20560

VAT DEFAULT SURCHARGE: Payment on account trader – Reasonable Excuse for not paying VAT by the due dates – Trader arranged for payments to be made by same day CHAPS transfer before the agreed cut-off time – bank delayed payment unable to authenticate the fax instruction – the trader  supplied a list of four people to cover this eventuality – satisfied the trader exercised due diligence and reasonable foresight – reasonable excuse – Appeal allowed – costs limited to out of pocket expenses.

LONDON TRIBUNAL CENTRE

	THERMAL TRANSFER LIMITED  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      ROY JENNINGS FCA FT11 (Member)	  

Sitting in public in London on 9 January 2008

Stuart Lawrence, in house lawyer for the Appellant 

Jonathan Holl of the Solicitor’s Office for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against a default surcharge dated 30 July 2007 in the sum of £11,617, which was subsequently reduced to £10,507 by the Respondents on 11 October 2007.
2.	On 8 January 2008 we heard representations from both parties and received their respective bundles of documents. We allowed the Appeal which was announced at the end of the hearing. The Respondents requested detailed reasons for our decision in accordance with rule 30(1) of Tribunal Rules 1986.
The Facts
3.	The Appellant’s principal business activity was heating and ventilation installation and associated services.  In mid 2006 the ownership of the Appellant was transferred from Southern Electric Company to E.T.D.E. The former owner undertook to service the Appellant’s VAT account until 1 January 2007 when the new owners assumed responsibility for the Appellant’s accounts.
4.	The Appellant’s annual VAT liability exceeded £2 million, and was, therefore, subject to the payment on account regime. 
5.	The default related to the VAT period 28 November 2006 to 25 February 2007. In that period the Appellant was required to make payments on account on 31 January 2007 and 28 February 2007 with the balancing payment on 23 March 2007.  The first payment on account was made by the due date. The second payment on account and the balancing payment, however, were received by the Respondents on 1 March 2007 and 26 March 2007 respectively which were after the due dates. As a result, on the 30 July 2007 the Respondents issued a default surcharge in the sum of £11,617 which represented two per cent of the VAT received late. The Appellant had defaulted once in the previous 12 months which generated the two per cent surcharge. On the 11 October 2007 the Respondents reduced the default surcharge to £10,507 because they accepted that the Appellant was not aware of the increase in the payments on account issued on 10 January 2007. 
6.	The Appellant made the disputed payments by means of same day CHAPS transfers. The terms and conditions for the CHAPS payment service stated that the Appellant’s bank would process the payment on the same day provided the request for payment was received by the cut off time of 3.15 pm. 
7.	The Appellant requested the bank by fax to make urgent same day payments for the second payment on account and the balancing payment at 3.01pm on 28 February 2007 and 12.20pm on 23 March 2007 respectively.  Each request was, therefore, made prior to the cut off time of 3.15pm authorising the bank to pay the requisite VAT by the due date. The Appellant included the correct information about the Respondents’ bank account and reference number on its payment request, which was signed by two authorised signatories.
8.	 Before making the said payments the bank decided to authenticate the faxed requests in accordance with the fax indemnity agreed with the Appellant. In each case the bank was unable to contact by phone one of the people named on the indemnity until after the 4.00pm deadline for release of a CHAPS payment with the consequence that the payments were made on the following business day.  Thus the second payment on account was sent to the Respondents’ bank account at 11.15am on 1 March 2007. The balancing payment was sent at 15.30pm on 26 March 2007, the next business day to the 23 March 2007 which was a Friday. 
9.	Under the fax indemnity the bank would normally authenticate payment requests in excess of £100,000 but not in every case. The Appellant supplied the bank with a list of four persons with their individual contact details including mobile phone numbers. Each individual named on the list was authorised to authenticate payment requests in excess of £100,000.  At least two of the named individuals were at their place of work on 28 February and 23 March 2007 when the bank attempted to make contact by phone. According to the bank, on 28 February 2007 its payment centre tried to contact the appropriate people on the list three times without success. The request was passed to the bank’s relationship office which obtained authentication from one of the individuals after the 4pm deadline for the release of the same day CHAPS payment. The bank provided the same explanation for the 23 March 2007 except that it supplied no details of the number of phone calls made by its payment centre. Despite several requests the Appellant has been unable to obtain further information from its bank about whom they tried to contact and on which contact number.
10.	The Appellant was first advised by the Respondents that the two payments were late on the 30 July 2007 when the surcharge notice was issued. The bank failed to notify the Appellant that it had not made the same day CHAPS payments on the dates requested.
11.	The Appellant held sufficient funds in its bank accounts to pay the outstanding VAT on the due dates. 
Reasons for Decision
