19433
VAT Default surcharge - VAT paid late by CHAPS but return received within 7 days at end of month - regulation 25(4L) VAT Regulations 1995 - no default in respect of return - reasonable excuse for late payment of VAT - taxpayer acting reasonably in confidently expecting a large payment - payment not received on time - appeal allowed.

LONDON TRIBUNAL CENTRE

	RHC  LIFTING LTD	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	CHARLES HELLIER (Chairman)
						CHRIS PERRY

Sitting in public in Bristol on 14 December 2005

Tony Morgan, Director and Penny Crawley, Office Manager, for the Appellant 

Pauline Crinion, instructed by the Acting Solicitor for HMRC, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appellant company appeals against a default surcharge for the period 04/04 ending 30 April 2004 of £4,009.30 being 15% of the outstanding VAT for that period.

The Legislative framework.

Before a default surcharge may be made for a VAT period a number of conditions have to be fulfilled:

(i)	a surcharge liability notice or one or more surcharge liability extension notices have to be served on the company. These notices specify a period - or the extension of a period within which, if the taxpayer is in default, a default surcharge may be made. The period each notice covers is a period of 12 months from the end of the period of most recent default;

(ii)	these notices can only be served after there has been a default by the taxpayer; and

(iii)	for a VAT period within the specified or extended period the taxpayer is again in default.

The surcharge amount is 2%, 5%, 14% or 15% of the outstanding VAT for the VAT period for which the default giving rise to the surcharge occurs depending upon whether that default is the first, second, third or fourth or subsequent time in relation to the surcharge period in which default is made.

The “outstanding VAT” for these purposes is the amount of VAT in respect of the relevant VAT period which has not been paid by the due date.

Section 59(1) VAT Act 1994 provides that a person is in “default” in respect of a VAT period if:

“by the last day on which a taxable person is required in accordance with regulations under this Act to furnish a return for a prescribed accounting period -

	(a)	the Commissioners have not received that return; or

(b)	the Commissioners have received that return but have not received the amount of VAT shown on the return as payable by him in respect of that period”.

But section 59(7) provides a defence for a taxpayer. It provides that if the taxpayer would otherwise be treated as being in default under section 59(1), it is not to be so treated if:

“(a)	the return or, as may the case may be, the VAT shown on the return was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit; or

(b)	there is a reasonable excuse for the return or VAT not having been so despatched.”

Pausing here the Appellant accepted that a surcharge liability notice and surcharge liability extension notices had been validly served on it in respect of periods for which it was in default, and that the period 04/04 fell within the surcharge liability period created by those notices. It also accepted that 15% was the correct rate of surcharge and that the VAT outstanding for the period was £26,728.69 so that the calculation of the surcharge as £4,009.30 was correct.

The Appellant also accepted that, on any basis, the VAT had been paid late.

In relation to the late payment, the only question before us was therefore whether or not the Appellant had a reasonable excuse for what would otherwise be a default.

It also appears that the VAT return was not received by the Commissioners until after the normal due date. Two issues arise for our consideration in relation to the return: first what was the due date, and second if it was received after the due date was there an excuse for the delay within section 59(7)(a) or (b).

Section 71 VAT 1994 provides that:

“(a)	an insufficiency of funds to pay any VAT due is not a reasonable excuse; and

(b)	where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy of the person relied upon is a reasonable excuse…”

We note that it is part (a) of this provision which may be relevant in this appeal and that broadly speaking that provision means that lack of funds on its own or by itself is not a reasonable excuse, but that there may be reasons for the relevant delay which, although they also gave rise to an insufficiency of funds, may be capable of amounting to a reasonable excuse.

Regulation 25(1) of the VAT Regulations 1995 (SI 1995/2518), provides that a VAT return must be made by the last day of the month following the end of the VAT period. For the 04/04 period this day would have been 31 May 2005.

