19566

VAT DEFAULT SURCHARGE: Was the default surcharges for the periods ending 31.12.04 and 31.3.05 correctly assessed? – Yes – because the respondents had not withdrawn the default for the period ending 31.8.04 –  Reasonable Excuse for not paying VAT on time for periods ending 31.12.04 and 31.3.05  – Appellant prevented from completing accurate VAT returns because of late delivery of purchase invoices – A prudent business person acting with due diligence and reasonable foresight would have attempted to find a solution to the problem of late purchase invoices – no reasonable excuse– Appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

	ICONEYEWEAR DISTRIBUTIONS LTD	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal:	Michael Tildesley OBE (Chairman)
					Kathleen Ramm FCA            

Sitting in public in North Shields on 22 February 2006

Graham Jamieson of Jamieson & Co Solicitors, for the Appellant

Richard Mansell, of the Solicitor's office of HM Revenue and Customs, for the 
Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal
1.	The Appellant was appealing against the imposition of two default surcharges. The first was issued on 22 February 2005 in the sum of £882.37 relating to the period 1 September 2004 to 31 December 2004. The second was issued on the 13 May 2005 in the sum of £5,361.04 relating to the period 1 January 2005 to 31 March 2005.
The Grounds of Appeal
2.	The Appellant originally appealed on the ground that the imposition of the default surcharges was unfair. At the hearing Mr Jamieson explained that Mr Blackett, the Appellant’s Managing Director, had dealt with the Notice of Appeal himself. Mr Blackett did not understand the legal basis for challenging default surcharges and naively put forward “fairness” as the ground of Appeal. Mr Jamieson submitted two new grounds of Appeal, one based on the legal concept of reasonable excuse. The Respondents raised no objection to the late amendment of the grounds of Appeal.  
The First Ground of Appeal 
3.	The Appellant changed its quarterly periods for submitting VAT returns to March, June, September and December to bring them into line with its accounting year end of 31 December. The Appellants’ accountants notified the change to the Respondents on 17 September 2004. The Appellant assumed that the Respondents agreed to the change and submitted its September quarterly return on 19 October 2004 instead of submitting the August quarterly return by 30 September 2004.
4.	The Appellant’s failure to submit the August quarterly return on time resulted in a default surcharge at the rate of five per cent of the sum owed. According to the Appellant the Respondents had not collected this default surcharge because they were satisfied that the Appellant had a reasonable excuse for not submitting the August return on time. The reasonable excuse arose from confusion between the parties about  the change in the quarterly periods for submitting returns. 
5.	The Appellant contended that the default surcharge for the August return no longer stood. Therefore, the default surcharges issued on 22 February 2005 and 13 May 2005 should have been calculated at the rate of five and ten per cent respectively not ten and fifteen per cent.
The Second Ground of Appeal 
6.	The Appellant’s business was the supply of sunglasses to major retailers in the United Kingdom which included Top Shop, River Island and House of Fraser. It owned the distribution rights of Iconeyewear sunglasses in the United Kingdom. Mr Blackett and his son ran the business which had an annual turnover of £700,000. The overwhelming majority of the Appellant’s business was conducted in the winter months. 
7.	The sunglasses were manufactured in China and then sent directly to Holland for the European market. The Appellant received its batch of sunglasses from Holland. However, the paperwork associated with the various supplies was despatched from China to the USA and then onto Holland and the United Kingdom. This meant that the Appellant often did not receive the paperwork until six to eight weeks after the supply of sunglasses from Holland. Mr Blackett on behalf of the Appellant was reluctant to complete the quarterly return until he had in his possession the purchase invoices relating to the supply of sunglasses which resulted in the late returns on 22 February 2005 and 12 May 2005.  Mr Blackett’s reluctance stemmed from the warning on the VAT return which stated that “a false declaration can result in prosecution”.  Mr Blackett considered that he was unable to make an accurate return unless he included the information from the relevant purchase invoices, which was why he delayed the returns until after the Appellant received the relevant invoices.
8.	Mr Jamieson submitted that the Appellant had a reasonable excuse for the late returns because it was prevented from submitting accurate returns due to the policy of the American company over the paperwork. The Appellant had no control of how the American company conducted its business. 
The Reasons for Our Decision
First Ground of Appeal
9.	The Respondents were not able at the hearing to respond to the first ground of Appeal because they were only notified of it at the hearing. We directed that the Respondents make their response in writing which they did on 3 April 2006.
10.	The Respondents stated in their letter of 3 April 2006 that they did not find a reasonable excuse for the Appellant’s late submission of the August 2004 return. Originally the Respondents imposed a ten per cent default surcharge for the late August 2004 return. However, they discovered that the ten per cent penalty should be reduced to five per cent because of the withdrawal of a default surcharge for an earlier period.  On 21 October 2005 the Respondents advised the Appellant of the reduction of the surcharge which extended the surcharge period. Unfortunately the Respondents  failed to insert the recalculated surcharge in their advice of 21 October 2005 which resulted in the remission of the surcharge on the ground of human error.
