20091
Value Added Tax  -  Default Surcharge   -   Payment delayed by delay on the part of HMRC in refunding to the taxpayer tax that had been deducted under the Constructors’ Industry Scheme in excess of the taxpayer’s liability  -   Appeal allowed

LONDON TRIBUNAL CENTRE

	PAUL RAYMOND MARSH	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M NOWLAN (Chairman)
						ELIZABETH M MACLEOD, CIPM

Sitting in public in London on 21 March 2007

The Appellant in person

Pauline Crinnion of the Solicitors’ Department of HMRC , on behalf of the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.     This was a default surcharge appeal where the Appellant claimed that he had a reasonable excuse in paying his VAT for the period 06/06 four days late because his late payment was occasioned by the delay on the part of the direct taxes portion of Her Majesty’s Commissioners for Revenue & Customs (“HMRC”) in repaying to him tax deducted under the Constructors’ Industry Scheme (“the CIS scheme”) in excess of his actual liability to tax. 

2.    It was a case where we both, on the Tribunal, immediately reached the identical conclusion that the appeal should be allowed. 

3.    The facts were as follows.     Under the CIS scheme, contractor customers of the Appellant’s roofing firm are required to deduct 18% tax from the labour as distinct from materials content of the charges levied against them by the Appellant, and are required to account for that tax to HMRC, and fill in a CIS 25 form indicating that they have so accounted for the tax.    In the case of the Appellant’s firm, 18% was deducted from total gross takings since the firm operated on a labour only basis and did not provide materials.     Insofar as the 18% tax deducted exceeds the taxpayers’ personal liability to tax, then provided that the taxpayer has no other unsatisfied liabilities to tax, such as a liability to account for PAYE in respect of his employees’ wages, then the tax is refundable. 

4.    The Appellant’s profits for the year to 5 April 2006 were £26,558, and £27, 387 as adjusted for taxation purposes.     Since the tax deducted at 18% from the Appellant’s gross turnover greatly exceeded the Appellant’s direct tax liability on those profits, the Appellant was owed a tax repayment of approximately £30,000.

5.    The due date for the repayment of the excess tax deducted at source depended on how the Appellant and his accountant presented his Tax Return, and his evidence of an entitlement to a Refund.   We were told that the entitlement would have been established at a much earlier date, had the Appellant or his accountant actually calculated for HMRC the excess of the tax property payable over the tax deducted at source,  and we were told that in the absence of this calculation being done by the taxpayer then HMRC were not strictly required to complete the calculations until 30 September 2006.    This would be a very considerable time after the submission of the self assessment return (on 14 June 2006), and after the supporting CIS 25 forms, confirming the amounts that had been deducted by contractor customers (forwarded to HMRC on 17 June 2006).    We were however told that once the calculations had been done by officials of HMRC, then the tax repayment would be made.      It was however indicated that tax repayments due and immediately payable by HMRC would often take between 10 and 14 days to be made.    

6.    In the context of the time taken for tax to be repaid under the CIS scheme once HMRC were satisfied that tax was properly repayable, the Appellant’s accountant regrettably made a second slight error (in addition to having failed to speed the process by submitting a self assessment calculation of the refund due) in that the accountant wrongly completed a box on the Tax Return, indicating that the Appellant did not have a bank account.   We were told that this factor would prevent HMRC from making a BACS transfer of the refund due automatically into the Appellant’s bank account, and that instead HMRC would issue a cheque, which would involve more delay.   In fact the Appellant did have a bank account, and how it would have assisted the Appellant to receive payment by cheque if he had not had such a bank account was not explained to us. 

7.     The Appellant owed VAT of £7,155.28 for the period 06/06 and he was very keen to see that the VAT was paid on time because he had had four earlier defaults such that the potential default surcharge would be at the rate of 15% , involving an extra payment of £1,073.29.     This, naturally, the Appellant could ill afford. 

8.     The Appellant issued a cheque in payment of the VAT on or before 31 July 2006 but the cheque unfortunately bounced.    The Appellant had hoped that the cheque would be honoured because he was by this time expecting to receive the much greater tax repayment owing to him.      His accountant had telephoned the HMRC office dealing with the intended repayment on several occasions, and we rather assume that the urgency of receiving the repayment was emphasised. 