But Regulation 25(4L) provides that “additional time is allowed to make a return for which any related payment is made solely by means of electronic communications [,and] that additional time is only as the Commissioners may allow in a specific or general direction”. In the VAT guide of 2 February the Commissioners say at paragraph 21.3 that if a taxpayer chooses to pay VAT shown as due on the return by CHAPS, it “may receive up to 7 extra calendar days for the return and payment to reach” the Commissioners. A similar statement appears on the reverse of a VAT return. In our view the statement in the VAT guide is a general direction by the Commissioners authorised by Regulation 24(4L) and having effect therefore as if contained in that Regulation. Accordingly if payment for 04/04 was made by the Appellant by CHAPS the due date for receipt of his return and the VAT is 7 June 2004.

Neither the statement on the reverse of the return nor that in the VAT makes receipt of the VAT within the extended period a condition for the extra 7 days to apply to the time for delivery of the return. Accordingly it appears that the payment of VAT by electronic means - even if after the end of the extended period (i.e. in this case after 7 June 2004) - extends the period for the receipt of the VAT return to 7 June 2004.

Regulation 40(2) of the VAT Regulations 1995 provides that the VAT due for a period must be paid to the Respondents not later than the last day on which the return is required to be made, and Regulation 40(3) and (4) permit the Commissioners to allow or direct additional time where the payment is made by electronic communication. As with the time for the delivery of the return in our view the statements made in the VAT Guide and on the VAT return are made in pursuance of Regulation 40(3) and (4) and as a result take effect as if they were incorporated in that Regulation. In the case of the Appellant and the period 04/04 the latest time for payment by CHAPS or other electronic means was 7 June 2004.

The facts

The Appellant accepted that it had had a bad VAT history. It had had a director who had had responsibility for VAT but who didn’t bother about it too much. That director had left the company in January or February 2004. Since then Mrs Crawley had been increasingly in charge of running the bank account and VAT compliance of the company. There had been a lot to sort out, but over a period after she had taken over she had put things back on the rails. Initially other officers of the company including the company secretary exercised greater control over her activities but as time went by she assumed greater responsibility. Since 04/04 there had not been a further delayed return or VAT payment. The period 04/04  was at the beginning of the time when she was assuming responsibility and she had to liaise closely with the company secretary.

The company factored its invoices through Lloyds TSB (LTSB). After notifying LTSB of the amount of an invoice 80% of its value would become available to the company from LTSB. Each day Mrs Crawley would determine what amount was available to the company from its factoring and transfer into the company’s current account the maximum amount to the nearest £1,000 available. All invoices were at the relevant time factored to LTSB except for CardNet payments (direct payments by credit or debit card) and a particular invoice for work done at Heathrow Terminal 5.

The invoice for the work done at Terminal 5 was for £47,952.93. It was for the manufacture, supply and assembly of a crane. The crane was supplied at the behest of a company called Ermec. Ermec had arranged with Abbey National PLC for the financing of the crane. The Appellant was asked by Ermec to invoice Abbey National directly for the crane. It was agreed with Ermec that Abbey National would pay the company and would make its own arrangements with Ermec. Mrs Crawley said that they had agreed with Ermec that upon completion of the crane the company would send an invoice to Abbey National, and that there would then be immediate payment by Abbey National. She had had a telephone conversation with Abbey National about where to send the invoice. It had been agreed that the invoice was to be paid by Abbey National by a direct CHAPS payment to the company’s bank.

Because the invoice was for a large sum, because immediate payment had been promised, and because the payer was Abbey National - a bank of good credit - the company had decided not to factor the invoice: speedy payment in full was felt to be virtually certain, and factoring involved paying a percentage of the invoice to LTSB.

The VAT return and VAT payment were due to be received by HMRC on or before 30 May 2004 (or 7 June 2004 if the electronic payment allowance applied). We now set out the events surrounding that time.

Thursday May 27 2004:	The VAT return was prepared and signed by the company secretary Amanda Tapsell. A cheque was made out for £26,728.69 which was the VAT shown as due. 

The invoice for the Terminal 5 work was posted to Abbey National.

The bank account was £23,726 in credit but there were salaries of £16,125 to pay the next day.

Amanda Tapsell was asked by Mrs Crawley not to post the return on this day.

