20232

DEFAULT SURCHARGE – Reasonable excuse – Late payment – Payment on account régime – Balancing payments made electronically within 4 and 5 days of the end of the month following the prescribed accounting period – Payment on account régime requires payment by end of month without benefit of 6/7 day period of grace for electronic payment – Appellant’s advisers unaware of non-availability of period of grace – Whether reasonable excuse – No – Appeal dismissed

LONDON TRIBUNAL CENTRE

	SAPPHIRE RETAIL FUND LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	SIR STEPHEN OLIVER QC (Chairman)
						HEATHER KELLY 					

Sitting in public in London on 7 March 2007

P Ryan, director, for the Appellant 

Jonathan Holl for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Sapphire Retail Fund Ltd (“Sapphire”) appeals against default surcharges of £5,566 for the 02/06 period and of £12,954 for the 05/06 period.

2.	Sapphire made electronic transfers to Customs on 3 April and on 4 July.  The payments were of balancing amounts due from Sapphire under the payment on account régime.  The direction made by Customs Large Payer Unit under the régime had been to make instalment payments at the end of the second and third months of the prescribed accounting period and balancing payments by the end of the month following the end of the prescribed accounting period.  Sapphire’s VAT agents proceeded on the assumption that it had the 6/7 day period of grace in which to make the balancing payments electronically.  But the régime required payment by the end of the month.  Hence the defaults.

3.	Sapphire’s case was presented by Mr P Ryan of Dualguide Management Services Ltd, the entity that provided Sapphire with accounting and VAT services at the relevant times.  He and Maria Brennan, another member of Dualguide’s staff, gave evidence.  

The facts

4.	On 8 March 2004 Sapphire was directed by Customs, Large Payer Unit Liverpool, that the payment on account régime applied.  The letter directed that for each period from 08/04 until 05/05 payments on account and balancing payments be made on or by the dates specified in the notice.  For the 02/05 period, for example, £109,982 was payable on 31 January 2005 and on 28 February 2005 with the balance due on 31 March 2005.  

5.	The direction of 8 March 2004 was accompanied by a notice addressed to Sapphire of Warwick Road, Stratford upon Avon, which provides as follows:

“Due dates for payments

Please note that the businesses in the Payment on Account scheme are not entitled to the seven day extension to due date for payments by credit transfer.  If your company was previously granted the seven day extension this concession is now withdrawn.  Payments on account must be received by the Commissioners’ account by the last working day of the month in which they are due.  The balancing payment for the VAT return must be received in the Commissioners’ account on or before the due date indicated on the VAT return.”

6.	Sapphire defaulted for the 02/05 period.  Its final payment of £109,982, due on 31 January 2005 was one day late.

7.	The next payment on account direction issued by Large Payer Unit, Liverpool, to Sapphire was dated 21 July 2005.  This specified monthly payment dates up to and including the 05/06 period.

8.	Sapphire has at all material times been part of a group of companies of which a principal member was Stanifer Group Holdings (“Stanifer”).  The finance director of Stanifer, a Mr Richard Breese, had had responsibility for VAT compliance until he left on 23 December 2005.  Shortly before then a change of ownership of Stanifer and its associated companies had taken place.  The accounting function, including VAT, had been transferred from Leamington to London.  Dualguide was appointed to run the accounting function.  Mr Breese had been expected to stay on till the end of February 2006 when the handover was to be complete.  The move to London had caused bad feeling in Leamington and, according to Mr Ryan, a lack of communication.  The offices at Leamington had been kept open for some months after the move of the accounting period to London.  Mail had been forwarded.  

The 02/06 default 

10.	The first two payments on account for the 02/06 period (of £96,435 each) were paid in time.  Sapphire’s return for the period was submitted on time.  The balancing payment of £278,000 was three days “late” (being received by Customs on 3 April 2006), i.e. later than the date specified in the Large Payer Unit letter of 21 July 2005.  Mr Ryan, in his capacity as director of Dualguide, said that Dualguide had not been aware that balancing payments had to be made by the end of the month.  Their understanding had been that the 6/7 extra days allowed for electronic payments applied across the board and was not excluded for payments under the payment on account régime.

11.	Customs had found that Sapphire’s balancing payment for the 02/06 period had not apparently reached them; and on 13 April 2006 a Customs officer (Mrs Barnicle of Large Payer Unit) telephoned Sapphire to alert them.  Sapphire discovered that the £278,000 had been made to the Commissioners’ PAYE office at Shipley.  Sapphire contacted Shipley and asked for the money to be passed on to the VAT section.  Maria Brennan of Dualguide called Customs at Liverpool to seek confirmation that the payment had been passed on.  Customs’ Liverpool office could not confirm because at that stage Dualguide had not the required authority to handle Sapphire’s VAT affairs with Customs.  Shortly after that Sapphire formally authorised Dualguide and faxed the authorisation to Customs.  

12.	For at least three months, Mr Ryan said, Sapphire had not realised that it had been in default.

The 05/06 default

13.	The first two payments on account were made on time.  The return for the period was received on time.  The balancing payment was four days late (being received by Customs on 4 July 2006).  Mr Ryan said that Dualguide had not been aware that, because Sapphire was on the payment on account régime, payment had to be made by the end of the month.  Moreover, he said, had Dualguide known that Sapphire had been in default for the 02/06 period (for precisely the same reason), they would have arranged payment by the end of June.  There was no problem about shortage of funds. 

