19862
VAT – PENALTIES  -  default surcharge  -  promise by bank manager to make payment of VAT in time although taxpayer’s bank account would become overdrawn beyond agreed limit  -  taxpayer relied upon promise  -  payment made two days late  - taxpayer having reasonable excuse for believing payment would be made in time  -  appeal allowed 

LONDON TRIBUNAL CENTRE

	MANGO PERSONNEL LTD	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	MICHAEL JOHNSON (Chairman)

Sitting in Exeter on 5 October 2006

Peter Collier, husband of Nicky Dunn, managing director of the Appellant for the Appellant 

Pauline Crinnion, of the Solicitor’s office of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This appeal is against a default surcharge for £3,981.06 imposed in respect of the Appellant’s VAT accounting period 10/05.  The Appellant contends that it has a reasonable excuse for the late payment of its tax due in respect of that period.

2.	The appeal was served in respect of two default surcharges, namely one for £3,807.40 in respect of period 07/05 and the other for £5,971.60 in respect of period 10/05.  However by a letter dated 28 July 2006 written to the Appellant by Mrs Wiles of H M Revenue and Customs (“HMRC”), she agreed to remove the first of these surcharges, so that the other fell to be recalculated at the rate of 10 rather than 15 per cent.  That reduced surcharge remains under appeal.

3.	Mrs Wiles agreed to remove the earlier surcharge having spoken to the Appellant’s bank manager, Mr Pellow.  She was satisfied from speaking to him that a reasonable excuse existed for the late payment of the VAT due from the Appellant in respect of the period 07/05.  

4.	The reasonable excuse accepted by HMRC was that, but for the illness of Mr Pellow, the VAT would have been paid by the bank.  That was because Mr Pellow had agreed an overdraft of £60,000 on the Appellant’s bank account, but Mr Pellow’s illness had prevented the overdraft being put in place by the date of the direct debit that should have paid the tax.  The direct debit was therefore rejected by the bank.  Had the direct debit taken effect when it should, the tax would have been accepted by HMRC as having been paid in time.  

5.	The nature of the excuse that was accepted in the case of period 07/05 was therefore that, although the bank had not yet made the agreed arrangements enabling the tax to be paid, it was reasonable for the Appellant to believe that the arrangements would have taken effect, so that the tax would be paid when it should have been. 

6.	In one sense, therefore, the Appellant was without the necessary funds to pay the tax: the Appellant would have to borrow the money on overdraft from the bank, under arrangements permitting the Appellant to become further overdrawn than before.  In another sense, however, the Appellant was in funds to pay the tax: because the bank manager had agreed to honour the payment, notwithstanding the indebtedness on overdraft of the Appellant to the bank.

7.	In my judgment, the situation was broadly the same in respect of period 10/05.  I find the following facts.

8.	Peter Collier, who represented the Appellant at the hearing of this appeal, is the husband of Nicky Dunn, who is the managing director of the Appellant.  The week before the payment of the tax due for the period 10/05, Mr Collier and Mr Pellow had a meeting.  Both of them knew that the payment of the tax the following week would result in the Appellant exceeding its overdraft limit with the bank.

9.	Mr Pellow told Mr Collier that the Appellant need not worry about that fact: he assured him that the tax would be paid.  I believe Mr Collier in that regard: the Appellant’s bank statements for December 2005 show that Mr Pellow was content to allow the Appellant’s indebtedness to the bank to climb to over £79,000 by 16 December 2005: ie the end of the week in which the tax fell to be paid.  That considerably exceeded the previously agreed overdraft limit of £60,000.

10.	That being so, the question arises why the direct debit on 12 December 2006 for the tax in respect of the period 10/05 was rejected by the bank.   In a letter dated 28 July 2006, Mr Pellow wrote to Mrs Wiles as follows:

“In relation to the payment due on 12 December, I made the decision not to pay the direct debit and instead send the funds required by CHAPS on 14 December 2005.  Under the bank’s payment rules, the direct debit due on 12 December 2005 would not have been paid and as the previous payment was late I did not want the customer record affected again, so thought that a CHAPS payment would arrive at the VAT office in time to avoid any late payment issues.”

11.	It therefore appears that the direct debit stood to be rejected because of what Mr Pellow called “the bank’s payment rules”.  As I read the paragraph just quoted, what Mr Pellow was in essence saying is this:

‘I was prepared to pay the money due from the Appellant to HMRC.  I knew that the direct debit would not be paid, because of the bank’s payment rules, but instead I effected payment in a way that I assumed would do just as well, and that would not leave the Appellant in trouble with HMRC for having made a late payment.’

12.	Unfortunately, Mr Pellow does not seem to have appreciated that the mere fact of making the payment by an alternative means, ie by CHAPS, would mean that the payment would inevitably be late.  The Appellant’s last chance of making the payment in time was on 12 December 2005, and the tax would only have been accepted that late by HMRC on the footing that it was paid by direct debit.  

