20195

VAT DEFAULT SURCHARGE: Eleven default surcharges totalling £12,752.36 for periods 05/03 to 11/05 — satisfied that 05/03& 08/03 returns dispatched in time — the remaining returns sent late — Appellant badly let down by company secretary and brewery accountants — cash flow difficulties for last three returns — reliance on others and insufficient funds — no reasonable excuse — Appeal allowed in part for 05/03 & 08/03 returns — Appeal dismissed in respect of the remaining nine returns.

MANCHESTER TRIBUNAL CENTRE

	FREELEY INNS LTD  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)

Sitting in public in York on 17 April 2007

Janet Freeman and Scott Freeman for the Appellant 

Bernard Hayley, Advocate HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellant was appealing against eleven default surcharges imposed for periods from 05/03 to 11/05 inclusive. The surcharges totalled £12,752.36.
2.	The Appeal was originally heard in the Appellant’s absence on 19 July 2006. The Appellant successfully applied for the Appeal to be re-opened pursuant to rule 26 of the Tribunal Rules 1986.
Details of the Surcharges 
3.	The details of the surcharges are set out in the table below together with the Appellant’s observations.
Period	Date of Return received by Customs	Date of Payment received by Customs	Action	Appellant’s Observations	
05/03: Due date: 23.6.03	4.7.03	4.7.03	Surcharge Liability Notice	The return with enclosed cheque dated 24.6.03	
08/03: Due date: 24.9.03	3.3.04	12.12.03	Surcharge Liability Notice Extension	The return with enclosed cheque dated 19.9.03	
11/03: Due Date: 23.12.03	3.3.04	12.2.04	Surcharge at 5 percent: £448.62	The return with enclosed cheque dated 29.12.03	
02/04: Due date: 22.3.04 	13.4.04	13.4.04	Surcharge at 10 per cent: £679.01	The return and enclosed cheque dated 19.3.04	
05/04: Due date: 30.6.04	25.11.04	27.1.04	Surcharge at 15 per cent: £1,326.87	The return and enclosed cheque dated 14.8.04	
08/04: Due date 30.9.04	15.10.04	15.10.04	Surcharge at 15 per cent: £1,378.36	The return and cheque enclosed dated 28.9.04	
11/04: Due date: 31.12.04	30.12.04	27.1.05	Surcharge at 15 per cent: £1,343,.53	Return was on time but cheque not enclosed	

