20722

DEFAULT SURCHARGE – preliminary issue – first default charge notice defective – insufficient evidence – not defective – application of stagger – letter from customs unclear – appellant entitled to apply stagger even though pre-stagger return received – appeal allowed with costs
           MANCHESTER TRIBUNAL CENTRE

    PTE PLC t/a Physique	    Appellant

	- and -

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	DAVID S PORTER	  (Chairman)

Sitting in public in Manchester on 6 June 2008

Christopher Owens VAT Consultant appearing for the Appellant

Mrs Kim Tilling from the solicitor’s office instructed by the acting solicitor for the Commissioners for H M Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	PTE PLC (the Appellant) appeal against a five percent surcharge in the sum of £19,933.35 relating to the late submission of their return for the period 30/11/07.  The Appellant had submitted returns and paid the VAT in time arising from an agreed stagger for the first period to 31/12/07. The Appellant claims that it has a reasonable excuse as the letter form H M Revenue and Customs approving the stagger was ambiguous. The Respondents say that the letter required the VAT return for the earlier period to be completed in spite of the fact that the stagger was to come into effect thereafter.
2.	Mrs Kim Tilling of the solicitor’s office instructed by the acting solicitor for H M Revenue and Customs appeared for the Respondents and produced a bundle of documents for the Tribunal. Mr Christopher Owens a VAT Consultant appeared for the Appellant and also produced a bundle for the tribunal.
3.	The tribunal was referred to the following cases:
•	In Style Pleaters VAT Decision 7700 
•	Express Vending Ltd VAT Decision 13262
•	Accounting Alliance Ltd VAT Decision 17741
•	All England Film  Caterers Ltd VAT Decision 20183
Preliminary Issue
4.	In his submissions at the end of the appeal, Mr Owens submitted that the notice for the first default dated 12.1.07 was incorrect, because it referred to the period 11/06 and should have shown the default period for twelve months, but only identified the period 1.9.07 to  30.11.07. He accepted that this matter had not been pleaded and was being raised for the first time at this hearing. The tribunal dealt with it as a preliminary issue. Mrs Tilling was able to produce a notice prepared for the meeting in which the Respondents notified the Tribunal of the error stating that it was
“ a clerical mistake in the transposition of the information from the traders ledger print in the reconstruction of the computer generated Surcharge Liability Notice dated 12 January 2007”.
That ledger entry for the 12.1.07 shows the period 11/06, the description  SLN issued , and the reference 30/11/07 . I am told that 30/11/07 is the end date for the period of default. That is confirmed by a similar entry at 18.01.08 which reveals period 11/07 SLN issued and the reference 30/11/08.
S 59 (2) Value Added tax Act 1994 (the Act) provides;
“ 59(2) Subject to subsection (9) and (10) below, section (4) below applies  in any case where:-
(a)	a taxable person is in default in respect of the prescribed accounting period: and
(b)	the Commissioners serve notice on the taxable person (a  “surcharge liability notice”)  specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of a period referred to in paragraph (a) above and beginning subject to subsection (3) below, on the date of the notice
(Note. Subsection 9 refers to penalties and subsection 10 refers to consultation with the Treasury and neither are relevant to this appeal. Subsection (4) refers to the amount of the surcharge and does not relate specifically to the point in question)
The tribunal was referred to In Style Pleaters VAT Decision 7700 in which it was accepted that the error in the expiry date of a surcharge Notice meant that it failed to comply with section 19(2) Finance Act 1985 (the earlier legislation). The Chairman stated 	:
	“It followed that the surcharge itself was not lawfully assessed because the conditions for it in section 19 (2), which pre-supposed the existence of a valid surcharge liability notice, had not been met.”
Mr Owens submitted that as the first surcharge notice was incorrect the next two notices replaced it and the surcharge on the second default would be reduced to 2% and subject to this appeal might fall entirely.	
Both parties conceded that the notice produced to the Tribunal is a copy of the actual notice served on the Appellant. It is not, however, an exact copy but merely a summary of the full notice. Mrs Tilling was unable to produce a copy of the original notice and Mr Owens stated that the Appellant had been unable to find the original notice served on it.