Friday 	May 29 2004		
Saturday	May 24 2004	Weekend	
Saturday	May 30 2004		
Monday 	May 31 2004	Bank Holiday	
Tuesday	June 1 2004	Earliest day return and cheque might have been   received   by HMRC.	
Wednesday	June 2 2004             	VAT return stamped as received by HMRC together with cheque	
Thursday            	June 3 2004	 Bank account £9,304 in credit	
Friday  	June 4 2004	VAT cheque presented, following which the company’s bank account was shown as £20,788 in the red	
Saturday/Sunday	June 5/6 2004	
		
Monday  	June 7 2004	Bank bounced the cheque. Either on this day or on Friday 4 June the bank informed the company that the cheque would not be paid	
Tuesday	June 8 2004	CHAPS remittance of £47,952 received from Abbey National. HMRC contacted to obtain details of how to make CHAPS payment. CHAPS payment made to HMRC.	

Mr Morgan accepted that the company had been “walking on thin ice” the week ending on 4 June. They had expected that the Abbey National payment would be received by Wednesday 2 June so that there would have been funds in the bank account to meet the presentation of the VAT cheque which, had it been received by HMRC on Tuesday 1 June, would have reached their bank account on or about Wednesday 2 June. Mrs Crawley had had a number of phone calls with Abbey National between Friday 28 May and Tuesday 8 June to chase payment. It seemed likely that Abbey National would have wanted to check with Ermec that the crane had been completed before making payment and it is possible that there was some unexpected delay in communication between Ermec and Abbey National which caused the Abbey National payment to be made later than had been hoped and expected.

Mr Morgan told us that it would not have been realistic to take men off the Terminal 5 job and to put them onto other work which might have paid faster. They were under pressure from Ermec to get the job finished. Ermec was a good customer. Most of their business was repeat business. With hindsight he agreed that they could have factored the Abbey National invoice to enable funds to be available sooner but they had expected immediate payment. Also with hindsight he agreed that the company could have arranged a short term loan but they believed that the money would come from Abbey National in time. They had had complete confidence in Abbey National and Ermec and that the money would be received quickly.

Discussion

There were two potential defaults. The first was the failure to get the VAT payment to HMRC on time. The second was the failure to get the VAT return to HMRC on time.

The failure to make payment on time.

Since payment of the VAT was, in the end, made electronically by CHAPS, it seems to us that the latest day by which it should have been received was 7 June 2004. It was made and received on 8 June 2004. It was therefore late by one day.

As a result the late payment constituted a default unless section 59(7) applied. The first limb of section59(7) does not apply: the CHAPS payment was made on 8 June - it could not reasonably be expected to arrive on 7 June.

The second limb of section 59(7) applies if there was a reasonable excuse for the failure to pay in time. The mere insufficiency of funds is not a reasonable excuse, but if the underlying cause for the default is something which constitutes a reasonable excuse, then even if that cause also led to the insufficiency of funds it can be a reasonable excuse for the late payment. If the cause of the default is something which the exercise of reasonable foresight and due diligence together with a proper regard for the fact that the tax would become due on a particular date could not have avoided, then that underlying cause can constitute a reasonable excuse. It is therefore possible that the late payment by Abbey National might constitute a reasonable excuse.

If we were looking only at the attempted payment of the VAT by cheque and the due payment date of 31 May 2004 it seemed to us that the Appellant would not have had a reasonable excuse. The VAT cheque was probably not posted in time to reach the Commissioners before that date, and even if it had been we tend to the view that it was not reasonably certain that the funds from Abbey National would have been in the company’s bank account to meet it. It would not have been reasonable to rely on the receipt of those funds by 2 June to cover the payment of the VAT cheque.

However payment was made by CHAPS so the due date for payment was 7 June 2004. The question is thus whether the company has a reasonable excuse for payment on 8 June - a day late.

We consider that the failure by one customer among many to pay a debt thereby producing a temporary shortage of funds would not generally amount to a reasonable excuse. In the Appellant’s circumstances however it was not simply a case of one customer among many failing to pay on time. The Appellant had guarded against that general risk by factoring their debts: had one of their normal customers failed to pay on time it would not generally have had an immediate shortage of funds because of the facilities provided by LTSB. The possibility that customers might pay late was a normal hazard of its trade; the possibility that this particular payer might not pay in time was a hazard of its trade but not a normal hazard of their trade.