9.     On 2 August the tax repayment was authorised, the HMRC officers having done the calculations somewhat earlier and having by 2 August established that the Appellant in fact had no outstanding PAYE liability. 

10.     By 7 August, the Appellant appreciated that the only way in which he would be able to pay his VAT liability on time would be to make a CHAPS transfer by that date, and he also appreciated that his bank would not make the payment until the tax repayment had been received from HMRC. 

11     Two phone calls on 7 August resulted in the Appellant being told that his repayment had been issued on 2 August, but he was then told that it would take between 10 and 14 days for him actually to receive the repayment.     In fact the Appellant was able to bank the cheque on 10 August, having presumably received the cheque in that day’s post, so that the bank immediately made the CHAPS transfer to pay the VAT, which the Appellant had pre arranged, and as a result HMRC received the VAT on 11 August.       Since the payment was late the computer automatically issued a default surcharge Notice, against which the Appellant appealed. 

12.    In the course of the hearing one of the points argued on behalf of the Respondents was that in the previous year the Appellant’s CIS refunds had also been delayed, and he had had experience of the considerable time that it took HMRC to make payments, and it was argued that he should therefore have appreciated that he should not rely on receiving timely repayments from HMRC in order to fund his VAT liabilities. 

13.     We have no hesitation in saying that the default surcharge should be struck out because the Appellant had a reasonable excuse for the late payment.    It is plain from the fact that without the repayment his bank would not, and indeed, did not honour the cheque which he actually issued on time that the failure to receive the CIS repayment was what caused the initial failure on the part of the Appellant to pay his VAT on time.     As the Appellant pointed out in correspondence, the deduction of 18% from his gross turnover constitutes a severe depletion of his resources, and amounted to a figure that actually exceeded the whole of his pre tax profits for the year, and exceeded by a margin of over four times the amount that he was required to pay in VAT.     The Appellant could admittedly not complain of a failure to receive a tax repayment if it was not due until a later date at all, but in the present case officials of HMRC had had over six weeks to complete some very simple calculations, and to establish that the Appellant actually owed nothing in unpaid PAYE tax.      When these calculations had been completed and the Appellant’s repayment had actually been issued on 2 August, had that repayment been received by 6 August, or indeed even by 7 August, the Appellant could have banked the cheque immediately, as in fact he did on 10 August, and had the CHAPS payment been made early enough in the day the VAT payment would still have been received on time.       The Respondent’s representative could not explain why it actually took from 2 August to 10 August for the Appellant to receive his cheque but it was certainly suggested that the cheque would probably have been sent by 2nd class mail, and it was also mentioned that more recently an instruction had been circulated around all HMRC offices to the effect that all post should be sent 2nd class to save money.     When HMRC has relatively draconian powers to see that tax payments are paid on time, with there being very serious penalties if payments are even one day late, we consider that it is unacceptable for HMRC to announce that taxpayers should expect very significant delays when they hope to obtain repayments.    For a hard pressed trader to be told that HMRC is habitually slow in making payments and that HMRC will post a cheque by 2nd class mail to save money even when it is the taxpayer’s money, and when the taxpayer will have a surcharge bill of over £1,000 if his VAT payment is late is just unacceptable. 

14.    We accordingly conclude that the cause of the Appellant’s late payment of VAT was first the considerable delay on the part of HMRC in processing his CIS refund, and more particularly the delay in actually making payment to him, once his repayment had been issued.     For his part the taxpayer and his accountant made several calls to try to expedite matters; the Appellant issued one cheque on time in the home that it would be matched by the tax refund, and thus met; and he put in place a banking arrangement to ensure immediate payment of his VAT once the CIS repayment had in fact been received.

15.    The final factor that would make any other conclusion in this case ridiculous is the realisation that  if the VAT authorities, being all part of one tax authority,  actually asked on 31 July or 7 August (the alternative final days for timely payment of the Appellant’s VAT) where “their money” was the correct answer would have been that “they”, the same tax collecting authority, had actually got it, or rather than were holding over four times the amount of the VAT payment.      For the Appellant to be penalised in these circumstances would be remarkable and unacceptable.

16.    The appeal is allowed. 

HOWARD M NOWLAN
CHAIRMAN

RELEASED:  2  April  2007

LON/2006/1099