As the original notice has not been produced, I am of the opinion that the original notice must have been correct. Firstly, because the dates in the copy notice are so obviously wrong, and I would have expected Mr Wild or one of his colleagues to have raised the point by way of an appeal at the appropriate time. Secondly, there has been a second default, which again has not been appealed.  The point has not been pleaded and the Appellant has had adequate time to raise the point prior to this hearing and have failed to do so. I do not accept that the original notice was incorrect.	
The facts
5.	   The tribunal found the following facts. PTE PLC t/a Physique has several subsidiary businesses identified at the bottom of its letter head namely Training Equipment India Ltd; ZIG; Physique Sports; Locker and flooring solutions and Home fitness Direct. Mr Wild the finance director explained that the business started in 1982 buying, selling and in some cases manufacturing fitness equipment The company now employ some 70 people. 5 years ago the company became a PLC to assist in raising capital and to raise some money for the owners. The VAT returns are processed through their computer. Mr Wild had taken over the financial department when the financial controller and his assistant and both left within 4 months of each other. Mr Wild had also to complete the accounts for other businesses. The VAT returns were to have been made up to the 31 December 2007 and as he had been working 6 days each week and the year end was the busiest time for him, he decided that he would apply for the VAT return date to be moved to the end of December, which would allow him until the end of January to make up the return and to pay the VAT. Mr Wild accepted that he knew the company was in the default surcharge regime and he realised that if the return was required by the end of December the company would be late again.
6.	Mr Wild therefore wrote to the variations department on 11 October 2007 in the following terms:-
“We have recently reduced the number of staff in our Accounting Department and this is putting a strain on our ability to submit the VAT returns before the due date, due to the fact that we have a number of other accounting and reporting commitments that fall due at the same time.
In view of this, could you pleased arrange for the next VAT return to be for the period from 1 September to 31 December 2007 and then quarterly thereafter…”
7.	It was not entirely clear from the evidence exactly when the VAT return for  the old period to 30 November 2007 was received. It was conceded that it is likely to have been some six weeks before the due date of 31 December which would tie in with Mr Wild’s believe that it was probably in the third or fourth week of October. Either way I am satisfied that it must have been received after his letter of 11 October.
8.	The Respondents replied on the 2 November, their letter is set out in full:-
“Our Ref  VAR Stagger change
Dear Sir/Madam
VAT Registration number 381 1930 58
Thank you for your request to change your tax periods. This has now been approved and your VAT returns will now end on the last days of:
March, June, September December
Before this change becomes effective you may receive a VAT return form under the old arrangements. If this happens you must complete the return form and send it to the VAT Central Unit in Southend-on –Sea together with any payment due by the due date specified on the form.
Alternatively, if you are registered for online VAT returns you must ensure that all outstanding VAT returns are completed by the due date. To do this you will need to go into your VAT online account where you will be presented with details of the available periods.
You will be in default if you do not complete all the necessary returns.
You will receive an amended Certificate of Registration in due course.
Please note you can now advise us of any changes in your registration details by visiting our web site www.hmrc.gov.uk.
Yours sincerely “
(Note. The italics are mine and they are referred to in the decision)
9.	Mr Wild confirmed that he was pleased to have received the letter confirming the stagger, but that he had not paid much attention to the rest of the letter. He conceded that he had already received the November return before the receipt of the letter of 2 November from the Respondents. He arranged for the software for the computer to be altered to accommodate the new dates and completed the return for what he believed to be the new due date of 31 January 2008 on the 25 January. The Appellant paid the sum of £406,150.78 by BACS on 5 February and as the Appellant was paying electronically the payment in relation to the stagger was paid on time by 7 February. 
10.	The Appellant received a surcharge liability notice and on 31 January sent  the Respondents two further returns both dated 31 January 2008. One for the 3 month period to 30 November showing £398,667 as the VAT due, and one for the one month period to 31 December showing £7483 the VAT due. The total sum of £406,150.78 was paid as above on time in relation to the new stagger date but late in relation to the November date.