We believe that whilst in practice it will be rare that a late payment from a customer can give rise to a reasonable excuse, it is not possible to say that late payment by a customer can never be a reasonable excuse. It is rare because very often late payment is an eventuality which it can be reasonably expected could, and should, be provided for so that it does not affect the payment of tax on the due date.

In considering whether or not the unexpectedly late payment by Abbey National constituted a reasonable excuse we asked ourselves therefore whether it was reasonable for the company to be so confident that the payment would arrive on time that it would not reasonable to expect the company to make other contingency arrangements to cover the possibility of its failing to be so made. If it was not reasonable to expect such arrangements to be made then it seemed to us that the Appellant could have a reasonable excuse.
There are contingencies against which it is clearly not reasonable to expect provision to be made. There could include for example the failure of a major bank. There are others where reasonable caution dictates some provision, for example against delayed receipts over the Christmas period. The contingency in this case lay close to the borderline between these two types of contingencies,

On the evidence before us however we concluded, on balance, that the company acted reasonably in being confident about the timely receipt of the Abbey National payment. It would have been reasonable for it to have been confident that the payment from Abbey National would arrive by Friday 4 June. That is because the invoice would have been received by Abbey National on Friday 28 May, and, leaving that day and both Tuesday 2 June and Wednesday 3 June for verification with Ermec (which had already assured the company of their cooperation), it was, in our view reasonable to expect a CHAPS payment to arrive on or before Friday 4 June. That it would not so arrive was possible, but, on balance, in our view not so foreseeable or likely to occur as to make it reasonable to make provision against that contingency.

Further, in the circumstances we do not believe that the company’s decision not to factor the invoice led to a risk which the company should reasonably have provided against - or put another way, the decision not to factor the income does not deprive the company of its excuse.

Thus with reasonable foresight and due allowance for the need for some communication between Ermec and Abbey National it was reasonable to expect with some fair degree of confidence the company to have been in funds to pay the VAT by Friday 4 June. The Appellant was aware of its responsibility to pay the VAT on time and considered the resources available to it. Included in the evaluation of those resources was the confident expectation of the Abbey National payment, and because it was reasonable in our view for the company confidently to expect that payment to be made on or before 4 June the company could not have been reasonably expected to make contingency arrangements for the borrowing of funds on Thursday 3 or Friday 4 June if that payment did not materialise The company diligently chased the Abbey National payment. The result of the delayed payment, namely an inability to pay the VAT on time, could thus be fairly described as practically inescapable. In the context of the company’s business we therefore concluded, on balance, that there was a reasonable excuse for the delayed receipt of the VAT by the Commissioners.

The return

Following the hearing we indicated to the parties that our initial conclusion on this issue was that there was not a reasonable excuse for the late delivery of the return but said that we wished to consider the matter further.

Out initial thoughts were based upon a preliminary presumption that the due date for the submission of the return was 31 May. It seemed to us that it was more likely than not that the return was dispatched (together with the VAT cheque) between Saturday 29 May and Tuesday 1 June - given that it arrived on Wednesday 2 June.

Thus in relation to the return the company could not have benefited from section 59(7)(a) because it was not reasonable to expect that it would be received before 31 May.

We then asked ourselves whether the company had a reasonable excuse for the late despatch of the return. It seemed to us that it was not despatched on Thursday 27 May because of a concern that the cheque which was with it might not be met if presented too early. That was a fair and reasonable concern. But it seemed to us that it would be reasonable for the company to have avoided the delay by submitting the return separately from the cheque. Had it done so the return would have arrived before 31 May. Whilst we could understand the concern over the cheque and perhaps the failure to think of submitting the return separately, we did not find either a reasonable excuse for the late submission of the return.

However, since the hearing we have had time to consider further the question of what was the due date for the submission of the return. We concluded above that it was 7 June. The return was received by the Respondents on 2 June. It was therefore received before the due date and accordingly there was no default in relation to the return within section 59(1).

We therefore allow the appeal: we find that there was no default in relation to the return and a reasonable excuse for the delay in the payment of the VAT.

Our decision was unanimous.

CHARLES HELLIER
CHAIRMAN

RELEASED: 25 January 2006

LON/05/0285
££RHC Lifting Ltd v Her Majesty's Revenue and Customs [2005] UKVAT V19433 (25 January 2006)