19512

Default Surcharge - cheque sent to HMRC with request not to present immediately - cheque not presented before date VAT due - whether receipt of cheque is payment - whether default - whether reasonable excuse - Sections 59 and 71 VATA

	STONEWOOD ELECTRONICS LTD	Appellant

-	and –

	THE COMMISSIONERS OF HER MAJESTY’S REVENUE & CUSTOMS	  Respondents

	Tribunal: CHARLES HELLIER (Chairman)
					CHRIS PERRY

Sitting in public in Bristol on 14 December 2005

James Kelly, Financial Controller of the Appellant - for the Appellant 

Pauline Crinnion, of the Acting Solicitor for HMRC instructed for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1	This is an appeal against a default surcharge of £6,621.97 in relation to the period 11/04 ending on 30 November 2004. As noted below the amount of the surcharge levied but for a computer error would have been 15% of £71,146.52 which was the VAT shown as due on the Appellant’s VAT return for that period.

2	The £6,621.97 represents 15% x (£71,146.52 - £27,000). The £27,000 having been erroneously treated by the Respondents’ computer as reducing the amount of VAT outstanding.

3	The Appellant does not dispute that a valid surcharge liability notice and valid surcharge liability extension notices had been served on the Appellant, or that the period 11/04 fell within the surcharge liability period created and extended by those notices. There is no dispute that if there was default the correct rate of surcharge was 15%.

4	Section 59(1) of the VAT Act 1994 provides that a person is to be regarded as being in default in respect of a VAT period if either:

“(a)	the Commissioners have not received [the VAT return for the period]; or

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

by the last day on which regulations prescribe the furnishing of a return. Regulation 25(1) of the VAT Regulations 1995 (SI 2995/2518) sets that day in the Appellant’s circumstances as the last day of the month following the end of the period. For the period 11/04 that day was therefore 31 December 2005.

5	Section 59(7) VAT Act 1994 provides that if a person satisfies the Commissioners or a tribunal that:

“(a)	the return or, as the case may be, the VAT shown on the return was dispatched 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 the VAT not having been so dispatched”,

he shall not be treated as having been in default in respect of the return or the VAT payment as the case may be.

6	In this case the return together with a cheque for the VAT shown on it as payable were dispatched on 27 December 2004 by post, and HMRC record them as having arrived on 31 December 2004. Thus at first sight it would seem that there was no default at all in respect of the period.

7	That is undisputedly the case in relation to the return. However in relation to the VAT payment there is one further factor.

8	It is this. The return and the cheque were accompanied by a letter from Mr Kelly on behalf of the Appellant. This letter sought a favour from HMRC. The letter reads:

“At the date of issue of the enclosed cheque we were due and had been promised a payment from a major debtor, but this has been delayed until the end of January.

“However we do have other funds, sufficient to meet this arriving in the first two weeks of January and if you are able to withhold deposit of the cheque until say, Monday the 10th January we will be able to meet the demand.

“We realise that this is rather unorthodox, but hope to demonstrate our good faith and at the same time avoid penalty for late submission”.

9	It appears that when the VAT Central Unit at Southend on Sea received this letter a telephone call was made to the Respondent’s Large Debt Unit at Northampton where a Mr Steve Wicks authorised the withholding of presentation of the cheque until 10 January 2005.

10	It appears that the cheque was honoured on presentation. Thus the Respondents received the cleared funds sometime after 10 January 2005.

11	Mr Kelly was frank in his evidence to us. We accept his evidence. He told us that as it happened the cheque would have been honoured by the bank had it been presented by the Respondents on receipt but when he sent the cheque he did not have confidence that this would be the case. He said that he was trying to hedge his bets by writing the letter: he was trying both to be open with HMRC and to put the ball into their court. The payment from a major debtor referred to in his letter was of a debt of about £50,000 due at the end of December. This customer usually paid on time; on this occasion however they had told the Appellant that they would not pay until late January. He had investigated other means of securing the availability of funds sufficient to be confident that the cheque would be honoured if presented on receipt but had not been successful: they could not advance the receipt of other payments that would become due to them, they had a £100,000 overdraft facility and were up to the limit and had generally had cash flow problems; they had he said, looked under every stone.

