19460

VAT – Default Surcharge – Late Return and Payment- whether reasonable excuse – s.71 (1) (b) Value Added Tax At 1994.  Appeal dismissed.

LONDON TRIBUNAL CENTRE

	DEBEN TRANSPORT LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	DR KAMEEL KHAN (Chairman)
						MRS C S de ALBUQUERQUE

Sitting in public in London on 14 December 2005

Mr I J Chittock, Director, for the Appellant 

Mr J Holl, Senior Officer, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Introduction
1.	This is an Appeal dated 27 July 2005 against a Default Surcharge Notice in relation to the period 29 November 2004 to 27 February 2005 in the sum of £10,038.00 (“the Surcharge”), which is based on a calculation of 5% of the net tax amount of £200,775.68.

The VAT return and related cheque payments were received by her Majesty’s Revenue and Customs (“HMRC”) on 31 March 2005, which was four days late given the due date of 27 March 2005. The Notice of Assessment of Surcharge was issued on 26 April 2005. The Appellant requested a reconsideration of the decision to impose the Surcharge and this was done by the Default Surcharge Reconsideration Team. Their decision was that the Surcharge would remain and this decision was communicated to the Appellant on 6 July 2005. 
The Appellant asked the Tribunal to also consider a Default Surcharge Notice for the period 1 August 2004 to 29 August 2004 for the surcharge amount of £742.00 calculated at 2% of the tax outstanding. The Tribunal refused this request since the appeal was out of time.
The Appellant’s Case
2.	The Appellant’s main arguments are contained in their letter written by Mr I J Chittock, one of their directors, to HMRC dated 11 May 2005, where four grounds of appeal were presented.  These are:

(a)	While the VAT return showed that the due date for submission and payment was 27 March 2005, the staff preparing the return were under the impression that payment and submission were not due until the end of March (i.e. 31 March 2005).  The cheque for the payment was received on 31 March and cleared on 4 April.

(b)	Deben Transport Limited (“Deben”) was taken over by CEL Group (“CEL”) in June 2004 and all financial, recording and control responsibility passed to CEL, which operated from a different location in Felixstowe.  CEL used the 31 March as their VAT return date and it is possible that this was confused with the Deben due date, which was earlier. 

(c)	The Surcharge is harsh given that Deben were only four days late and had an impeccable reputation for prompt payment. 

(d)	Deben who was having financial difficulties in 2004 when taken over, would suffer financially as a result of the penalty. 
3.	Mr Chittock, Chief Financial Officer of the Group, said that the return was completed on 22 March but sent on 29 March due to the confusion with the CEL VAT quarter date.  He said there was a change of staff in that Mr D Lambert, accountant, dealt with Deben’s VAT returns before the change of ownership but that Mrs C Bauer, a senior employee, took over responsibility for the VAT returns after the ownership changed.  This may have contributed to the confusion with the return due date.  The VAT return was signed by Mrs C Bauer.  Mr Chittock drew attention to the case of John Cormack (HM Inspector of Taxes) v CBL Cable Contractors Limited 2005 EWHC 1294 (CH) (“CBL Cable Contractors”), a case dealing with sub-contractors default and their obligation to account for tax.   Mr Justice Laddie said in that case:

“…the degree of culpability of the taxpayer in the default is relevant in determining whether it is minor and technical or not.” (para 29)

The conclusion which Mr Chittock drew from this quotation is that minor breaches should be looked at more sympathetically and with a view to mitigating any harsh penalties if the Appellant was not culpable.
The Inland Revenue’s Arguments
4.	The HMRC arguments can be summarised as follows:

(a)	The Appellant is under an obligation by law to submit its VAT return and related payments by the due date. (Regulation 25 and 40 VAT Regulations 1995 1995/2518 (“1995 Regs”)).  The return and payments were not made by the due date. 

(b)	The Appellant does not have a reasonable excuse for the late submission of its returns and related payments where the person responsible for the performance of these tasks has been dilatory (Section 71(1)(b) VATA 1994).

(c)	The amount of surcharges is calculated in accordance with the law.  The default for the period 02/05 followed those in the earlier period 10/03 and the period 08/04, they were therefore three current periods of default with the first of these resulting in the issue of a Surcharge Liability Notice.  Once a Surcharge Liability Notice had been issued, the next default results in a surcharge based at 2% of the VAT due for the period and the second, as applied to the Appellant’s default for the period 02/05, results in the Surcharge based on a calculation of 5% of the VAT payable.  Section 59(5)(b) VATA 1994 states that the specified per cent is 5% for the second such period.  HMRC state that the percentage applied was correctly applied and pursuant to Section 59(7) VATA 1994 there is therefore no reasonable excuse.

(d)	Mr Holl for the Respondents referred to a letter dated 1 June 2004, written by Mr D Lambert, Accountant, for the Appellant who said that the Company had a major management and corporate restructuring which involved the amalgamation of their accounts department with that of the takeover company.  He said that this resulted in the Appellant bringing its accounting calendar in line with that of the takeover company although the Appellant continued to be run as a separate entity.  There was no group VAT registration since 49% of the shares of the Appellant had been acquired.  The letter gave all the VAT periods of the Appellant company including that of 27 February 2005 and asked for the contents of the letter to be noted going forward.
5.	HMRC said that the Appellant was aware of the due date for the returns and payment and there were earlier defaults by the Company which indicated past negligence and dilatoriness.
Legislation

6.
(a)	Regulation 25(1) VAT Regs 1995.

		“Every person who is registered or was or is required to be registered shall, in respect of every period of a quarter or in the case of a person who is registered, every period of 3 months ending on the dates notified either in the certificate of registration issued to him or otherwise, not later than the last day of the month next following the end of the period to which it relates, make to the Controller a return.”

