20202

Default Surcharge - reasonable excuse – payment on account trader – obligation to ensure funds received by HMRC on specified dates – 7 day extension for electronic payment not available – telephone confirmation from HMRC to the contrary – support for reasonable excuse – held, for other reasons: no – other payment made by standing order received late – held: in the circumstances there was a reasonable excuse.

LONDON TRIBUNAL CENTRE

Appellant

THE FRAMESTORE LIMITED

	- and -

Respondents

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	

			Tribunal:	CHARLES HELLIER (Chairman)
					MRS E R ADAMS FCA ATII

Sitting in public in London on 25 April 2007

Mr David White, the Finance Director of the Appellant for the Appellant 

Pauline Crinnion  for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
1.	The Appellant is a “payment on account trader”: it is required in a manner and pursuant to provisions to which we shall refer later, to make two monthly payments of VAT before and on account of its payment of VAT for  each relevant VAT quarter. It is required to make a balancing payment on the normal date at the end of the quarter.
2.	The Appellant was late in making some of these payments. The Respondents assessed it to a default surcharge in respect of some of those failures. The Appellant maintains that it has a reasonable excuse for the defaults and accordingly that it is not liable to the default surcharge in respect of those failures.
3.	Section 28 VATA permits the treasury to make an order providing that a person of a specified description make payments on account of VAT to which it is liable, and for regulations to be made supplementing that order. The treasury made an order: SI 1993/2001. It provides for persons with annual VAT bills of more than £2m to pay monthly payments on account at the end of each of the two months immediately preceding the usual VAT payment date equal to 1/24th of the VAT payable in a 12 month reference period. Regulation 8 of the order provides that a payment on account :	
“…shall be made not later than-
(a) the last day of the month next following the end of the first complete month included therein, and
(b) the last day of the month next following the end of the second complete month included therein.”
4. Regulations 44 to 48 of the VAT Regulations 1995 supplement the order. Regulation 45 requires the Commissioners to give notice to the taxpayer of the amounts it has to pay on account. The Commissioners gave such notice to the Appellant by letters dated 14 February 2006 specifying the amounts to be paid and the times and manner of payment required.  
5. The order and the regulations thus provide a set time for the receipt of the the two payments on account. The order is however silent about the balancing payment. Its date of payment is thus governed only by the Regulations. 
Regulation 40 provides for the date on which VAT must normally be paid. It may thus govern the treatment of the balancing payment. It provides that the VAT due for the relevant quarter is to be paid not later than the end of the month after the quarter ends. It then provides that where payment is made by electronic means the Commissioners may direct or allow that additional time for payment may be allowed. The Commissioners’ published material indicates that they have exercised this power and allow a further 7 days for such payments.  However the notifications given by the Commissioners to the Appellant on 14 February 2006 included the following words: “Please note that the businesses in the payment on account scheme are not entitled to the seven day extension given to the due date for payment for payments by credit transfer…The balancing payment for the VAT return must be received in the Commissioners’ account on or before the day indicated on the VAT return..” We conclude that in the case of the Appellant the Commissioners did not direct or allow additional time if the balancing payment were made electronically. The due date for payment was therefore the end of the month after the end of the VAT quarter. 
(We make no finding as to whether the Commissioners are empowered to allow extra time for the balancing payment in such circumstances. Regulation 40A provides that the payment of the VAT at the end of the quarter must be made in the same manner as the payments on account. If “manner” encompassed the date of payment rather than just the method, then they would not have such a power ).
6. The Appellant’s VAT liability is such that it is within the payment on account rules. On 14 February 2006 the Commissioners wrote to it indicating the amounts to be paid and the dates on which payment should be made. We set out below the dates prescribed and the dates on which payment was received by the Commissioners.

Payment Number	VAT Period	Amount Due	Date due or Prescribed	Date Payment received	
1	06/06	179,646	31.5.06	On time	
2		179,646	31.6.06	On time	
3		215,483 (balance)	31.7.06.	Late: 7.8.06	
4	09/06	179,646	31.8.06	Late: 5.9.06	
5		179,646	29.9.06	Late: 3.10.06	
6		792,320 (balance)	31.10.06	179,646-on time; and 612,674 late.	