12	Mr Kelly argued that his letter did not say “do not present this cheque”: he said the Respondents would have been acting quite lawfully if they had presented it for payment; the letter did not even say directly “please withhold presentation”, it merely said “if you are able to withhold”. Neither did his letter say that there would not be sufficient funds to meet the cheque, instead it reflected his uncertainty - indicating that there would be funds to meet the cheque on 10 January.

13	Thus, Mr Kelly argued, the Appellant had put the Respondents in possession of an instrument which, if they had presented it, would have given them the VAT due. The Respondents had chosen not to bank that cheque: how could their choice put him in default?

14	Mr Kelly noted that the Respondent’s usual practice was to accept the receipt of a cheque on the last day for payment as payment of the amount of the cheque. The Respondents had so received such a cheque: was it possible that the subsequent actions of the Respondents could affect whether there had been payment?

15	Mrs Crinion noted that the Appellant had had some difficulties in paying its VAT on time in the past. A large debt had been paid by instalments of £13,500 per month over the period August 2004 to June 2005. The terms of the instalment payment agreement made clear that it did not affect the determination of defaults and default surcharges.

16	Mrs Crinion said that to describe Mr Kelly’s letter as “just asking a favour” was a bit much. It was more than that: it was really a request to withhold presentation of the cheque i.e. to treat the cheque as if it were post dated.

17	Mrs Crinion explained that the amount of the surcharge notified should have been 15% x £71,146.52 that is to say 15% of the VAT shown on the Appellant’s 11/04 VAT return, the whole of which HMRC said was outstanding for the purposes of section 59(5). However the Notice of Assessment for the surcharge had assessed it at 15% of £44,146.52 because there had been deducted from the VAT for the period £27,000 being two of the £13,500 instalment payments made under the instalment payment agreement noted above paid on 6 December 2004 and 7 January 2004. These amounts should not have been deducted since they were not made in settlement of the VAT amount on the return, however she said that the Commissioners were not seeking, and would not seek, to charge or recover the additional £4,050 (being 15% x £27,000).

Discussion

18	It seems to us that the issues raised in this appeal are threefold:

First:	is the simple receipt of a cheque for an amount of VAT the receipt of that amount for the purposes of section 59(1) VAT Act 1994?

Second:	if the simple receipt of a cheque is receipt for the purposes of section 59, is the position different if the cheque is conveyed with: (a) an instruction not to bank it, (b) a request not to bank it, or (c) a suggestion that it might bounce if it were banked, before a certain date?

Third:	If the receipt of the cheque together with Mr Kelly’s letter was not receipt for the purposes of section 59(1), then was it the case that either:

(i)	the VAT shown on the return was dispatched in such a manner that it was reasonable to expect that it would be received by the Commissioners on time; or

(ii)	there was a reasonable excuse for the VAT not having been so dispatched,

so as to invoke the benefit of section 59(7) VAT Act?

19	The first two of these questions raised issues of law with which neither we nor the Appellant or the Respondents were equipped to deal at the hearing. The Respondents have subsequently served with observations on these questions on the Appellant and the tribunal centre. The Appellant was invited to respond but has submitted no response.

The First Issue:	Is the receipt of a cheque, the receipt of the relevant amount of VAT for the purposes of section 59(1)?

20	C&E Commissioners v Palco Industry Co Ltd [1990] STC 594 was an appeal against a default surcharge in a case where a cheque had not been honoured when presented by the commissioners for payment. The commissioners had presented the cheque for “town clearing” in a way which meant that it was presented to the company’s bank within 24 hours of receipt. On presentation the company’s bank returned the cheque because there had been insufficient funds in the company’s account.

