20621
VAT – DEFAULT SURCHARGE – Three surcharges – first surcharge due to pressures of business – foreseeable event – Appellant did not take the steps that a prudent business person  would have taken – no reasonable excuse - second surcharge arose from a mistaken belief about the terms of the electronic payment concession – Appellant’s lack of knowledge the cause of mistaken belief – no reasonable excuse –  Respondents concede that the Appellant has reasonable excuse for the last surcharge –  Appeal dismissed for the first and second surcharges – Appeal allowed by agreement in respect of third surcharge

MANCHESTER TRIBUNAL CENTRE

	HEATSOURCE LIMITED  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      ROLAND PRESHO FCMA (Member)	  

Sitting in public in North Shields on 30 January 2008

Alex Hunter managing director for the Appellant

Bernard Hayley of the Solicitor’s Office for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against three default surcharges in the sums of £2,142.46, £2,090.24 and £2,403.55 for the periods ending 30 November 2006, 28 February 2007 and 31 May 2007.
2.	On 30 January 2008 we heard representations from both parties and received their respective documents. We allowed the Appeal in the surcharge for quarter ending 31 May 2007 but dismissed the Appeal in respect of the other two surcharges. We announced our decision at the end of the hearing. The Appellant requested detailed reasons for our decision in accordance with rule 30(1) of Tribunal Rules 1986.
The Facts
3.	The Appellant’s business involved the servicing and repair of central heating systems, predominantly oil fired systems. The business was targeted at the private household sector in Northumbria. The Appellant employed 14 members of staff and leased premises in Hartlepool. Its annual turnover was in the region of £450,000.
4.	Mr Hunter, the managing director, kept the accounts for the Appellant in conjunction with the many duties of his office. The Appellant did not have the funds to employ an accounts member of staff full-time.  The Appellant also used “Quickbook” software for its accounts which was not widely used in the United Kingdom making it difficult to recruit trained staff. The Appellant had now engaged a book-keeper part-time who was being trained by Mr Hunter in the software.   
5.	From 1 July 2005 to 31 May 2007 the Appellant’s record of VAT compliance was poor, submitting late returns or payments for seven successive quarters during the period. The Appellant was aware of the consequences of late returns or payments from the surcharge liability notices served upon it. The Appellant was, therefore, in the default surcharge regime attracting 15 per cent surcharges for the disputed returns.
6.	Since quarter ending 28 February 2006 the Appellant had been making payments and returns electronically which enabled it to take advantage of the additional seven day concession after the due date for making payments.
7.	The Appellant submitted the return for the quarter ending 30 November 2006 on 6 January 2007 with payment by BACS on 8 January 2007 which was received by the Respondents on 10 January 2007. The due date for the return was 31 December 2006. The last date of receipt for payment by electronic transfer was 7 January 2007.
8.	The Appellant submitted the return for the quarter ending 28 February 2007 on 30 March 2007 with payment by BACS on 4 April 2007 which was received by the Respondents on 10 April 2007. The due date for the return was 31 March 2007. The last date of receipt for payment by electronic transfer was 7 April 2007.
9.	The Appellant submitted the return for the quarter ending 31 May 2007 on 16 July 2007 with payment by BACS on 17 July 2007 which was received by the Respondents on 19 July 2007. The due date for the return was 30 June 2007. The last date of receipt for payment by electronic transfer was 7 July 2007.
10.	The Appellant failed to comply with the deadlines for the quarter ending 30 November 2006 because the due date of 31 December 2006 fell in the busiest period of the Appellant’s business cycle, and close to the Christmas holiday which was associated with a strong demand for call-outs. During this period the Appellant concentrated its limited resources on dealing with its customers with the result that its VAT payment was late by a matter of days.
