Hans Christian Bier (t/a Contract Audio Visual) v Revenue and Customs [2005] UKVAT V19441 (01 February 2006)

19441
VAT Default surcharge - Appellant had unusually high turnover in a quarter - normally paid VAT by BACs transfer - VAT payable in quarter exceeding BACs daily threshold - payment therefore made in three instalments - instalments falling after due date - effect of HMRC practice in relation to electronic payments - regulation 25(4L) VAT General Regulations 1995 - Reasonable Excuse - on the facts  - appeal dismissed.

LONDON TRIBUNAL CENTRE

HANS CHRISTIAN BEIR 	           Appellant
T/A CONTRACT AUDIO VISUAL SALES (CAV)

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Tribunal:	CHARLES HELLIER  (Chairman)
CHRIS PERRY

Sitting in public in Bristol on 15 December 2005

Nicolas Brojer, CAV’s Accountant, for the Appellant 

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

© CROWN COPYRIGHT 2006

DECISION

The Appellant appeals against a default surcharge of £2,553.54 made in respect of the 09/04 VAT period ending on 30 September 2004.  The surcharge was at the rate of 10% on the VAT shown on the VAT return for the period.

The Appellant did not dispute that a valid surcharge liability notice and a notice extending the surcharge liability period had been served on the Appellant or that if it was default in respect of the 09/04 period (without any reasonable excuse) the rate of VAT surcharge was properly 10% of the outstanding VAT. The issue before us was whether or not the Appellant was in default for the purposes of the surcharge provisions in respect of the period.

The Appellant made payment of the VAT for the 09/04 period by means of three internet banking BACs payments which as will be seen, were received by HMRC after the normal due date. As will be seen below, the legislation provides for the possibility that different time limits may be applicable where electronic payment is made, and that these different limits may apply not only to the due date for the payment of the VAT, but also to the due date for the receipt of the return.

The Legislative Background

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 [the] 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 the case may be, the VAT shown on the return was dispatched at such 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 the VAT not having been so dispatched.”

Regulation 25(1) of the VAT Regulations 1995 (SI 1995/2518) deals with the making of returns. It provides that a VAT registered person must:

“not later than the last day of the month following the end of the period to which it relates make to the Controller a return…”.

It also provides that:

…(b) when the Commissioners consider if necessary in any particular case to vary the length of any period or the date… by which any return shall be made, they may allow or direct any person to make returns accordingly,…”.

Regulations 25(4A) to (4M) contain provisions for the making of returns using electronic communications. They require among other things the electronic return system to be approved by the Commissioners. Regulation 25(4L) provides as follows:

“Additional time is allowed to make a return for which any related payment is made solely by means of electronic communication (see paragraph (1) - time for making return, and regulations 40(2) to 40(4) - payment of VAT).

“That additional time is only as the Commissioners may allow in a specific or general direction, and such a direction may allow different times for different means of payment. 

“The Commissioners need not give a direction pursuant to this paragraph.”.

Regulation 40 deals with paying the VAT on a return. Regulation 40(2) provides that any person required to make a VAT return shall pay the VAT payable in respect of the return period “not later than the last day on which he is required to make that return.”

Regulation 40(2A) to (5) provides that:

(3)	The requirements of paragraph… (2) above shall not apply where the Commissioners allow or direct otherwise.

(4)	A direction under paragraph (3) may in particular allow additional time for a payment mentioned in paragraph (2) that is made by means of electronic communications. The direction may allow different times for different means of payment.

(5)	Later payment so allowed does not of itself constitute a default for the purposes of section 59 of the Act (default surcharge).”

Leaving aside for the moment issues relating to electronic payment, the requirement imposed on the taxpayer is therefore that (unless the Commissioners allow or direct otherwise) the return must be received by HMRC before the end of the month following the end of the VAT period, (in the case of the Appellant’s 09/04 period this would mean by 31 October 2004); and that the VAT due must be paid to HMRC not later than that date. This is the case unless the Commissioners allow or direct otherwise. Otherwise than in relation to electronic payments there was no suggestion that in this case the Commissioners had so allowed or directed.

In the Appellant’s case, however, payments of the VAT due were made electronically so that regulation 25(4L) could be relevant. That regulation, although it lies in a group dealing with electronic returns, is not restricted in its application to the situation in which an electronic return is made but provides for the possibility of the extension of time for a return period if the payment is made electronically. Thus the making of electronic payment for the whole of the VAT due may permit additional time for the receipt of the (paper) return if the Commissioners have so allowed in a specific or general direction. Thus in the Appellant’s case the date for receipt of the 09/04 return could have been extended beyond 31 October 2004.

On the back of the VAT return for the relevant period, after a section specifying certain electronic methods of payment, there was printed:

“If you pay by one of these electronic methods you may receive up to 7 extra calendar days for the return and payment to reach us.”