21	In the course of a judgment in which he allowed the commissioners’ appeal against the tribunal’s decision to allow the company’s appeal against the default surcharge Hodgson J said:

“A cheque is only valid as payment if it is honoured on due presentation. Due presentation does not require immediate presentation or, as here, presentation on some precisely calculated day. The payer cannot dictate when the cheque should be presented. It is for the drawer of the negotiable instrument to ensure that funds are available to meet it. If there are no funds and the cheque is dishonoured there is no payment and the consequences of non-payment must follow.

“[Counsel for the taxpayer submitted that] the taxpayer company was entitled to avoid the penalty because… it was reasonable to expect that [the return and the cheque] would reach the commissioners by the due date. That means equating the word “tax” in the subsection with the cheque. It seems to be that this is a wholly untenable argument. Tax obviously has the meaning it has in [section 59], namely an amount of tax. The argument wholly fails to take into account the nature of a negotiable instrument, to which I have already referred. No doubt so long as the cheque reaches (or was dispatched to reach) the commissioners timeously it would not be open to the commissioners to argue, if it was honoured on presentation, that the case came within [section 59(1)(a)]  but if it is dishonoured on presentation there has neither been payment of tax nor dispatch of the amount of the tax.”

22	It is implicit in the first sentence of the passage cited above that the receipt of a cheque can constitute payment for these purposes. Hodgson J makes clear the condition for treating the receipt of the cheque as payment is that it is honoured on presentation, and that the date on which presentation is actually made is not relevant. It cannot be the case that a simple delay in presenting a cheque by the recipient can affect the date when payment is to be treated as made for the purposes of section 59.  We therefore conclude that the simple receipt by HMRC, on or before the due date of a cheque for the VAT which is honoured on presentation constitutes “receipt of the amount of VAT” for the purposes of section 59(1)(b). 

23	Even if we are wrong in this conclusion, and the receipt of a cheque which is subsequently honoured does not constitute receipt of payment on the date of the receipt of the cheque but instead constitutes receipt of that payment when funds are received on the cheque clearing, it seems to us that in circumstances where there was an unprovoked delay by the Respondents in presenting the cheque, the taxpayer could take the benefit of section 59(7)(a). That is because it would, assuming that the cheque was posted in good time for the deadline be reasonable to assume that it would be presented timeously and accordingly  that the VAT would be received by the Commissioners on time. We note however that, on this basis, this defence would be available only where it was reasonable to expect same day clearing or where the cheque could reasonably be expected to be received sufficiently before the end of the month to enable it to be presented and paid before the end of the month.

24	Accordingly if the Appellant’s cheque had been submitted without Mr Kelly’s letter and had been presented on 10 January (as it was presented) and honoured (as it was), then there would have been no default by the Appellant within section 59(1)(b).

The Second Issue	Can instructions, requests or suggestions submitted with a cheque affect the conclusion on the First Issue?

25	In their written observation the Respondents say that in the normal course if a cheque is cleared on original presentation the date of receipt of cheque at Southend is treated as the date payment is made rather than the date funds are cleared into the Commissioners’ account. This appears to us to be consistent with the statements of Hodgson J in Palco.

26	The Respondents also indicate that the Commissioners do not accept post-dated cheques, and that the normal procedure would be to return the cheque. In this case the letter from the Appellant was referred to the Debt Management Unit because of the currency of a Time to Pay agreement, and that Debt Management Unit accepted the request in the Appellant’s letter and presented the cheque after the date signed.

27	Does Mr Kelly’s letter make any difference to our conclusion on the first issue?

28	If Mr Kelly’s letter had contained an instruction not to present the cheque then we think that there could have been a difference. If the terms of the letter were such that the cheque was given to the commissioners to hold on trust or on certain terms then the Commissioners might not have been free to deal with it for their own benefit as they thought fit. We would in such circumstances have held that, for the purposes of section 59, they had not received the cheque and therefore that they had not received the amount of the VAT. In those circumstances the Appellant would have fallen within section 59(1)(b) in relation to the amount of the VAT.

