20559

Value Added Tax – Default Surcharge -  Payment received after the due date on account of an error by the Appellant's bank – Appeal allowed

LONDON TRIBUNAL CENTRE

	MOTT ASSOCIATES LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M. NOWLAN (Chairman)
						SANDI C. O’NEILL

Sitting in public in London on 16 January 2008

Trevor Mott of Mott Associates Limited in person for the Appellant

Jonathan Holl of HMRC's Solicitor's Office on behalf of the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

1.     This was a default surcharge appeal strictly in relation only to one imposition of surcharge for the Appellant's VAT period 12/06, ending on 31 December 2006.  The surcharge was imposed at the 10% rate and amounted to a charge of £3711.84.  The rate was 10% because there had been earlier defaults in the surcharge period, to which we will refer shortly.  The alleged reasonable excuse for the late payment for the period actually under appeal was that it was a banking error on the part of Barclays Bank that resulted in a cheque being returned to drawer, so that payment (when subsequently made once it had been ascertained that the cheque had not been honoured) was made 16 days late.  We accept that the late payment did result from an error by the bank, and we allow the appeal. 

The facts in more detail

2.     	The surcharge history is somewhat relevant in this case, albeit that the factor that governs the strict appeal for the surcharge period 12/06 is unconnected with the history, save for the fact that it is the history that accounts for why the surcharge rate had reached 10%.

3.	The first default was for the period 12/04, there being no surcharge because this was the Appellant's first default for more than two years.  There was then a default for the period 09/05 in which there was again no charge because the surcharge at the relevant 2% rate would have been below £400 such that HMRC waived the surcharge.  Whilst the waiver of the charge is seemingly favourable, it can in a sense be unfortunate in that the trader is given no incentive to appeal that there was a reasonable excuse for the late payment of VAT because few people will pursue an appeal when no tax or penalty of any sort is involved.

4.     We accept that we were not given the full facts in relation to the default for the period 09/05, and that that period was not strictly under appeal, but we should mention that it was disclosed that during this period and in the period given for the filing of the return and the payment of the VAT, Trevor Mott was undergoing heart surgery in both November 2005 and January 2006.  Since he was the only person in the small business who had cheque signing authority and who dealt with the accounting and VAT affairs, we think it reasonable to assume that had he asserted that there was a reasonable excuse for the late payment of the VAT for this period, that claim would have been accepted.     As it was no claim was made. 

5.     The next default was also slightly unfortunate.  This default was for the period 03/06.  A surcharge was imposed for this period in the amount of £712.58, the surcharge rate being 5% albeit that it would have been 2% had "reasonable excuse" been claimed and accepted for the surcharge referred to in paragraph 4.   Had the rate been 2%  rather than 5%, the surcharge would presumably have been waived because it would have been well below £400.  As it was, the Appellant wrote to HMRC giving reasons as to why the return and payment for this period were late.  His reasons were initially rejected and so he wrote a further letter, specifically commenting that he would continue his dialogue with the Commissioners rather than appeal to this Tribunal because the HMRC web-site encouraged him to do this.
 
6.     HMRC replied on 23 August 2006, again rejecting his claim to have a reasonable excuse, but Mr. Mott, who seemed to us to be transparently honest, claimed that he had not received this letter.  He thus assumed that the surcharge of £712.58 had been waived or withdrawn.  He has not paid this amount and has received no request for payment.

7.     	The late payment which was the formal subject of the appeal before us raised altogether different and rather simpler questions. 

8.     Trevor Mott described how he had 4 or 5 accounts with Barclays Bank, two of which were particularly relevant.  One was a business current account, and another a related deposit account.  He described that there was an arrangement under which Barclays operated an automatic transfer system between the two accounts so that after banking hours on each day, and assuming that there were sufficient funds on the deposit account, a transfer would be made in one direction or the other between the deposit and current accounts, so that there was always a balance of £2000 on the current account.  Accordingly if a cheque was drawn on the current account for £37,000 (the approximate amount of the relevant VAT payment), the current account would show a debit for that amount and at or after close of business would show a corresponding credit, marked TFR, being the transfer from the deposit account, assuming there to have been sufficient on that account, and ignoring other transactions of the day.

9.       	The cheque sent by Trevor Mott to HMRC was plainly sent in due time, and there would have been no default had the cheque been honoured.

10.     	Trevor Mott asserted, and we both accepted that:-

•	at the time the cheque in favour of HMRC was drawn on the current account, there were adequate funds in the related deposit account to fund the payment, quite apart from the fact that he had an agreed undrawn overdraft limit of £10,000; and
•	the transfer system between the two accounts should have worked automatically and had always done so in the past in relation to sums payable of well in excess of the payment in this case.
11.     In the light of the facts asserted and accepted by us in paragraph 10 above, it was reasonable to assume that Barclays Bank would have explained clearly what had happened.  Had they confirmed that they failed for some reason to operate the automatic transfer system, and conceded that they wrongly bounced Trevor Mott's cheque, it was confirmed that HMRC would have immediately conceded reasonable excuse, and withdrawn the surcharge.
    
12.     As it was Barclays wrote two letters in which:-

•	they conceded that there had been some sort of "processing error" for which they apologised; but unfortunately
•	the content and the explanation given for what had happened was incomprehensible.
Notwithstanding efforts on the part of both members of the Tribunal, Trevor Mott and the representative of HMRC, no-one was able to advance an interpretation of the letters that made sense, and indicated clearly what the Barclays error had been and whether that error alone resulted in the initial cheque being wrongly dishonoured. 

Our decision

13.     We decided that, notwithstanding the confusion caused by the two short letters from Barclays, that we accepted Trevor Mott's assertions recorded in paragraph 11 above.   Accordingly we immediately allowed his appeal, and now confirm that. 

The earlier defaults

14.     We were somewhat concerned about the two earlier defaults that we have summarised in paragraphs 3 to 6 above for the periods 09/05 and 03/06.  We accepted that the circumstances of these two defaults had not been fully explained to us, and also that there were no formal appeals in relation to them.  We would hope that if Trevor Mott sought to appeal out of time in relation to the defaults for these two periods that consent for such a late appeal might be granted, and that one or both of the defaults might be over-turned.  The justification for a late appeal would be that he had plainly assumed that his claim in relation to the period 03/06 had been accepted since he had not received the letter of 23 August 2006 and had not been asked for payment of the surcharge.  Since HMRC has not pursued him for payment of the £712.58, he may conclude that it is not worth trying to re-open this matter.  For our part we would find it somewhat surprising if the circumstances of the default for the period 09/05 (namely two operations for heart surgery) had been explained to the Commissioners or this Tribunal, they would not have been accepted as providing a reasonable excuse for the marginal delay in payment. 

HOWARD M. NOWLAN
CHAIRMAN

RELEASED: 30 January 2008

LON/2007/1903