12.	Under Sections 59 and 59A of the VAT Act 1994 the Appellant was required to furnish its VAT returns and make payments on account and the balancing payment of the outstanding VAT by the specified dates. The Respondents received the Appellant’s second payment on account and balancing payment for the quarter ending  25 February 2007 after the due dates. As the Appellant was subject to a surcharge liability notice it was liable to pay a surcharge amounting to £11,617 for its default.
13.	The Appellant can avoid the default surcharge if it can satisfy the Tribunal on a balance of probabilities that it had a reasonable excuse for not furnishing the VAT payments on time or that the VAT owed was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Respondents within the appropriate time limit.
14.	The default surcharge regime under section 59 of the VAT Act 1994 is a blunt instrument which only takes limited account of the blameworthiness of the trader. If the trader cannot establish a reasonable excuse, the legislation takes no account of the difference between the trader who has made a genuine effort to comply, albeit without success and the trader who has made very little effort and it takes no account whatever of the extent of lateness. Either the trader is on time or he is not; either he exercises due diligence or he does not. No account is taken of the degree of culpability.
15.	The Respondents contended that the Appellant did not have a reasonable excuse for not making the payments on time. The Respondents’ advocate pointed out apparent inconsistencies with the Appellant’s version of events. The advocate drew our attention to the content of telephone conversations made between the Appellant and the Respondents on the 23 March 2007, the last day for the balancing payment.  It appeared from the recorded conversations that the Appellant did not have sufficient funds to make the outstanding payment and was requesting an extension of time. Also the advocate considered the Appellant’s explanation inadequate about the contacts made by the bank authenticating  the fax instructions to make payment. 
16.	The Respondents’ advocate correctly drew our attention to the inconsistencies and inadequacies of the Appellant’s case. However, we are satisfied that the Appellant did have sufficient funds in its bank account to pay the VAT owing. We required the Appellant to produce bank statements which demonstrated sufficiency of funds. Further we accepted the Appellant’s explanation that it made strenuous attempts to discover from the bank the precise details of the contacts made. Unfortunately the bank was unable to supply detailed information other than that telephone calls were made and that it was unable to authenticate the fax instructions prior to the cut-off time for processing same day CHAPS payments.
17.	 We find that the Appellant took steps to ensure that the second payment on account and the balancing payment for the quarter ending 25 February 2007 would be received by the Respondents on the due date. The Appellant instructed its bank by means of a fax marked urgent to make the said payments by same day CHAPS transfer. The instructions were signed by two signatories. The instructions were sent in time for the bank to process the same day CHAPS transfers. The Appellant supplied the bank with the contact details of four individuals who could each authenticate the instruction if the bank chose to verify the payment.  We are satisfied that a list of four individuals should have been adequate for the bank to make the necessary enquiries in time to process the payments. Further we find that the Respondents did not advise the Appellant about the late payments until they issued the surcharge notice dated 30 July 2007. Thus the Appellant was not on notice that it should have reviewed its procedures by the time of its balancing payment to prevent a repeat of the problem with the second payment on account.
18.	The Respondents’ advocate submitted that in essence the Appellant’s defence consisted of blaming the bank for not processing the payment on time, in which case the terms of section 71(1)(b) of the VAT Act 1994 specifically  precluded such reliance from amounting to a reasonable excuse. We consider that on a correct construction of reasonable excuse we are entitled to examine the Appellant’s conduct in relation to the underlying cause of the default. In this respect we adopt the words of Lord Donaldson of Lymington MR in Customs and Excise Commissioners v Steptoe [1992] STC 757, which in our view apply equally to both parts of section 71(1) of the VAT Act 1994 (“insufficiency of funds” and  “reliance on other”):
"if the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, then the taxpayer may well have a reasonable excuse for non-payment, but that excuse will be exhausted by the date on which such foresight, diligence and regard would have overcome the insufficiency of funds" (ibid. at p.770d/e).
19.	In view of our findings, we conclude that the actions taken by the Appellant were those of a prudent business person, and that it exercised due diligence and a proper regard for the fact that the tax would become due on a particular date. We hold that the Appellant has a reasonable excuse for the defaults in respect of the second payment on account and the balancing payment for the quarter ending 25 February 2007.  
Decision
20.	We, therefore, allow the Appeal. The Appellant applied for costs in the sum of £1,650. As the Appellant was represented by its employee we decided that the Appellant was a litigant in person and entitled only to out of pocket expenses. We gave the Appellant an opportunity to challenge our view, which was declined. In those circumstances we ordered the Respondents to pay costs of £200 to the Appellant.

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 30 January 2008

LON 2007/1784