Further facts

14.	Dualguide is, as already noted, a separate corporate entity from Sapphire.  It was not in dispute that Sapphire had not briefed Dualguide about its non-entitlement to the 6/7 day extension for payment of VAT by electronic transfer.  Sapphire had known about the withdrawal of the 6/7 day “concession”, and had acted accordingly making all the balancing payments on time throughout 2004 and 2005.  The earlier than expected departure of Mr Breese, Sapphire’s finance director, is, we accept, a reason why the information was not passed to Dualguide when it took over the accounting and VAT function for Sapphire.

15.	It is relevant to mention that in early May 2006 Customs, through its officer Ms York, conducted an overview of the Stanifer-related companies dealt with by Dualguide.  An exchange of e-mails of  28 April and 3 May between Ms York and Dualguide contain no mention on the part of Customs of the 02/06 default.

16.	It follows that by some date before 28 April 2006, Customs had become aware of the change of VAT management of Sapphire.  We note also Sapphire had, by e-mail of 28 March 2006, attempted to get Customs to change their address (for VAT purposes) to that of Dualguide (Grosvenor Street).

17.	The surcharge liability notice for the 02/06 default is dated 21 April 2006.  It was sent to Sapphire’s “old” address, notwithstanding the e-mail request for Dualguide’s address to be changed.  We accept that it was not seen by Dualguide until 12 July 2006.

18.	On 25 May 2006, Customs (Large Payer Unit) wrote to Mr Ryan of Sapphire using the old address informing him as follows:

“We are aware that you are a compliant trader but this letter is a courtesy reminder to advise that your VAT payment on account instalment of £96,435 is due to be received in the Commissioners’ account as cleared funds on or before 31 May 2008.  Under Payment on Account Legislation all your VAT payments must be made electronically and you do not benefit from any extension to due date for paying in this manner.”

That letter, which comes from the Customs’ files, is stamped “Returned  Mail”.  

19.	By 12 July 2006 Dualguide had received the surcharge liability notice for the 02/06 period.  Mr Ryan wrote to Mr Hall of the Large Payer Unit on that date explaining (once again) that payment had been made to Shipley (PAYE) office of HMRC and not to Customs and that Dualguide had received no further correspondence from Customs indicating that the matter had not been resolved.  In the same letter Mr Ryan points out that in the course of speaking to Customs about “another matter” he had discovered that the matter of the 02/06 default was still outstanding and that he had been informed that the balancing payment for 05/06, transmitted on 3 July 2006, “was also deemed late”.  

Conclusions

20.	The reason for the defaults for both periods was because Dualguide were unaware that balancing payment by Sapphire had to be made by the end of the month following its accounting period.  Dualguide were aware that Sapphire was on the payment on account régime; it must have been aware of the direction in the Large Payer Unit letter of 21 July 2005 to pay instalments of £96,435; Sapphire complied with this.  

21.	Sapphire’s corporate awareness of its obligations to make the balancing payments by the end of the month (and without the benefit of the extra 6/7 concession for electronic payments) disappeared when Mr Breese left.  Until he left Sapphire had apparently made all its balancing payments on time.  It is also significant that, because of Customs’ failure to alter Sapphire’s address to that of Dualguide, Sapphire neither received the surcharge liability notice for the 02/06 default nor the letter of 25 May 2006 (an extract of which is set out above) that was returned to Customs stamped “Returned Mail”.  

22.	Sapphire’s case was that Dualguide did not know about Sapphire’s non-entitlement to the 6/7 day concession and that Customs had never told Dualguide (until too late) either that the 6/7 day concession was not available or that Sapphire had been in default for the 02/06 period because the payment on account was three days late.

23.	Sapphire cannot rely on Dualguide’s failure to organise payments on time as grounds for a reasonable excuse defence.  That is the effect of VAT Act 1994 section 71(1)(b).  The consequence is that Sapphire on its own account has to show a reasonable excuse. Sapphire, we know, had been aware of its non-entitlement to the payment to the concession because it had been a payment on account regime. It had been told of it in the Large Payer’s Unit notification of 8 March 2004 and had complied by making all balancing payments on time right up to the end of 2005.

24.	The problem arises because of the hand-over of responsibility for VAT compliance to Dualguide.  Had all gone according to expectation Mr Breese would have carried this out during the first few weeks of 2006.  But he departed unexpectedly on 23 December 2005.  (Even so, the balancing payment due on 30 December 2005 was apparently made on time.)  Clearly there was a failure to communicate between Sapphire, through its old VAT compliance team, and Dualguide.  Put positively, Sapphire should have passed the message on to Dualguide that balancing payments had been made on time and Dualguide, with its new accounting responsibility, should have found out.  Put negatively Sapphire has not satisfied us that it had a reasonable excuse.

25.	In reaching our conclusion we have considered the point taken for Sapphire that Customs could and should have notified Dualguide of the fact that the concessionary period for electronic payments was not available to Sapphire.  It would, we recognise, have been possible for Ms York to have alerted Dualguide to the point when she met the Dualguide people on 3 May 2006.  Moreover Dualguide did not receive the surcharge liability notice relating to the 02/06 period till after the late return for the 05/06 period.  That non-receipt and the failure to receive the letter of 25 May 2006 may have been caused by a failure on the part of Customs to have fully changed the address of Sapphire for VAT communication purposes.  We have some sympathy for Sapphire and Dualguide.  Nonetheless, we think, Dualguide could and should have found out about the non-availability of the 6/7 day concession for all payments made under the payments on account régime.

26.	For those reasons we dismiss the appeal.

SIR STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 2 July 2007

LON 2006/1219