19786

Value Added Tax – Default Surcharge – Accounts manager wrongful acts – Whether reasonable excuse – Yes – Appeal allowed – S.71 VATA 1994

LONDON TRIBUNAL CENTRE

	VANE LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	DR K KHAN (Chairman)
						MR TONY RING FTII

Sitting in public in London on 30 August 2006

Mr A Edyvane, Managing Director for the Appellant 

Mr Simon Chambers, Advocate in the office of the Acting Solicitor for HM Revenue & Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal

	Vane Limited (the Appellant) appeals against a default surcharge imposed for the period 01/06.  The surcharge has been issued inspite of the VAT return being received, on time, on the 3 March 2006.  The payment of VAT through electronic payment (BACS) was received on 8 March 2006, one day late.  The due date for the return and payment was 7 March 2006.  The surcharge was at the rate of 5% and amounted to £2,266.05.

The Legislation

	S.59 of the Value Added Tax Act (VATA) 1994 provides, inter alia, that where outstanding VAT has not been paid by the due date, the taxable person is in default. A surcharge is payable in respect of each default.  The surcharge is a specified percentage which is determined by reference to the number of VAT periods in which the taxable person is in default in the surcharge period.  The percentage is 2% for the first accounting period of default; 5% for the second; 10% for the third and 15% for subsequent accounting periods.  A taxable person is not liable to a surcharge if he satisfies the Tribunal that he has a reasonable excuse for the payments of tax not being send on time.

	S.71(1) VATA 1994 provides:

“71(1) For the purpose of any provision of Section 59 to 70 which refers to a reasonable excuse for any conduct –

(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 on the part of the person relied upon is a reasonable excuse.”

The Issue

	The main issue for determination is whether the Appellant has a reasonable excuse for the payment of tax not being received on time.

The Evidence

	A small bundle of documents was produced for the Tribunal by the Appellant which included a statement and a summary of facts dated 28 August 2006 by Mr Alvin Edyvane, Managing Director of the Appellant; a statement by Mr Natasha Leer, Administration and Accounts/Payroll Department, dated 29 August 2006 explaining comments made by the Accounts Manager; resignation letter of Accounts Manager dated 20 January 2006; emails from the Accounts Manager dated 16 January 2006 and 14 April 2005 together with replies from the recipients of those e-mails and various correspondence between HMRC and the Appellant for that year.  Bank statements of the Appellant were provided.

The Facts

	From the evidence before us we find the following facts.

	The Appellant is an employment agency specialising in permanent, contract and temporary appointments in the construction industry.  As a company specialising in that sector they come within the Construction Industry Scheme (CIS) with the HMRC.  This Scheme requires the company to make deductions from all payments for labour of an amount of the subcontractor’s tax and national insurance contribution.  It is important for companies operating the CIS to have a good relationship and compliance record with the HMRC.

	The Appellant employed their Accounts Manager for the period December 2003 to March 2006, when a replacement was found.  It had become apparent in the months before departure that her performance was not satisfactory.  A replacement was appointed to start on 1 March 2006.  The Accounts Manager had a very short handover (renegotiated to 5 days rather than the originally agreed 14 days) to her replacement.  The Appellant agreed the shortened handover period provided all payments and paperwork were up to date before her departure.  After the Accounts Manager’s departure, the Appellant received a default surcharge notice from HMRC.  This raised concerns with the Appellant who asked a firm of accountants to review all their internal books and compliance procedure to ensure that there were no further problems.  The Appellant explained to the Tribunal that their compliance record with HMRC was good up to that time.  

	The Appellant became aware that the previous Accounts Manager had told others through emails forwarded on the company’s computer that she intended to disrupt the company’s business before her departure and that she had made a serious error in dealing with the company’s affairs. The Tribunal received further evidence on this matter in the statement of Natasha Leer. In her statement, Ms Leer stated, inter alia, that the Accounts Manager had said that she intended to delay the payment of VAT to HMRC and to leave on a shortened notice period with minimal handover to her replacement.

	The Accounts Manager was responsible for payroll, accounts and credit control.  This included payments in relation to PAYE/NI, VAT and CIS together with all paperwork.  The VAT returns were signed by the Managing Director after being prepared by the Accounts Manager and there were in place bank mandates, through the Banks Automated Clearing System (BACS), for electronic payment of VAT to be made on time.  It was explained to the Tribunal that this system had worked well to allow prompt payments and there were no previous problems.

The Argument

	The Appellant argued that the wrongful acts of the Account Manager, which may be viewed as a form of dishonesty, were responsible for the delay in paying the VAT and this constituted a reasonable excuse for the purpose of the surcharge.  

	Further, they say that the shortened handover period by the previous Accounts Manager, was a disruptive act which should be taken into account by the Tribunal in making its decision.

	The Respondents say that there is no reasonable excuse for the purpose of S.71(1) VATA 1994 either due to insufficiency of funds or reliance on a third party.  Further, they contend that the Appellant was slow to make a decision on replacing the Accounts Manager at a time when she was underperforming.  They submit that the claim for dishonesty had not been clearly established and cannot be relied upon as a defence to the surcharge.

	We outline below our decision.

	We believe that the Appellant had a reasonable excuse given the wrongful acts of the employee, (Customs and Excise Commissioners v Salevon Limited [1989] STC 907).  The real cause of the late payment was the conduct of the Accounts Manager.  We have evidence of misfeasance by the employee and conduct which was designed to disrupt the business.  The evidence was in the form of a statement by a fellow employee of a conversation overheard and email correspondence which showed an intention to cause problems.  These are not matters which come within S.71(1) VATA 1994 on a proper construction of the scope of those provisions.  The Tribunal must also look to see if the Appellant had acted with “due diligence and a proper regard for the fact that the tax would become due on a particular date” (per Lord Donaldson, Customs and Excise Commissioners v Steptoe [1992] STC 757).  It is therefore not sufficient to look only at the wrongful acts of the employee.

	There is evidence of a proper system in place for the preparation and submission of VAT returns, an automated electronic payment system for paying the VAT and a team of three people in the accounts department to ensure all financial and tax matters are properly done.  It was important to the Appellant, for certification and registration purposes in the construction industry, to have such a system in place and to have a good record.  Annual certification required such compliance and procedures.

	We do not believe that the Appellant had failed in their obligations but rather they were failed by the acts of an unhappy employee, which were wrongful and disruptive.  Those acts were not detected until the surcharge notice was received and the employee had left the company.  We believe these were isolated acts.  The Appellant took appropriate steps to check their procedures in appointing their accountants to conduct a review of the company’s affairs and no further errors were found.

	The Tribunal has scope to look at the underlying cause or reason for the non-payment of VAT in the light of the legislative provisions.  In this case, the underlying reason for late payments were wrongful acts of an employee where the employer had a satisfactory system in place to ensure timely payment.  In the circumstances the appeal should be allowed. 

K KHAN
CHAIRMAN

RELEASED: 27 September 2006

LON/06/559