20410

VAT – default surcharge – section 59 VATA 1994 – reasonable excuse – payment by internet banking – bank holiday – internet site not working – appeal allowed

LONDON TRIBUNAL CENTRE

	HOPE BARTON OWNERS ASSOCIATION LTD	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	CHARLES HELLIER (Chairman)
						RICHARD CORKE FCA

Sitting in public in Plymouth on 6 September 2007

Martin Pope, General Manager of the Appellant, for the Appellant

Gloria Orimoloye, solicitor, instructed by the Acting Solicitor for HMRC, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	The Appellant appeals against a default surcharge of £966.05 in respect of the period ending 28 February 2007 and being 2% of the VAT which was received late in respect of that period.

The Statutory Provisions

2.	Section 59 VAT Act 1994 provides for the imposition of default surcharges.  Subsection (1) provides that if the VAT due for a quarter or the VAT return for a quarter is received late, the taxpayer is to be regarded as being in default for that quarter.  If a person is in default in respect of a quarter then the Commissioners may serve a Surcharge Liability Notice. This notice specifies a surcharge period of 12 months from the end of that quarter. If the taxpayer defaults again for a quarter ending within those 12 months then two consequences follow.  First the Commissioners may serve a further notice extending the surcharge period by la further period of 12 months from the end of the quarter for which the later default occurred; and second, the taxpayer may become liable to a surcharge (subsection (4)).  The surcharge is calculated as 2%, 5%, 10%, or 15% of the VAT paid late for the quarter of the later default, the percentage depending upon whether the later default was the first, second, third, or fourth or subsequent default in the surcharge period.

3.	Subsection (7) however provides some measure of relief from this surcharge regime.  It provides that if a person who would otherwise be liable to surcharge satisfies the Commissioners, or on appeal the tribunal, that in the case of a default material to the surcharge:-

“(a)	the return, or as the case may be, the VAT shown on the return, was dispatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit, or
(b)	there is a reasonable excuse for the return or VAT not having been so dispatched.”

Then he shall not be liable to the surcharge and shall be treated as not having been in default in respect of the period in question.

4.	Section 71 VAT Act 1994 limits the circumstances which can give rise to a “reasonable excuse” by providing that:

(a)	an insufficiency of funds to pay any VAT due is not a reasonable excuse; and
(b)	where reliance is placed on any person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.”

5.	Section 25 of the VAT Act requires a taxable person to “account for and pay VAT “ as shall be prescribed in Regulation.  The VAT Regulation 1995 make the following provision:-

(i)	Regulation 25(1) requires a person who accounts quarterly to make his return no later than the last day of the month after the end of each VAT period.  Regulations 25(4A) to (4K) permit a return to be made by certain electronic means.  Regulation 25(4L) provides that

“Additional time is allowed to make a return for which any related payment is made solely by means of electronic communications … That additional time is only as the Commissioners may allow in a specific or general direction, and such a direction may allow different times for different means of payment.”

(ii)	Regulation 40(2) requires the VAT payable for the period to which a return relates to be paid no later than the date on which the return is required to be made.  Where a return is made by electronic means Regulation 40(2A) requires the payment of the VAT to be made by acceptable electronic means.  Regulation 40(3) permits the Commissioners to allow or direct otherwise, and Regulation 40(4) makes clear that such a direction may allow additional time for a payment made by electronic means.

The Commissioners’ directions

6.	In the VAT Guide (April 2002) which is published by the Commissioners, at paragraph 21.3.1 it is stated:-

“If you chose to pay the VAT shown as due on your return by Bankers Automated Clearing System (BACS), Bank Giro Credit Transfer, or Clearing House Automated Payment System (CHAPS), you may receive up to 7 extra calendar days for the return and the payment to reach us.  Here are some important facts you need to know if you want to benefit from this concession – 

…

-	Payment must be in our bank account on or before the 7th calendar day.  If the 7th day falls on a weekend, we must receive payment by the Friday …

-	To make sure that your payment reaches us in time, you should check with your bank how many days they need to complete the transaction …”

7.	It seems to us that this is properly to be construed as a general direction given by the Commissioners pursuant to their powers in Regulations  25 and 40.  The effect of the direction is therefore that an electronic payment will be treated as made in time if it “reaches” the Commissioners’ bank account by the 7th day after the end of the month following the last day of the VAT period in question.

The evidence and the facts

8.	Mr Pope (who is the General Manager of the Appellant and responsible for its VAT compliance) gave oral evidence and we had before us bundles of copy correspondence produced by the Appellant and the Respondents.  We find the following facts.

9.	For the periods ending 30 November 2006 (11/06) and 28 February 2007 (02/07) the Appellant submitted its VAT return electronically so that they reached the Commissioners on 19 December and 19 march respectively – well within the time allowed.

10.	The Appellant used internet banking facilities to pay the VAT due.  For 11/06 it gave an instruction to pay on 7 January 2007, and the funds reached the Commissioners’ account on 10 January 2007. Had the funds been immediately cleared to the Commissioners’ bank account the payment would have been on time but because of the delay within the banking system the funds arrived 3 days late.

11.	The Commissioners issued a surcharge liability notice in respect of that late payment specifying a period of 12 months until 30 November 2007.  Mr Pope later telephoned the Commissioners’ telephone helpline and was told that he had received the notice because of the late receipt of the funds.