“Payment Number” carries no technical meaning: it is the term we use in this decision to identify the relevant payment. 
7.	Section 59A VATA provides a regime for the imposition of default surcharges on payment on account traders. The normal regime in section 59 is disapplied by section 59(1A), but the two regimes are in substance much the same. 
8.	A payment on account trader is treated as being in default if a payment it was required to make under the payment on account regime is not received when it became due and also when the trader would otherwise have been in default under section 59 (which covers the final balancing payment and late returns). If a trader is in default the Commissioners may serve a “surcharge liability notice” on it specifying a period of 12 months in respect of which future defaults incur a surcharge, and, in the case of a subsequent default in that period, extend the period to finish 12 months after the end of the VAT quarter in which the later default took place. In respect of the first VAT quarter in which there is a default in an original or extended period the surcharge is 2% of the late paid VAT in the quarter, for the second the rate is 5% and for the third 10% and for  subsequent VAT quarters 15%.
9.	There was no dispute that in respect of the June 2005 (06/05) VAT quarter the Appellant had been in default and that a surcharge liability notice had been properly served on it. The period that notice specified covered the 06/06 period. Accordingly if there was a default in the 06/06 period then:
(1)	a default surcharge of 2% of the late paid VAT for that quarter became due;
(2)	the surcharge liability period was extended to 06/07 by the sevice of a surcharge liability period extension notice; and 
(3)	if there was also then a default in the 09/06 period then a surcharge of 5% of the late paid VAT for that period would arise.
10.	But if there was no default in  respect if the 06/06 period then :
(1)	no surcharge liability would arise in respect of that period;
(2)	the surcharge liability period created by the 06/05 default could not be extended, and as a result
(3)	no surcharge liability could arise in relation to 09/06 even if there was a default in respect of that period. 
11.	Section 59A(8) provides that:
“(8) If a person who…would be liable to a surcharge …satisfies …a tribunal
(a)	in the case of a default which is material for the purposes of the surcharge [ and is a failure to pay a payment on account on time] –
(i)	that the payment on account of VAT was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners by the day on which it became due, or
(ii)	that there is a reasonable excuse for the payment not having been so despatched, or
	(b) in the case of a default which is material for the purposes of the surcharge and [would be a section 59 default] that [the excuses in section 59(7) apply],
he shall not be liable to the surcharge and …he shall not be treated as having been in default in respect of the …accounting period in question (and accordingly, any surcharge liability notice the service of which depended on that default shall be deemed not to have been served.”
Subsection (9) provides, so far as is relevant in this appeal, that a default is material to a surcharge if it is the default which gives rise to the surcharge or is relevant to the service of the surcharge liability notice on which the surcharge depends.
12.	Therefore if the Appellant can show that it has a reasonable excuse for the payment not having been received in time or that is was reasonable to expect that it would have been received on time then no penalty arises, and to the extent that the default is material to a later surcharge – as the 06/06 default would be to the 09/06- surcharge – the surcharge period is treated as not extended with the result that no surcharge can arise in the 09/06 period. In other words it is as if in these circumstances there had not been a default in 06/06.
Findings of Fact
1.	In addition to any factual findings set out in the preceding paragraphs, we find the following facts from the documentary evidence before us and the oral evidence of Mr White.
2.	The Appellant is a company with a turnover of about £50m per annum. It makes digital effects for films and commercials.  At all relevant times the Appellant had sufficient funds or bank facilities to make the VAT payments. The failure to make the payments was not due to a shortage or a concern about a shortage of funds.
3.	Mr White was appointed Finance Director of the Appellant on 12 June 2006. His predecessor left about two weeks later at the end of June 2006. Within three weeks after Mr White’s arrival the financial controller left quite suddenly.  Temporary staff were employed to fill that position until a permanent appointment was made in October 2006. Mr White had a large number of matters to get to grips with on his arrival. VAT compliance was one of those matters.
4.	VAT Payment Number 3 was due to be received by HMRC on 31 July 2006 some six weeks after Mr White’s appointment. This was the balancing payment due one month after the end of the VAT period when the VAT return had also to be sent to the Respondents.
5.	The letters from the Commissioners to the Appellant in February 2006 indicated:
a.	that the Appellant fell within the payment on account regime;
b.	the amounts to be paid and the dates on which the amounts must be received;
c.	that the Appellant was required to make the payment electronically;
d.	that no seven day extension was allowed for the payment; and 
e.	that queries should be directed to the Large Payers Unit (although it did not indicate that they should not be directed to the general VAT helpline); the last paragraph of the letter said: “If you have any queries about this letter or any other aspect of the POA scheme, please contact Large Payers Unit at the above address or telephone the number appropriate to our letter reference [it then set out two numbers]”.