In the VAT Guide April 2002 published by the Respondents at paragraph 21.3.1 it is stated:

	“Paper VAT returns

You can pay by cheque, postal order or by electronic means. If you pay by either cheque or postal order, it should be crossed “A/C Payee” and made payable to “HM Customs and Excise” with a line through any spaces on the “pay” line.

If you choose to pay the VAT shown as due on your return by Bankers Automated Clearing System (BACS), Bank Giro Credit Transfer or Clearing House Automated Payment System (CHAPS), you may receive up to 7 extra calendar days for the return and payment to reach us. Here are some important facts you need to know if you want to benefit from this concession -

- 	The 7 day extension to the due date will be applied automatically every time you pay your VAT return using BACS Direct Credit or Bank Giro Credit Transfer. You may also pay by CHAPS but please note that this may be the most expensive payment method for you. Payment cannot be made via Girobank.

-	Payment must be in our bank account on or before the 7th calendar day. If the 7th day falls on a weekend, we must receive payment by the Friday. When the 7th day falls on a bank holiday, payment must be in our bank account by the last working day beforehand.

-	To make sure that your payment reaches us in time, you should check with your bank how many days they need to complete the transaction.
	…

-	If your return or payment is received late, you will be in default and may be surcharged.

-	Your bank may charge you for using any of these payment methods. Check with them for details.

-	If you have any general questions about how the concession operates, please contact our National Advice Service.”

The Factual Background

From the evidence of Mr Brojer and the documents in the bundle before us we find the following facts.

The Appellant’s business is hiring out equipment. Two or three years ago the Appellant had over estimated the demand for equipment and had acquired too much equipment. It had had cash flow difficulties. The difficulties had however been resolved by the beginning of 2004.

In the period June 2002 to September 2003 the VAT due for each period had been between £4.6k and £60.1k with an average of £7.7k. December 2003’s figure was £13.9k, a refund of £1.2k became due for March 2004, and the June 2004 payment was £1.8k. Thus payments were usually well below the  £10k level.

The Appellant had had a very good 09/04 quarter. Its turnover had increased substantially. As a result the net VAT due at the end of the quarter was £25,699 - well in excess of the VAT due in the previous 2 or 3 years’ quarters.

Mr Brojer extracted the figures for the VAT returns from the accounting system for each month.  He extracted those for July 2004 on 22 September, for August 2004 on 23 September, and those for September 2004 on 29 October.

The first two months’ figures provided an indication to Mr Brojer that the VAT payable for 09/04 would be high. He warned Mr Beir of this fact. When he finalised the figures for the whole quarter the VAT payable was very high. £25k was well in excess of previous figures.

Mr Beir normally left the submission of the VAT returns and payments to Mr Brojer, but on being told of this greatly increased charge for 09/04, was concerned that despite previous warnings, it was almost unbelievably high.  Mr Beir insisted on being shown how the higher charge had arisen. He had been aware of the greater volume of sales, but wanted to be convinced of the figure for the VAT payable. Unfortunately Mr Beir was quite busy with other matters at the end of October and the beginning of November so it was not until Friday 5 November 2004 that Mr Brojer was authorised to submit the return and make the VAT payment for the 09/04 period.

Mr Brojer faxed the return to HMRC on Friday 5 November and told us that he also posted it either on Saturday 6 November or Monday 8 November. HMRC record it as received on Monday 8 November 2004. We therefore conclude that it was probably posted on Saturday 6 November 2004.

At about 3 or 4 pm on Friday 5 November 2004 Mr Brojer prepared to make arrangements for the electronic BACs transfer of the VAT due to HMRC. He used an internet banking system.  When he gave the instruction for the £25,699 to be transferred, the request was refused. After another couple of attempts he rang the bank. He was told that internet banking payments could not exceed £10k. He therefore gave instructions for a payment of £10k. He tried unsuccessfully over the weekend to make further payments. On Monday 8 November 2004 he made a further electronic payment of £10k, and on Tuesday 9 November made a final payment of the balance.

These payments were received in HMRC’s bank account on Tuesday 9, Wednesday 10, and Thursday 11 November respectively.

In 2003 and 2004 Mr Brojer’s experience with internet banking was developing. In late 2003 and early 2004 most payments were made by cheque; now it was different. The December 2003 VAT payment had been by cheque. The June 2004 VAT payment had been an internet banking payment. Prior to November 2004 he had not used internet access to attempt to transfer amounts of more than £10k.

When Mr Brojer spoke to the bank about the failure of the attempted £25,699 transmissions the bank did not suggest to him, and he did not suggest to the bank a CHAPs transfer. A CHAPs transfer would have ensured same day receipt of funds by HMRC.

