H  Griffiths Engineering Ltd  v Revenue and Customs [2005] UKVAT 19098 (18 May 2005)

19098
Default surcharge – Reasonable excuse – Late payment – Bank’s admitted error – Bank had committed similar error in relation to payment for previous period – Whether Appellant should have taken more active steps to ensure that bank did not repeat its error – What steps?  – Appeal allowed  

 
LONDON TRIBUNAL CENTRE

H  GRIFFITHS ENGINEERING LTD	Appellant

- and -

HER MAJESTY’S  REVENUE AND CUSTOMS 	Respondents

			Tribunal:	 STEPHEN OLIVER QC (Chairman)
				 SHEILA WONG CHONG FRICS 

Sitting in public in London on 27 April 2005

Janice Farmer, director, for the Appellant 

Pauline Crinnion for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	H Griffiths Engineering Ltd (“HGE”) appeals against a default surcharge assessment for the 9/04 period in the sum of £4,813.

2.	HGE was represented by Janice Farmer, a director, who also gave evidence.

3.	HGE has been using the CHAPS system to pay its tax to the Customs.  Using this system HGE’s due date for payment of the tax due for the 9/04 period was 7 November (a Sunday).  HGE placed the order for payment of £34,089 on 5 November.  On that day, though not on the previous day, HGE had sufficient funds standing to its relevant account at the National Westminster Bank and a sufficient overdraft facility to cover the payment.  Due to a “processing error” on the part of the National Westminster Bank payment was not made until 8 November.  It is not in dispute that, had the Bank processed the payment properly, payment would have reached Customs by the due date.

4.	HGE relies on error of the National Westminster Bank as a reasonable excuse.  HGE had successfully put forward the same reason, as a reasonable excuse for the period 6/04.  The Customs had accepted that reason, having been provided with evidence from the National Westminster Bank.  The Customs’ reason for refusing to accept the bank error as a reasonable excuse for the 9/04 default is summarized in a letter of 9 February 2005 from the “Appeal Team” of the Customs.  The relevant passage in that letter reads as follows:

“Advised in my earlier letter …, the company had used the same excuse for period 6/04.  Following receipt of evidence from your bankers, this reason was accepted for period 6/04 and the surcharge, exceptionally on this occasion, removed.

However you cannot use the same excuse again.  Whilst the failure of the bank to transfer funds once can be regarded as unfortunate, a business person mindful of their legal obligations for VAT could reasonably have been expected to have sought assurances from the bank that the transfer would not be delayed in the future.

I regret to inform you therefore that the surcharge imposed for the 9/04 shall remain.”

5.	Janice Farmer gave evidence as to the circumstances of the June 2004 “bank error”, i.e. the first of the National Westminster Bank’s errors.  On Friday 6 August 2004 in the afternoon Janice Farmer had placed a CHAPS order with the Bank to pay £34,835 being the tax due for the 6/04 period.  Prior to that HGE had been in default but, as we understand the position, these defaults had been the consequence of  shortages of funds.  There had never in the experience of HGE, been a problem of actual payment through the CHAPS system.  The Bank failed to process the payment which had eventually been received by the Customs on Monday 9 August.  Janice Farmer took the matter up with the Bank and on 20 August 2004 a Mr Day from “Specialized Lending Services” wrote:

“This is to confirm that the Company requested that the Bank send a CHAPS payment of £34,834 to the account of HM Customs and Excise on 6 August 2004.

As a result of a processing error on the Bank’s behalf, this payment was not remitted until 9 August 2004.

Please accept our apologies for any inconvenience caused.”

Mr Day advised Janice Farmer not to leave the payment order until the afternoon of the last day.  Mr Day went on to advise her that it would be better to change their procedures and place the order by fax to the National Westminster’s Corporate Service Centre.

6.	We come now to the payment giving rise to the present default surcharge assessment.  Early in the morning of 5 November 2004 Janice Farmer checked HGE’s bank records.  She had arranged for a director of HGE to put in a loan of £5,000,  for £4,000 to be transferred from current account and for an amount to be paid by the financial institution that factored HGE’s invoices: and a substantial payment from a customer had just been deposited.  Satisfied that there were funds in place, Janice Farmer immediately faxed off the payment order for £34,089 to the Corporate Services Centre as advice by Mr Day with the following request:

“Please ensure this transfer goes through today.”
The fax was headed “Attention Shaun”.   Janice Farmer explained that because there was no continuity in the individuals at the Bank handling HGE’s affairs she had directed it at Shaun following advice from Mr Day.  Once the fax had been sent off Janice Farmer gave the matter no further thought.

7.	The next Monday (8 November) Janice Farmer checked HGE’s bank account and found that the payment to Customs had not been processed.  Janice Farmer wrote to Customs on 8 November as follows:

“I am writing to inform you that our payment of VAT has again not been processed by our bank’s service centre.

We had made sure that the funds were in our account and a fax was sent through on Friday 5 requesting the bank to pay our VAT, a copy of which I enclose.  Again when I look at my bank account this morning, I find that the entry had not gone through.

In an effort to address the situation, I shall in future, set up the details of the Customs and Excise through my BACS system and put the payment through myself, then I can be sure it is paid on time.”

She took the matter up with Specialized Lending Services at the National Westminster Bank and received a letter which said, After confirming that HGE had indeed placed the CHAPS order on 5 November:

“This is to confirm that the Company requested that the Bank send a CHAPS of £32,089 to the account of HM Customs and Excise on 5 November 2004.

Due to a processing error on the bank’s behalf, this payment was not remitted until 8 November 2004.

Please accept our apologies for any inconvenience caused.”

8.	The case for the Customs is essentially that a prudent businessman who has on one occasion been let down by his bank should “seek assurances from the bank that the transfer will not be delayed in the future.”

9.	We know that HGE  took the matter up with their Bank after the first processing error.  The bank advised HGE to use its Corporate Service Centre, to fax the CHAPS payment order in and to do this earlier in the day.

10.	We do not know what would have happened if HGE had sought “assurances” from the National Westminster Bank that it would not make processing errors in the future.  In all likelihood the National Westminster Bank would have given the assurance, broken it and written their standard form letter of regret.  The Commissioners have not given any further indication as to what in their view the reasonable competent businessman would have done in the circumstances.  Making the payment order a day earlier might have helped, but there is no guarantee of this.  Chasing the bank by phone or fax later in the day on which the payment order was made might have helped. With the benefit of hindsight, that action on HGE’s part might have caused the Bank to process the payment in time. Perhaps the reasonable competent businessman would threaten his Bank with legal action if it ever failed to process a VAT payment properly. Perhaps he should have given up using CHAPS because it was too unreliable and, like HGE has now done, moved over to the BACS system.

11.	It would have helped if the Customs had adduced evidence.  Presumably the Central Region Default Surcharge Appeals Team have reasoned grounds for the standards they are demanding of traders who use unreliable banks.  Specifically it would have helped to have known from the writer of the letter of 9 February 2005 more precisely what assurance the Customs say should have been sought from the bank to the effect that the transfer would not be delayed in future.

12.	It seems to us, in the absence of evidence from the Customs to the contrary, that HGE have established a reasonable excuse.  They took advice from the National Westminster Bank after the processing error in relation to the 6/04 payment and they acted on that advice.  We do not know what more they could reasonably have done.  We would not have expected the reasonable competent businessman who was doing what he had been advised to do by the Bank following its last processing error to have made a call to the Bank’s Corporate Service Centre to check that the Bank was really processing the payment order.

13.	The appeal is allowed.

STEPEHEN OLIVER QC
CHAIRMAN
RELEASED: 18 May 2005

LON/04/2299