29	But Mr Kelly’s letter did not contain an instruction. Instead it contained a suggestion that the cheque might not be honoured on presentation and a request that presentation should be delayed. We find that the commissioners were free to present the cheque if they chose to do so albeit that if they did so there appeared to be a risk that it would not be honoured. Although Mr Kelly’s letter strongly suggested that the cheque might not be honoured on presentation it did not prohibit its presentation or place any condition or restriction upon the commissioners.

30	The letter strongly suggests that if the cheque were presented it would bounce. It suggests that until 10 January the cheque was affectively a worthless piece of paper. But that suggestion does not affect the legal nature of the cheque being a demand addressed to the bank with immediate (and not post-dated) effect to pay a sum of money. It was not a post-dated cheque or something less than a cheque.

31	Accordingly, on the basis that, as we have found, the receipt of a cheque which is subsequently cleared constitutes payment of the amount of the cheque, and as a result of our finding that the Respondents were free to present the cheque on its receipt, [we] find that payment was made when the cheque was received by the Respondents and not when the cheque cleared. Accordingly we find that the amount of VAT was received by the commissioners on or before the due date and accordingly that there was no default by the Appellant for the purposes of section 59(1)(b).  The Respondents were at liberty to present the cheque whenever they wished but decided to offer an accommodation to the Appellant. That accommodation did not affect when the VAT should be treated as paid for the purposes of section 59.

32	As a result we will allow this appeal. In the last section of this decision we set out the conclusion we would have reached on the reasonable excuse issue had we concluded otherwise on the second issue.

The Third Issue:	The benefit of section 59(7) VAT Act.

33	Our discussion on this issue is on the basis that the receipt of the cheque together with Mr Kelly’s letter did not constitute receipt of the VAT for the purposes of section 59(1).

34	The first limb of section 59(7) provides an escape from a default if it was reasonable to expect that the VAT would be received by the Commissioners within the time limit. In addressing this question we assume that if the cheque had not been accompanied by Mr Kelly’s letter, then it would be reasonable to assume that the VAT would have been received within the appropriate time limit.

35	The letter presented a choice - it expressed the “hope” that a penalty would be avoided but did not compel the Respondents to act so that that hope would be fulfilled: it therefore did not require the Respondents to present the cheque immediately. Neither in our view was the Appellant’s letter a direction not to present the cheque. But it plainly was a request not to do so. Even if the words “please” or “request” were not present, they oozed from the text. The letter encouraged the Respondents not to present the cheque. In such circumstances it is not reasonable in our view to expect that the cheque would have been presented immediately for payment: it might have been so presented but it was not reasonable to expect that it would be.

36	Accordingly we find that the Appellant cannot take the benefit of section 59(7)(a).

37	The second limb of section 59(7) is available to the Appellant if there was a reasonable excuse for the late receipt of the funds. But the reason for the late receipt was in our view not the action of the Respondents in presenting the cheque on 10 January, but the encouragement and effective request of the Appellant that the Respondent should so act. The Appellant cannot say that the action it desired and promoted was reasonably an excuse for the result of that action.

38	Neither in our judgment is the reason which promoted the Appellant’s request a reasonable excuse for the late payment. We accept that the Appellant was embarrassed by a late payment from a debtor and that it looked at other possible ways to fund the VAT payment but in the context of this business we were not persuaded (and the Appellant made no serious attempt to persuade us) that reasonable foresight and due diligence could not have overcome the feared insufficiency of funds.

39	As a result we find that the Appellant would not have been able to rely on either limb of section 59(7).

40	We allow this appeal because of the conclusion on the first and second issues.

CHARLES HELLIER
CHAIRMAN

RELEASED: 17 March 2006

LON/05/287