02/05: Due date: 31.3.05	1.4.05	21.4.05 & 9.5.05	Surcharge at 15 per cent: £1,018.51	Return was dated 27.3.05 but no cheque enclosed	
05/05: Due date: 30.6.05	29.6.05	29.6.05 cheque represented	Surcharge at 15 per cent: £1,738.63	Cheque represented	
08/05: Due date: 30.9.05	13.10.05	13.10.05	Surcharge at 15 per cent: £2,047.57	Accept return and payment late	
11/05: Due date 31.12.205	02.02.06	02.02.06	Surcharge at 15 per cent: £2,771.26	Accept return and payment late	
Appellant’s Evidence
4.	The Appellant ran a business as a public house with a restaurant with 80 covers, the annual turnover was approximately £350,000 to £400,000 with the restaurant contributing 60 to 70 per cent of the turnover. The Appellant employed five full-time staff and eleven part-time staff.
5.	Mr Scott Freeman and Ms Padley were the two directors of the Appellant. The two directors concentrated on the operational side of the business. They entrusted the financial affairs of the business including the completion of the VAT returns to Mrs Mumby who was a good friend of Ms Padley and had looked after the books for the former owners of the public house. Mrs Mumby was appointed company secretary. Mrs Mumby liaised with a firm of accountants engaged by the brewery. At the time the directors considered it was the right thing to do to leave the financial side to Mrs Mumby. 
6.	In April 2006 Mrs Mumby left the business without notice. After her departure the business encountered cash flow problems which appeared to be due to a build up of invoices. The directors were surprised that the business was in debt. As far as they were aware the business was ticking over. They discovered that no proper accounting records had been kept for the year. Mr Freeman tried to deal with the financial side. He believed that the brewery accountants were supporting him. Unfortunately the financial position of the business deteriorated which was compounded by Mr Freeman’s inexperience in financial matters. The cheque for the 05/05 return bounced because there were insufficient funds in the bank. 
7.	The Appellant enlisted the support of Mr Freeman’s mother to straighten out its financial affairs. Since March 2006 the Appellant has submitted every VAT return and payment on time. The Appellant has cleared its VAT debt except the surcharges which are the subject of this Appeal, and paid the income tax and national insurance arrears. Its suppliers were now being paid regularly. The Appellant was keeping to its  agreed bank overdraft. The Appellant was making a concerted effort to turn the business around.
8.	The Appellant felt badly let down by Mrs Mumby and the brewery accountants. The directors were not aware that the returns had not been delivered on time. Mr Freeman, however, accepted that with hindsight the directors should have taken a more active role in the financial side of the business and not left it to Mrs Mumby and the brewery accountants. 
9.	Mrs Freeman on behalf of the Appellant identified several inconsistencies between the Appellant’s records and the dates recorded by the Respondents when they received the returns and payments.  The Appellant’s cheque for the 05/03 return was cleared in its bank account on 24 June 2003 which suggested that it was received by the Respondents prior to the due date of 23 June 2003. The Appellant’s returns for periods 08/03 and 11/03 were dated 19 September 2003 and 29 December 2003 respectively but apparently were never received by the Respondents. The Appellant produced a fax dated 3 March 2004 where Mrs Mumby attached duplicate copies of VAT returns for 08/03 and 11/03. The Appellant did not seek to rely on other inconsistencies between their records and those of the Respondents, accepting it had been late with the payments.
10.	The Appellant accepted that the 05/05 return was not paid on time because of insufficiency of funds in its bank account. Mr Freeman acknowledged that his inexperience with financial matters contributed to the late delivery of the return and payments for the 08/05 and 11/05 periods, although he considered that he should have received more help from the accountants for the brewery.
11.	Mr Freeman and Mrs Freeman were particularly concerned about their non-appearance at the Appeal hearing in July 2006. They did not receive notification of the July hearing date. They only discovered that it had taken place after speaking to the VAT office in Chesterfield. They immediately contacted the Tribunal office which advised them about the Appellant’s right to re-open the proceedings. Mr and Mrs Freeman stressed that they took their responsibilities for VAT very seriously and wanted the opportunity to put their case to the Tribunal.  
Reasons for my Decision
12.	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 from 05/03 to 11/05 inclusive. As a result the Appellant became subject to the default surcharge regime and incurred penalties totalling £12,752.36. 
13.	The Appellant can avoid the default surcharges if it can satisfy the Tribunal on a balance of probabilities that either:
(1)	It dispatched the return at such time and in such manner that it was reasonable to expect that it would be received by the Respondents within the appropriate time limit or
(2)	It had a reasonable excuse.
14.	The Respondents conceded at the hearing that it was reasonable to expect that they should have received the 05/03 return by the due date of 23 June 2006.
15.	I am satisfied from the evidence of the VAT return for the 08/03 and the fax dated 3 March 2004 that the VAT return for the 08/03 period had been sent in time but was mislaid in transmission.  In those circumstances I find that the 08/03 return was despatched at such time and in such manner to expect that it would have been received by the Respondents within the appropriate time limit, had it not got mislaid. I, however, do not extend this reasoning to the 11/03 return because it was dated 29 December 2003, six days after the due date of 23 December 2003.  
16.	I am satisfied that none of the other returns were despatched in time. Although some of those returns were dated before the due date, there was no corroborative evidence to suggest they had been sent in time for the Respondents to receive them by the due date. Also the time period between the date recorded on the return and the date received by the Respondents was relatively short, which suggests that they were sent late.  
17.	As the other nine returns or payments were late, albeit in some instances by a few days, it can only avoid the default surcharges if it can establish a reasonable excuse for not furnishing the VAT returns and payments on time. 
18.	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. 
19.	The Appellant’s reasons for not making the returns and payments on time were that it was badly let down by its company secretary and the accountants for the brewery, cash flow difficulties, and Mr Freeman’s inexperience with financial matters.  Unfortunately reliance on others and insufficient funds cannot in law constitute a reasonable excuse. Mr Freeman’s inexperience also does not amount to a reasonable excuse. A prudent business person would have recognised his inexperience in financial matters, and taken appropriate steps to ensure that his inexperience would not have compromised his obligation to pay the VAT on time. I, therefore, find that the Appellant has no reasonable excuse for the default surcharges for the periods 11/03 to 11/05 inclusive.
20.	I wish to acknowledge the considerable efforts made by the directors and Mrs Freeman to turn round the Appellant’s business and their responsible attitude in ensuring that the VAT obligations are now being met. I also accept that they did not receive the hearing notice for the July 2006 Tribunal. 
Decision
21.	I allow the Appeal against the surcharge liability notice and the extension to that notice for the VAT periods 05/03 and 08/03. I dismiss the Appeal in respect of the imposition of penalties for the periods 11/03 to 11/05 inclusive. I make no order for costs.
22.	In view of the successful appeal in respect of the two periods 05/03 and 08/03, I direct the Respondents to recalculate the amount of surcharges due, and serve a revised assessment upon the Appellant. I also ask the Respondents to consider favourably the Appellant’s request for time to pay the outstanding surcharges, provided such a request is made and is reasonable.

                                

MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 7 June 2007

MAN/06/0240