19221                                                                                                                                                                                                                                  
VAT — PENALTIES — default surcharge — taxpayers’ bookkeeper admitted to hospital unexpectedly in order to give birth prematurely — reasonable excuse found for late submission of VAT return — cheque for tax returned unpaid by taxpayers’ bank because of unanticipated depletion of account by direct debit mistakenly initiated by another creditor — reasonable excuse found for non-payment of tax — balance of tax due remaining unpaid by reason of insufficiency of funds — tribunal precluded in law from finding reasonable excuse in respect of that tax — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	ALBERT WILLIAM HARRIS, JENNIFER ELIZABETH HARRIS
and ADAM OLIVER HARRIS trading as THE MARCIA INN	Appellants

- and -

HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

			Tribunal:	Michael Johnson (Chairman)

Sitting in public in York on 14 July 2005

Catherine Ann Hall, bookkeeper for the Appellants

Chris Owen of the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2005

DECISION

1.	This is an appeal under section 59(7) of the Value Added Tax Act 1994 (“the Act”), in which the Appellants are challenging their liability to pay a default surcharge for £1,379.13 in respect of their VAT accounting period 08/04.  

2.	The surcharge was imposed because the Appellants’ VAT return for that period arrived with H M Customs and Excise (“Customs”), as they then were, on 12 November 2004, when it should have been with Customs by the due date of 30 September 2004, and because no part of the tax of £9,194.24 shown as owing was paid by the due date.

3.	The Appellants were ably represented by their independent bookkeeper, Mrs Hall.  She explained to the tribunal the circumstances of the late VAT return.  She had been due to work on the Appellants’ VAT return in accordance with instructions to complete and submit the return by the due date.  However Mrs Hall was expecting a baby, and she was unexpectedly hospitalized in September 2004 when it transpired that her child was due to be born prematurely.  Mrs Hall was only discharged from hospital on 29 September.

4.	This meant that, inevitably and for reasons entirely beyond the control of Mrs Hall, the VAT return for the period in issue was bound to be late, and in the circumstances, I am satisfied that a reasonable excuse exists for its late submission.   

5.	So far as the tax was concerned, the Appellants drew a cheque in favour of Customs for £5,194.24, that is to say £4,000 less than the tax shown on the return as payable in respect of the period 08/04.  That amount of £5,194.24 was, as I find, arrived at in good faith by the Appellants as the amount that their bank account could at that stage bear.  However, in the event, that cheque was declined on presentation by Customs.  

6.	As Mrs Hall explained to the tribunal, the reason why that cheque was not met was that the company from which the Appellants bought their electricity had, prior to presentation of the cheque, incorrectly operated a direct debit facility made available by the Appellants, resulting in an overpayment to the company and a corresponding unexpected depletion of the Appellants’ account.  The direct debit facility should have been operated just once by the electricity company; instead it was operated twice.  

7.	I find that that was a mistake made by the electricity company which the Appellants could not have anticipated, resulting in the Appellants exceeding their credit at their bank.  In the circumstances, I am satisfied that a reasonable excuse exists for the £5,194.24 not having been paid to Customs as intended.

8.	I therefore conclude that neither the late submission of the VAT return in question nor the non-payment of the tax were matters for which Mrs Hall should be obliged to accept responsibility, and so far as this tribunal is concerned, she is in my judgment to be completely exonerated from causing the surcharge under appeal.

9.	I remain however troubled by the non-payment of the balance of £4,000 which the Appellants made no attempt to pay at the time.  I understand that the Appellants would have paid this amount as well had they been able to afford to do so, but they lacked the necessary funds.  

10.	Section 59(7) of the Act requires, in order for taxpayers to avoid liability to a default surcharge, that they should show that a reasonable excuse exists for the non-payment of the whole of the tax due, not just some of it.  Mrs Hall explained that the business of the Marcia Inn has constantly struggled to pay the full amount of its VAT on time. as indeed Mrs Jenny Harris stated on a compliments slip sent to Customs with the Appellants’ VAT return for their accounting period 12/04. 

11.	Sympathetic though I am towards the cash-flow difficulties of the Appellants’ business, I am legally precluded by section 71(1)(a) of the Act from treating an insufficiency of funds to pay any VAT due as a reasonable excuse under section 59(7).  That unfortunately appears to be precisely the reason why not £9,194.24 but £5,194.24 was tendered as mentioned: no excuse other than insufficiency of funds appears to exist for the non-payment of the balance of £4,000 due at the time.

12.	In summary, therefore, the surcharge must in my judgment stand.  So far as her own role is concerned, Mrs Hall has succeeded in persuading the tribunal that the appeal should be allowed; however so far as concerns the Appellants’ cash-flow problems, a matter entirely outside her control, it has not been shown that the surcharge under appeal should be lifted.  

13.	In my judgment Mrs Hall is not to be held liable to compensate the Appellants for the amount of the default surcharge imposed. 

14.	I indicated at the conclusion of the hearing that I was having to dismiss the appeal on the narrow ground explained above.  I indicated that a written record of the reason for the dismissal would be prepared and released for the information of the Appellants.  This is the promised written record.

15.	No application was made for costs to be awarded against the Appellants and none are awarded.

MICHAEL JOHNSON
CHAIRMAN
Release Date:  20 July 2005

MAN/05/0234