11.	We are satisfied that the Respondents did not absolve the Appellant’s  default for the late return and payment of the VAT for the period ending August 2004 on the ground of reasonable excuse. The Respondents made an error by not recalculating and issuing the revised penalty at five per cent. That error, however, did not render the Appellant’s default for the August 2004 period invalid. The default still stood because the Appellant had not submitted the VAT return and payment by the due date for the August period. The default was confirmed by the Respondents notices of the 15 and 21 October 2004 which stated that the Appellant was in default and the surcharge period extended until 31 August 2005. The Appellant has not appealed against the Respondents’ decision that it was in default for the August period.
12.	 Section 59(5) of the VAT Act 1994 deals with the calculation of the default surcharge by imposing a specified percentage of the VAT owed for the relevant period. The specified percentage increases with the number of defaults during the surcharge period for which the taxpayer has outstanding VAT. Under Section 59(1) of the 1994 Act a taxpayer is in default if the Respondents have not received his VAT return by the due date.  The Appellant failed to send his August 2004 VAT return on time and there was VAT outstanding on that return. Thus the Appellant was in default for the August 2004 period and that default met the requirements of section 59(5) of the 1994 Act for it to be counted in the calculation of the specified percentage.
13.	The Appellant had two prior defaults (for the periods ending 31 August 2003 and 31 August 2004) in the surcharge period relevant to the default for the period ending 31 December 2004.  There was an additional default for the period ending 31 December 2003 which did not count under section 59(5) of the 1994 Act because it was a repayment return, no outstanding VAT was owed.  Under section 59(5) where there are two prior defaults in the surcharge period the specified percentage for calculating the default surcharge is ten per cent.  Thus the default surcharge for the period ending 31 December 2004 and issued on 22 February 2005 was correctly assessed at ten per cent of the VAT owed.
14.	The Appellant had three prior defaults (periods ending 31 August 2003, 31 August 2004 and December 2004) in the surcharge period relevant to the default for the period ending 31 March 2005. Under section 59(5) where there are three prior defaults in the surcharge period the specified percentage for calculating the default surcharge is fifteen per cent.  Thus the default surcharge for the period ending 31 March 2005 and issued on 13 May 2005 was correctly assessed at fifteen per cent of the VAT owed.
15.	We are, therefore, satisfied that the default surcharges issued on 22 February and 13 May 2005 were correctly assessed at ten and fifteen per cent respectively.
Second Ground of Appeal
16.	Section 59 of the VAT Act 1994 requires the Appellant to furnish VAT returns and pay the outstanding VAT within one month of the relevant accounting period. The Appellant failed to pay the VAT due within one month for the accounting periods ending 31 December 2004 and 31 March 2005. The Appellant’s failure to pay VAT on time provided the trigger for the imposition of default surcharges.
17.	The Appellant can avoid the default surcharges if it can satisfy the Tribunal on a balance of probabilities that it had a reasonable excuse for not furnishing the VAT payments on time. Insufficiency of funds to pay any VAT due or reliance upon another to perform any task cannot in law amount to a reasonable excuse  (section 71(1)(a)(b) of the VAT Act 1994).
18.	The VAT and Duties Tribunal in Greengate Furniture Ltd v Commissioners of Customs and Excise [2003] V & DR 178 described default surcharges as a blunt instrument which took limited account of the blameworthiness of the trader. There is no power under the legislation to mitigate the penalty. The purpose of the default surcharge legislation is to ensure compliance with the payment of VAT within the prescribed timescales. Thus the range of circumstances that can amount to a reasonable excuse are strictly limited. To meet the legal requirements of a reasonable excuse, the Appellant would have to demonstrate that it met the standards of a prudent business person exercising reasonable foresight and due diligence with proper regard for its obligations to pay VAT on time.
19.	The Appellant under its second ground of Appeal stated that it was prevented from submitting accurate returns on time because of the actions of the American company in requiring the invoices from China to be sent to the USA and not with the sunglasses. The Appellant, however, did not seek the advice of HM Revenue and Customs about options for overcoming this problem. Had it done so, the Appellant would have been alerted to the possibility of including estimated figures in its VAT return.  
20.	We accept that the Appellant genuinely believed, albeit mistakenly, that it could not make accurate VAT returns unless it had the information from the purchase invoices. However, a mistaken genuinely held belief in itself does not in our view amount to a reasonable excuse. The Appellant was aware of the problem with the purchase invoices, and had time to seek a solution. A prudent business person exercising reasonable foresight and due diligence would have attempted to find lawful solutions to the problem, and at the very least made enquiries with HM Revenue and Customs. The Appellant provided no evidence of its attempts to find solutions. We do not consider that the Appellant’s actions in this regard met the standards of a prudent business person. In those circumstances we find that the Appellant has no reasonable excuse for the defaults in respect of the periods ending 31 December 2004 and 31 March 2005.
Decision
21.	We find that
(1)	The default surcharges for the periods ending 31 December 2004 and 31 March 2005 were correctly assessed at ten and fifteen per cent respectively of the VAT owing on the said returns.
(2)	The Appellant’s belief that it could not submit accurate returns unless it had the information from the purchase invoices did not amount to a reasonable excuse for the defaults in respect of the periods ending 31 December 2004 and 31 March 2005.
22.	We, therefore, dismiss the Appeal and make no order for costs. 

MICHAEL TILDESLEY
CHAIRMAN
Release Date: 27 April 2006

MAN/05/0797