11.	The Appellant submitted its VAT return for the quarter ending 28 February 2007 in time on 30 March 2007. The Appellant made its payment by BACS on 4 April 2007 which was not received by the Respondents until 10 April 2007. When making the payment on 4 April 2007 the Appellant did not allow for the Easter bank holiday which started on the 6 April 2007 with the result that the payment was not credited to the Respondents’ bank account until the Tuesday following the holiday. The Appellant misunderstood the Respondents’ concession of extending the due date by seven days for making payments by electronic transfer.  Under the concession the Respondents’ bank account must be credited with the VAT by no later than seven calendar days from the due date.  Where the seventh day fell on a weekend, the Respondents must receive payment by the last banking day preceding the seventh day. In the Appellant’s case the last banking day was the 5 April 2007 as the 6 April was Good Friday. In short the Appellant’s BACS payment on 4 April 2007 was not made in time for it to be received by the Respondents in accordance with the terms of their concession.  
12.	The Respondents accepted that the Appellant had a reasonable excuse for its default in respect of the quarter ending 31 May 2007.  In those circumstances we have not set out the detail of the Appellant’s reasons for its non-compliance, suffice to say that having heard Mr Hunter on oath we were satisfied that the reasons constituted a reasonable excuse.
Reasons for Decision
13.	Section 59 of the VAT Act 1994 requires the Appellant to furnish VAT returns and pay the outstanding VAT within one month of the relevant accounting period. The due date for receipt of payment is extended by seven days for electronic transfers The Appellant failed to pay the VAT owing by the due date for the VAT periods ending 30 November 2006, 28 February 2007 and 31 May 2007 and was liable to pay a surcharge of 15 per cent of the tax due for each VAT period.
14.	The Appellant can avoid the default surcharge if it satisfies the Tribunal on a balance of probabilities that it has a reasonable excuse for not furnishing the VAT payment on time. The default surcharge regime, however, 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.	Reasonable excuse is strictly construed by the legislation. Insufficiency of funds and reliance on the default of others cannot in law constitute a reasonable excuse. An honest mistake is insufficient by itself to form a reasonable excuse. In order to establish a reasonable excuse the Appellant has to show that it exercised reasonable foresight and due diligence and a proper regard for the fact that tax would become due on a particular date. 
16.	We are satisfied that the Appellant’s reasons for its late payments for quarters ending 30 November 2006 and 28 February 2007 did not amount to  reasonable excuses. 
17.	In the case of the quarter ending 30 November 2006 the Appellant knew that the payment date coincided with its busiest period and was a foreseen event. A prudent business person exercising due diligence and having a proper regard to his legal obligations in respect of VAT would have taken positive steps to ensure that the VAT  was paid on time despite the quarter end coinciding with the busiest period. Mr Hunter’s evidence showed that the Appellant did not have a specific strategy for dealing with the anticipated problem. The Appellant simply did the best it could with its existing resources and took a calculated risk that it would avoid the penalty by only being three days late with its payment, which in our view were not the actions of a prudent business person dealing with his tax responsibilities. 
18.	 The Appellant’s default for the quarter ending 28 February 2007 was due to its mistaken belief about the operation of the concession for electronic payments. The Appellant assumed that by making payment on 4 April 2007 the Respondents would receive it within the seven day concession. The Appellant was unaware that seven days meant calendar days and of the payment requirements when the seven days included bank holidays and weekends. Under the VAT regime the Appellant has the legal responsibility for making accurate and timely returns. The Appellant cannot avoid its responsibility by pleading ignorance of the legal and technical requirements. It was incumbent upon the Appellant to make itself aware of the requirements of the seven day concession. The Appellant’s failure to acquaint itself with the requirements was exacerbated by the fact that it had been using the electronic payments scheme for 12 months by the time of its default for the quarter ending 28 February 2007.  Thus the Appellant’s mistaken belief stemmed from its own shortcomings about gaining the necessary knowledge to discharge its VAT responsibilities, which in our view did not amount to a reasonable excuse.
Decision
19.	For the reasons set out above we find that the Appellant did not have a reasonable excuse for its defaults in respect of the quarters ending 30 November 2006 and 28 February 2007. We, therefore, dismiss the Appeal in respect of those defaults.
20.	We allow the Appeal by agreement in respect of the default surcharge for the quarter ending 31 May 2007. The Respondents conceded that the Appellant’s circumstances constituted a reasonable excuse.
21.	We make no order for costs. 

                          

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 17 March 2008

MAN/