20057

VAT DEFAULT SURCHARGE: Reasonable excuse for not making VAT return and payment on time for period ending 31 May 2006 – Appellant relied on the non-payment of an invoice dated outside the VAT period under Appeal – no relevant evidence to substantiate a reasonable excuse– Appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

	SAVE 9 LTD  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      SUSAN STOTT FCA CTA	  (Member)

Sitting in public in York on 18 January 2007

Steve Bromham, director for the Appellant 

Bernard Hayley of the Solicitor’s Office for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellant was appealing against the imposition of a default surcharge in the sum of £2,294.87 for the period 1 March 2006 to 31 May 2006.
The Dispute
2.	The Appellant provided IT services and products and operated from business premises in Scarborough. Its annual turnover was about £330,000 and currently employed five members of staff.
3.	The Appellant did not pay the VAT due in the sum of £15,299.17 for the period ending 31 May 2006 by the required date of 30 June 2006. This resulted in the Appellant incurring a default surcharge at the rate of 15 per cent in the sum of £2,294.87. 
4.	The dispute concerned whether the Appellant had a reasonable excuse for not making the VAT return and payment by the due date. The Appellant’s reason for not meeting its VAT obligation was that a major customer was late with its payment of an invoice, which resulted in cash flow difficulties for the Appellant company. The value of the invoice constituted 50 per cent of the Appellant’s turnover during the relevant period.   The Respondents contended that cash flow difficulties did not amount to a reasonable excuse because the legislation specifically precluded insufficiency of funds from being a reasonable excuse. The issue was whether the underlying cause for the cash flow difficulties amounted to a reasonable excuse.
The Hearing
5.	Mr Bromham gave evidence upon oath for the Appellant. The Respondents submitted a bundle of documents.
6.	We announced our decision to dismiss the Appeal at the hearing. The Appellant requested the decision to be recorded in writing in accordance with rule 30 of the Tribunal Rules 1986.
The Appellant’s Evidence
7.	The Appellant secured a major contract with a local recruitment firm to install computer hardware and software. The value of the contract was £46,234 which included the VAT. The financing of the contract, however, required the Appellant to invoice the computer leasing company for its services rather than the customer. The Appellant’s terms and conditions required the invoice to be met within 30 days. Unfortunately for the Appellant the leasing company kept revising the payment date every time the Appellant queried the payment. The Appellant was unable to negotiate an extension to its overdraft facility with the bank because it had already exceeded its overdraft facility.
8.	It transpired during the hearing that the relevant invoice to the computer leasing company was dated the 18 July 2006 which was outside the VAT period under Appeal. The Appellant issued an initial invoice to the customer which had been withdrawn by a credit note but that invoice was also outside the disputed VAT period being dated 4 July 2006.
9.	We explored with Mr Bromham whether the Appellant could put forward other reasons for the delay with the VAT return and payment for the quarter ending 31 May 2006. Mr Bromham stated that the Appellants constantly suffered from late payments from customers but he accepted that the value of the other customers’ purchases was not of the same magnitude as that of the order from the local recruitment firm. Mr Bromham also mentioned that the Appellant had recently received a repayment of corporation tax with interest from HM Revenue and Customs. He considered that the Respondents should be treated the same as small businesses and receive a surcharge for late returns of overpaid tax. Thus in the interests of fairness the Respondents should not pursue the Appellant for payment of a surcharge when they were equally culpable in not returning the overpaid tax earlier.
Reasons for Our Decision
10.	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 of the accounting period ending 31 May 2006 and was liable to pay a surcharge of 15 per cent of the tax due amounting to £2,294.87
11.	The Appellant can avoid the default surcharge if it satisfies the Tribunal on the balance of probabilities that it had a reasonable excuse for not furnishing the VAT return and payment on time.
12.	Reasonable excuse, however, is strictly construed by the legislation. Insufficiency of funds and reliance on the default of others cannot in law constitute a reasonable excuse. An honest mistake is insufficient by itself to form a reasonable excuse. In order to establish a reasonable excuse the Appellant has to show that it exercised reasonable foresight and due diligence and a proper regard for the fact that tax would become due on a particular date. 
13.	The Appellant’s reason for its failure to comply with the requirements for VAT returns and payments was not relevant to the VAT period under Appeal. The disputed invoice was issued on the 18 July 2006 which was some six weeks after the quarter end of 31 May 2006. When this was pointed out to Mr Bromham by the Tribunal, he requested an adjournment to bring details of other late payment debtors which related to the period under Appeal. However, we were satisfied on enquiry that none of the other debtors had orders of a value even closely approximating the value of the order from the local recruitment firm. It was apparent from the Appellant’s record of compliance for VAT returns, defaulting in the four previous quarters, that the principal cause for the default was insufficiency of cash. We decided that no useful purpose would be served by adjourning the Appeal part heard. 
14.	The other reason put forward was that the Appellant should be treated equally with HM Revenue and Customs which had not been surcharged for its late return of overpaid corporation tax. This reason did not constitute a reasonable excuse because it did not explain why the Appellant failed to comply with its VAT obligations. The conduct of HM Revenue and Customs is governed by different legal requirements.
Decision
15.	The Appellant produced no relevant evidence to substantiate a reasonable excuse for not making the VAT return and payment for the period ending 31 May 2006 on time. We, therefore, dismiss the Appeal and make no order for costs.

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 13 March 2007

MAN/06/0687