we heard into account, we are unable to accept that McCree Music had a reasonable excuse for its failure to pay the tax on time.  We are not satisfied that the late payment of the amount shown due in the 5/04 return was wholly the fault of the bank.  We accept that the bank was late in providing statements and acknowledged this.  But we cannot accept that it was impossible for McCree Music to get the necessary information (or most of it) by the end of June so as to enable it to make its return for the 5/04 period and pay the tax.  McCree Music had details of the receipts for March and April 2004. A reasonable competent businessman would, we think, have had some means of ascertaining the figure for “sales” for the May period.  After all, there were 30 days of June in which to ascertain this information.  With a reasonable amount of drive and initiative, McCree Music should, we think, have obtained quite sufficient information to enable it to assemble a figure equal or approximately equal to its cash receipts for May 2004.

15.	We recognize, of course, that McCree Music was going through a period of dire financial difficulty.  Mr McCree’s main concern was to keep the business afloat by meeting the essential business bills and staff wages.  We do not, however, think that he has demonstrated a reasonable excuse.

16.	For the reasons given above we dismiss the appeal.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 1 April 2005

LON/04/1888