Mr Brojer was aware that internet banking payments could take 2 or 3 business days to arrive in the transferee’s bank. The time taken often depended upon the identity and location of the transferee’s bank.

Discussion

Both the return and the VAT payment for 09/04 arrived after 31 October 2004, which is the date set by regulations 25 and 40 for their receipt in the absence of a direction or allowance otherwise.  Thus unless the time for delivery and payment was extended by the Commissioners the Appellant would be in default unless he could avail himself of the defence in section 59(7)(a) or (b). We discuss the return first and then the payment.

The Return

The return was due to be received by 31 October 2004 unless the Commissioners had allowed or directed additional time in exercise of their powers under regulation 25(4L). As noted above it appears to us that the powers given in that regulation are not dependent upon the return being made electronically but only upon payment being made electronically. In this case payment of the VAT was made electronically. This is therefore a case in which the Commissioners are permitted to allow or direct additional time.

Mrs Crinion referred us to HMRC News Release 21/2000 which announce that from 31 May 2000 “Businesses paying their VAT electro0nically from 31 May… will have an extra week to submit and pay their VAT returns.” The notice goes on to describe the extra 7 days as a “concession”.  We have also set out above the statement in the VAT Guide. Apart from these the only formal intimation we have seen from the Commissioners that they will allow further time for the delivery of the VAT return are the words on the back of the return quoted above. These words appear to us to be sufficiently clear to constitute a general direction pursuant to the Commissioners’ powers under regulation 25(4L). (See also regulation 4 of the VAT General Regulation 1995). Accordingly where payment is made by any of the electronic means specified on the form, then, the date by which the return must be received will be the 7th day of the following month. In the case of the period 09/04 this means before 7 November 2004. Furthermore there is nothing to indicate that this additional time applies only where the payment is made to HMRC before that date, and indeed the only condition for the extra 7 days is that the payment is made electronically. As a result, the method used by the Appellant for payment had the effect of extending the date by which the return had to be received, to 7 November 2004.

In the course of the hearing a suggestion arose that the 7 day extension period associated with electronic payment was an extra statutory concession by the Commissioners. Having had time since the hearing to consider the legislation and associated material, it seems to us that, for the reasons set out above in relation to regulation 24(4L) and 40(3) and (4), this is not the case: the legislation empowers the Commissioners to make or direct an allowance of additional time, and the statements in the VAT Guide and on the back of the VAT return are in our view directions validly made in exercise of that power.

The paper version of the return was received by HMRC on 8 November and so fell outside that deadline, but the return was also faxed to HMRC on 5 November, 2004, and that means of communication is, in our view, such that it would be reasonable to expect it to be received by HMRC on the same date. As a result we find that there was no default in relation to the submission of the return: either it was received (in fax form) on 5 November - before the deadline, or if it was not so received the delay will not, because of section 59(7)(a), be treated as a default because it was reasonable to expect that it would have been received by HMRC before 7 November.

The Payment

Regulation 40(3) and (4) permit the Commissioners to direct that additional time may be allowed for payment that is made electronically. The legend on the back of the VAT return and the statement in the VAT guide seem to us to be capable of constituting such a direction. Accordingly where payment is made by electronic means the due date for payment is the 7th day of the following month: in the case of the Appellant and the period 09/04 that means 7 November 2004.

The payments made to the Respondents did not arrive in their bank account until 8, 9 and 10 November. It seems to us that it was on these dates that they should be treated as “paid” to the Respondents. As a result each payment was outside the extended time limit. Therefore, unless the Appellant can rely upon section 59(7), he will have been in default in respect of the 09/04 payment.

It does not seem to us that the Appellant can escape default by relying upon section 59(7)(a): the Appellant knew it would not have been until Monday 8 November at the earliest that the first payment would have arrived in the Respondent’s bank account. It was therefore not reasonable to expect that any of the payments would have arrived within the appropriate time limit.

The Appellant can escape default by relying on 59(7)(b) if he has a reasonable excuse for the delay. It seems to us that had Mr Beir responded more speedily to Mr Brojer’s pestering that he deal with the VAT return, or had a CHAPS payment been used to transmit the funds on Friday 5 November, or had the BACs payment been made on earlier days in the week, then the default would not have occurred. We were not persuaded that there was any reasonable excuse for at least one of these not taking place. Although a VAT payment of this size was out of the ordinary for this business the magnitude of the expected payment was being monitored. It is therefore reasonable to expect that the business took steps to ensure that it could make the payment on time. We find that there was no reasonable excuse for the delayed payment.

We therefore dismiss the appeal.

Our decision was unanimous.

CHARLES HELLIER
CHAIRMAN

RELEASED: 1 February 2006

LON/04/2327