13.	Nevertheless, Mr Pellow made the payment – using a method of payment, ie CHAPS, that had not been agreed with the Appellant – in such a way that it arrived with HMRC by 14 December 2005.  The making of the payment resulted in the increase of the Appellant’s indebtedness on account with its bank from £30,851.26 to £70,080.32.  The evidence before the tribunal is that an overdraft of that size had not been formally agreed.  However what had been agreed, as I find, is that the tax would be paid – and it was.

14.	Mr Collier told the tribunal, and I accept, that had there been any suggestion at his meeting with Mr Pellow that the tax would not be paid in time, the Appellant would have obtained a short-term loan from Nicky Dunn’s parents to tide over the business.  

15.	That appears to be confirmed by a letter dated 1 August 2006 written by Mr Bruce Horton, Corporate Manager of Barclays Bank plc, Newton Abbot branch, and directed “To Whom it May Concern” (ie in effect to the tribunal).  Mr Horton indicates in his letter that Nicky Dunn’s parents had previously requested him to place funds into the Appellant’s account as short-term loans.  He confirms that his customers had more than enough liquid funds in December 2005 to meet the amount of the VAT payment then due.

16.	In my view, the key to this appeal is that the Appellant reasonably expected the tax to be paid in time.  In other words, it was reasonable to expect that the direct debit would be honoured on 12 December 2005.  Mr Pellow did not tell Mr Collier that payment would not be made by direct debit, in accordance with the existing arrangements.  On the contrary, Mr Pellow told Mr Collier that payment would be made, and it was either expressed or implied in their conversation that the payment would not be made late.

17.	I think that Mr Pellow probably realized, after his meeting with Mr Collier, that he was powerless to prevent the rejection of the direct debit, despite his promise that payment would be made in time.  Doing his best to produce a satisfactory alternative, he initiated the CHAPS payment without instructions to do so.  No doubt he believed that a payment by that means would “do the trick”.  However, it resulted in the payment being made two days late, in turn resulting in the surcharge under appeal.

18.	Mrs Pauline Crinnion, appearing for HMRC, submitted that the circumstances of this appeal could not give rise to a reasonable excuse, having regard to section 71(1)(a) and (b) of the Value Added Tax Act 1994.  She submitted that the present case was one of insufficiency of funds.  Further or alternatively, she submitted, the Appellant had placed reliance on the bank to perform the task of making payment.  By statute, neither of these matters could give rise to a reasonable excuse when payment was not made in time.

19.	For the Appellant, Mr Collier submitted that there was no lack of funds, firstly because the bank manager was prepared to stand behind the Appellant and make payment, even though the result would be to more than double the Appellant’s overdraft, and secondly because his wife’s parents were prepared to fund the VAT, even if the bank indicated that it would not pay the money.  He accepted that the Appellant relied upon the bank manager to make the payment in time, but that was because Mr Pellow had led him to believe that there would be no difficulty in that regard.

20.	In my view, Mr Collier is correct that this is not an insufficiency of funds case within the meaning of section 71(1)(a).  Many businesses trade by making use of overdraft facilities, and if funds are available by resorting to such facilities, then there is a sufficiency of funds.  In the present case, the tax was paid two days late, but it is clear to me that the tax not only could, but would have been paid two days earlier by direct debit, had the bank’s payment rules permitted this.

21.	Nor do I think that this is a case of the Appellant having placed reliance upon a person to perform a task.  The relationship between bank and customer is that of a mere conduit to make payment, not to perform a task within the meaning of section 71(1)(b).  The bank is obligated to make payment if its customer’s account is in funds, or – as in this case – treated as being in funds.  The bank’s function is simply to remit the funds, in accordance with the instructions of the customer.  

22.	I can see that the bank might regard its customer as having relied upon it to perform a task, but that would not, in my opinion, be the view of the customer.  From the customer’s point of view, payment by direct debit, by CHAPS, or by whatever other method would be no more than an alternative to paying by cash.  Section 71(1)(b) cannot in my view mean that the Appellant is barred from contending that it has a reasonable excuse because it relied upon its bank to make the payment, if the bank should have made payment according to the instructions it received.  

23.	On the facts I have found, it seems to me that the Appellant had a reasonable right to expect that the direct debit due on 12 December 2005 would be honoured.  That in my judgment amounts to a reasonable excuse, just as a similar expectation sufficed, in Mrs Wiles’ opinion, to amount to a reasonable excuse in respect of the late payment for the period 07/05.

24.	I indicated at the conclusion of the hearing that the Appellant had, in my view, made out a reasonable excuse for not being liable to the surcharge under appeal and that this appeal would be allowed.  This decision records my reasons for so deciding.

MICHAEL JOHNSON
CHAIRMAN

RELEASED: 25 October 2006

LON/2006/0208