(b)	Regulation 25(1) (c) VAT Regs 1995

		“Where the Commissioners consider it necessary in any particular case to vary the length of any period or the date on which any period begins or ends or by which any return shall be made, they may allow or direct any person to make returns accordingly, whether or not the period so varied has ended.”

(c)	Payment of VAT – Section 40(2) VAT Regs 1995.
		
		“Any person required to make a return shall pay to the Controller such amount of VAT as is payable by him in respect of the period to which the return relates not later than the last day of which he is required to make that return.”

(d)	Section 71(1)(b) VAT Act 1994.

		“Where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied on is a reasonable excuse.”

(e)	Section 59(5)(b) VATA 1994

		“In relation to the second such period, the specified percentage is 5 per cent.”

(f)	Section 59(7) VATA 1994.

		“If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above satisfies the Commissioners or, on appeal, a tribunal that, in the case of a default which is material to the surcharge –

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

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

he shall not be liable to the surcharge and for the purposes of the preceding provisions of this section he shall be treated as not having been in default in respect to the prescribed accounting period in question (and, accordingly, any surcharge liability notice the service of which depended upon that default shall be deemed not to have been served).”

Decision

7.	This is a case where the staff had not performed their duties to meet the deadlines for the submission for a VAT return and the payment due for the quarter.  Their error could be due to confusion about dates for the submission of the return and payment.  However, the Default Surcharge regime is automatic and the intention of the taxpayer does not provide a defence. 
8.	It is possible to have a defence if there is a “reasonable excuse”.  There is no legal definition of the expression “reasonable excuse” but Section 4 of the Notice 700/50 – Default Surcharge does provide some guidelines.  It states:

“If you can show that your conduct was that of a conscientious business person who accepted a need to comply with the VAT requirements, there must be a reasonable excuse.”

While this statement is general, genuine mistakes, honesty and acting in good faith are not reasonable excuses for surcharge purposes.  There is no doubt that the Appellant wanted to comply with the VAT legislation and to meet their due date.  Their return was prepared some days before the date for submission and payment but the actual submission and payment was four days late.  Let us look at the reasons given by the Appellant. 
9.	First Mr Chittock said that there were competent and senior people dealing with the VAT matters.  Mr Lambert prepared and signed the returns before the reorganisation of the Company and Mrs Bauer did the same job, after that date.  Mr Lambert had taken steps to inform HMRC of the reorganisation of the Company and confirmed the VAT quarter dates.  Mr Chittock, who had overall responsibility for the CEL group’s financial affairs, had every confidence in his staff.  He said that it is possible that Mrs Bauer had confused the VAT quarter date for the CEL Group with that of the Appellant.  However, this is not supported by the letter from Mr Lambert who had written to HMRC explaining the Corporate reorganisation and clearly stating the VAT quarter dates of the Appellant.  He was clear on the due dates and this letter and relevant information would have been passed to Mrs Bauer when she took over from him.  The reorganisation of the group would necessarily involve a handover of all outstanding tax matters which needed attention.  The inaccuracies or dilatoriness of Mrs Bauer, in the circumstances, cannot be a reasonable excuse pursuant to Section 71(1)(b) VATA in 1994.
10.	Mr Chittock said that the Appellant was in financial difficulties.  He also said there were upheavals as a result of the reorganisation and the takeover.  However, the Appellant continued to operate on their own and the shareholding purchased by CEL was a minority interest.  The Appellant continued to operate separately and not as part of the CEL Group for VAT purposes.  This was confirmed by the letter from Mr Lambert.  There were changes to staff and in the accounting function but these were not significant.  Indeed the Return was prepared on time (Mr Chittock explained that it was ready by 22 February). The indication is that things in the accounts department were running smoothly at the time.  If the default was due to something other than dilatoriness or inaccuracy, a reasonable excuse may be established.  However, there is nothing to indicate that the financial difficulties of the Appellant or the reorganisation of the group was responsible for the late return and payment.  If anything, the reorganisation seemed to have put the Company on a better financial and organisational basis.  Mr Chittock said that the Appellant had an exemplary record for compliance for VAT purposes which should be considered in mitigation.  He also drew reference to the decision in CBL Cable Contractors drawing a distinction between minor and major breaches resulting in default.
11.	The Appellant had three current period defaults with the first resulting in a Surcharge Liability Notice, and thereafter the percentage used in calculating the Surcharge increases with further defaults.  It is not therefore correct for the Appellant to say that they had an unblemished record in dealing with VAT matters and payment.  Secondly, while the point made in the CBL Cable Contractors is noted, it is not relevant to the issues raised in this case.  The penalties are set by law whether the breaches are major or minor.  If by the due date the taxpayer had not provided a return to HMRC or paid the amount of VAT shown on the return the taxable person is in default in respect of the VAT period.  There is a defence only if a reasonable excuse can be provided (para).  In this case, the Appellant has not discharged the burden to show that there is a reasonable excuse.  The percentage used in calculating, the Surcharge was correctly applied.  There is no available information in relation to the default period 08/04/ or 02/05 to allow the withdrawal of the Surcharge pursuant to Section 59(7) VAT 1994.  This appears to be a case where the members of staff simply got the dates wrong.  While one sympathises with the Appellant’s position, the Default Surcharge is an automatic regime, which is applied to late returns and late payment.  There is no relevant information provided to support a reasonable excuse.  For the reasons given, the Appeal is accordingly dismissed.

DR KAMEEL KHAN
CHAIRMAN

RELEASED: 13 February 2006

LON/05/799