12.	For the 02/07 period Mr Pope again completed and submitted the VAT return in good time.  He knew this time that he had to allow additional time for internet banking payment to be cleared to the Commissioners’ account.  He checked with his bank and learned that 3 days should be allowed for funds to clear.  He knew that 7 April was a Saturday so that he had to ensure that the funds would reach the Commissioners’ account by the day before, Friday 6 April.  He gave internet banking instructions on 19 March (when he submitted the return) for the transfer to be made from the Appellant’s account on 4 April giving 3 days for it to reach the Commissioners’ account on Friday 6 April.

13.	Unfortunately when he gave the instructions he was not aware that Easter fell early this year and that Friday 6 April was Good Friday, a bank holiday.  The transfer was made on 4 April and the funds were cleared to the Commissioners’ account on Tuesday 10 April.  This payment was therefore also late.

14.	But in the week running up to Good Friday Mr Pope had suddenly realised that there might be a problem and that the payment he had carefully arranged to be on time might not be.  He decided to check on the date for which he had given instructions to make the transfer – he could not by then remember exactly when he had set the date although he thought it was for 4 April.  On the weekend of 31 March he went to look at the internet banking site but it was not working.  He could neither check the date nor amend it.

15.	We were shown Mr Pope’s copy of a manuscript letter written by him on Sunday 1 April to HMRC at Southend-on-Sea explaining his problem.  He told us that he had posted it to HMRC by first class post that day.  Mr Pope could do nothing until Monday 2 April after the weekend.  He then tried to deal with the issue by telephoning his bank, but they would not take instructions over the phone.  His bank manager, Robert Hyde, was unavailable and it was only on Maundy Thursday 5 April that contact was made.  Mr Hyde found that he was also unable to access the site on that day.

16.	It appears that Mr Pope was unable to access the internet banking site for the whole of the period Monday 2 April to Thursday 5 April.  As a result he was unable to determine whether he had given transfer instructions for 4 April or to amend those instructions to ensure that the transfer was made earlier on 3 April.

The Parties’ Contentions

17.	Mr Pope says that he did his honest best; and did all he could.  When he realised that internet transfers required several days to clear he took this into account in his next instructions.  He took into account the weekend.  When he realised that there was a problem because of the bank holiday he took steps to put it right.  When he could not get onto the internet site he rang the bank and wrote to HMRC.  He had done what was reasonable to expect of him.

18.	Mr Pope pointed to the uneven nature of the incidence of the Appellant’s input tax.  In the first two full quarters in 2006 it had VAT reclaims of about £4k, in the third a payout of about £1k, and in the 02/07 quarter a payment of £48k odd: some 65% of its VATable outputs occurred in that quarter.  The default surcharge of 2% of the largest quarter’s VAT was unfair and bore disproportionately on its business.

19.	Mr Pope noted that the Commissioners’ literature about submitting online returns stated that doing so delivered cashflow advantages.  In order to get the internet payment to the Commissioners’ account on time he would have had to arrange that the funds left his account on 3 April.  Had he made the payment by cheque in the old fashioned way it would have arrived at the Commissioners’ on Saturday 31 March; the cheque would have been presented to the Commissioners’ bank on Monday 2 March and would then have needed to clear.  He questioned whether the electronic payment if it was indeed required to be made on 3 April delivered a cashflow advantage as stated   Mrs Orimoloye told us that HMRC used same day clearing to clear cheques received.

20.	Mrs Orimoloye submitted that a genuine mistake by the Appellant was not a reasonable excuse. The Appellant, having defaulted for 11/06 and having been notified of, and knowing the reasons for, that default, knew that the transfer for 02/07 had to be made in such a way that it would be received in the Commissioners’ bank account on or before 7 April.  It was reasonable to expect a person to take account of the incidence of bank holidays in planning the funds transfer.

Discussion

21.	In our opinion making a mistake, however honestly and well intentioned, is not of itself a reasonable excuse.  Whether or not it depends on the circumstances of the mistake.

22.	If all that had happened was that Mr Pope had overlooked the bank holiday in planning the transfer of funds then we would not in these circumstances have found that the Appellant had a reasonable excuse.

23.	But that is not all that happened.  Mr Pope initially overlooked the bank holiday but then realised his mistake.  He set about trying to correct it.  But he could not do so because he could not get on to the internet site to rearrange the transfer.  The bank would not accept telephone instructions.  He could not send a cheque because the payment had to be by electronic means (see Regulation 40(2A)).  It was this set of circumstances – precipitated, but not solely caused, by his initial overlooking of the bank holiday – which gave rise to the delayed receipt.

24.	We note that it might have been possible for Mr Pope to organise directly with his bank a CHAPS transfer to the Commissioners on any day between Monday 2 April and Thursday 5 April.  Such a transfer could have ensured timeous receipt by the Commissioners although it would have caused some complication with the pre-arranged internet transfer.  Had Mr Pope been advised of this possibility and failed to implement that advice then we do not think he would have had a reasonable excuse.  There is some advice on CHAPS transfers in the Commissioners’ published material.

25.	We do not find that Mr Pope did everything possible to avoid the delayed receipt, but the question for us is not whether he did everything possible but whether he had a reasonable excuse.  On balance we find that in his particular circumstances he did have a reasonable excuse: in the circumstances he made reasonable efforts to get the VAT to the Commissioners on time if not every possible effort.

26.	We therefore allow the appeal.  Our decision was unanimous.

CHARLES HELLIER
CHAIRMAN

RELEASED: 24 October 2007

LON 2007/1111