13.	This correspondence had been received by the Appellant and filed in its VAT file. The fact that payments 1 and 2 were made on time (under the supervision of the previous financial controller) indicated that the letter had been acted upon.
14.	At the time he joined the Appellant Mr White was not familiar with the payment on account regime. By the time payment 3 was due he had not read the correspondence in the VAT file. He was aware that the VAT return and a payment were due on 31 July but was not aware that the 7 day extension for electronic payment was not available. 
15.	On 31 July Mr White instructed a member of his staff to ring HMRC to get clarification that electronic payment would entitle the Appellant to an extra 7 days. His colleague phoned the general VAT enquiry line, gave the Appellant’s VAT number  and was told that they would be entitled to an extra 7 days but that they needed to ensure that the payment was cleared to HMRC’s account by the 7th day. He did not indicate that the Appellant was a payment on account trader. This call was made at 4.06pm. The payment as noted in the table above was made electronically and was received by HMRC on the 7th day.
16.	HMRC sent the Appellant a surcharge assessment of 2% on 23 August 2006.  Payment Number 4 was due on 31 August 2006.
17.	By September Mr White was more on top of the demands on his time and his new job. He knew that Payment Number 4 had to be made on 31 October 2006, but as the result of an oversight he failed to ensure that it was made on time. The Appellant does not proffer any excuse in relation to this failure or appeal against any surcharge to which it gives rise.
18.	On 18 September Mr White wrote to the Appellant’s bank instructing it to pay £179,646 to HMRC on the last working day of each month. This would take care of the first and second payment on account for each month and for the third balancing payment an additional amount would be required.
19.	But the letter to the bank failed to indicate that the payment should be made by CHAPS so as to ensure same day receipt. The bank effected the payment by standing order. This had the effect that although the payment left the Appellant’s account on the right day it did not give HMRC cleared funds until a few days later. 
20.	As a result Payment Number 5 was received three days late on 3 October 2006. The Appellant contends that in the circumstances it has a reasonable excuse for this default.
21.	On 10 October 2006, in the realisation that payments were not being received by HMRC on the due date, the Appellant wrote to its bank instructing it to make the monthly payments of £179,646 by CHAPS. 
22.	Then at the end of October the bank made two payments of £179,646 – one received on 17 October and the other on 31 October. In addition the Appellant gave instructions to its bank to make a balancing payment by CHAPS for the balance after deducting only one payment of £179,646. But this balancing payment was not received by HMRC until 1 November. Thus part of Payment Number 6 was received late. The Respondents accept however that the Appellant had a reasonable excuse for this last late payment which the bank admitted it had failed to pay in accordance with the instructions given to it. 
The Parties’ arguments
(a)Payment Number 3
23.	Mr White says that the Appellant had a reasonable excuse for the delay in this payment. It had been told by HMRC that it had an extra seven days to make the payment.
24.	Mrs Crinnion says that the Appellant had notice of its payment on account  obligations, and that Mr White knew a payment was due but had clearly not read the VAT file. She notes that when Mr White’s colleague made the call to the Enquiry centre no mention was made of the fact that it was a payment on account trader. If it had been made clear the answer given would have been different. But on any event she says the Appellant was on notice that the call should have been made to the Large Payers Unit.
(b)Payment Number 5
25.	Mr White accepts that his letter to the bank did not specify that CHAPS payments should be made, but he assumed (wrongly, but he says reasonably) that the payments would reach HMRC on the date they were paid because  HMRC held an account at the Bank of England.
Discussion
(a) Payment Number 3
26.	Ignorance of the law cannot in our view on its own support a reasonable excuse. The mere fact that Mr White was not aware of the Appellant’s obligations under the POA legislation does not seem to us to support a reasonable excuse.
27.	However it does seem to us that a clear confirmation from HMRC that payment could be made seven days later could support a reasonable excuse for the delay in payment. The issue before us is whether the circumstances of the confirmation support a reasonable excuse, not whether they are sufficient to support an estoppel against the Respondents. A member of the Appellant’s staff telephoned HMRC, gave its VAT number, and was told that the Appellant could pay seven days later. It seems to us that it was reasonable to rely on the advice received even though no disclosure of its POA status had been made, and that any matters specific to the Appellant would be brought to light on giving its VAT number. Even if the caller had been aware of the paragraph in the letter of 14 February directing POA queries to the Large Payers Unit (see above)  it does not seem to us that those words clearly indicated that a query of this nature should be addressed only to that unit.
28.	Thus if the reason for the delayed receipt was that the Appellant had relied upon that telephone call we would find that the it had a reasonable excuse for the late payment.
29.	However, the telephone call was made at 4.06 pm. If it was not possible to make a CHAPS payment after that time then it was not HMRC’s advice which caused the late receipt but the Appellant’s expectation that if it made the payment electronically it would be allowed an extra seven days: in other words its ignorance of the law. The Appellant did not assert that the payment could have been electronically made after 4.06pm, and we find that it would not have been possible to do so. We therefore find that the Appellant did not have a reasonable excuse for the late receipt of Payment Number 3.
30.	Accordingly the appeal against the surcharge in respect of Payment Number 3 and the 06/06 quarter is dismissed, and the surcharge liability extension notice, and extension of the surcharge period occasioned by it remains effective. 
(b) Payment Number 5
31.	We find that the Appellant did have a reasonable excuse for the delay in the receipt of this payment. 
32.	We do not find that the condition in section 59A(8)(a)(i) is satisfied – it could not be reasonably expected that the payment actually despatched by the bank would have reached the Commissioners in time, but that is different from the conclusion that we reach that it was reasonable for the Appellant to have expected that the steps it had taken would  have that effect. We believe that the steps taken by the Appellant to ensure that the VAT would be received on time were in the circumstances a reasonable attempt to ensure compliance with its obligations. Neither is the excuse barred by section 71: it is not an excuse based on insufficiency of funds, or merely upon the reliance on another person to perform a task or upon his dilatoriness or inaccuracy in performing it.  Whilst Mr White was relied upon by the company to supervise its VAT compliance, the reason for the delay was not that reliance but the reasonable but mistaken assumption that he had taken the necessary steps to achieve the required result. 
33.	We therefore allow the appeal in respect of Payment Number 5.

34.	Our decision was unanimous. We award costs to neither side.

CHARLES HELLIER

CHAIRMAN
RELEASE DATE: 18 June 2007

LON 2007/162