11.	Mrs Tilling submitted that although there had been several changes in the accounts department these had been over a period from June 2006 up to the request for the stagger. The Appellant knew it was in the surcharge regime and on notice to take care with its returns. The letter of 2 November agreeing the stagger clearly stated that if a return was received it had to be completed in the usual time scale. The Appellant had been down-sizing and the pressure on the Appellant to complete its returns were no different than normal commercial contingencies for which allowance should have been made. If the Appellant was unclear as to the meaning of the letter of 2 November they should have contacted the Respondents for clarification. Mr Wild could not recall whether he had read the rest of the letter of 2 November and if he had done he would have realised that he needed to send in the return by 31 December the due date for the November return. As a result the Appellant does not have a reasonable excuse and the surcharge has been properly raised.
12.	Mr Owens submitted that the Appellant had to apply for the stagger to overcome the initial problem of lack of staff and work commitments and to make the returns easier for the future. The letter of 11 October was very specific and the response from the Respondents on 2 November confirmed that the application was “now approved”. The letter from the Respondents thereafter is far from clear. It stated that “you may receive a VAT return”. It does not say that you may already have received a return. Nor does the word “may” suggest that something needs to be done. The next sentence suggests that if you do receive a return then it “must” be completed. It is unclear which return this refers to as the Appellant had already received a return before the confirmation of the stagger. The letter also states that the Appellant will receive an amended Certificate of Registration in due course. There is no need for a Certificate to be issued as the change can be confirmed by letter. Regulation 25 of the VAT Regulations 1995 at subsection (1) refers to the Making of Returns and states “ that every person who is registered …. Shall “ be “  notified either in a certificate of registration issued to him or otherwise.. ……”
If there is any ambiguity with regard to the letter of 2 November then the Appellant should be given the benefit of the doubt and the tribunal must decide that the Appellant has a reasonable excuse.
The Decision
13.	Having heard the evidence and considered the law and the cases I find that the Appellant had a reasonable excuse and the appeal is allowed. Mr Wild was aware that the Appellant was in the surcharge regime and he believed that the Appellant may not be able to complete its November return in time and said so in his letter of 11 October. It was not therefore unreasonable of him to believe that the return could be made up to the end of December. In fact he had to alter the software for the computer to accommodate the change. He then completed the return on time as far as the stagger was concerned and sent the VAT again on time  in relation to the agreed stagger. 
14.	The problem lies with the letter of 2 November 2007 from the Respondents. It confirmed in no uncertain terms that the stagger had been approved and gave the new dates. The letter goes onto say “…before the change takes effect….”.but does not specify when it will take effect? The Appellant has been told that the request for the change has “now” been approved”. Does the change take effect from 2 November or 31 December? The letter goes on to say before the change takes effect “you may receive a VAT form”. The Appellant had already received a VAT return before the letter of 2 November. It was therefore reasonable to suppose that the reference to may could not refer to that return. The letter then states that the Appellant must complete the return which he may have received before the change. The provisions become even more confused if the Appellant was registered for online returns. In those circumstances the Appellant must ensure that all outstanding returns are completed by the due date. The Respondents submit that there are two due dates namely 31 December and 31 January but online there appears to be only one due date. A default arises if all necessary returns are not submitted. As far as the Appellant is concerned the necessary return is the return due on 31 January 2008, otherwise the application for the stagger, which has been approved, would have been of no assistance as the Appellant knew that it would be in default for the period to the end of November. The letter of 2 November does not suggest that the stagger cannot be actioned until the Certificate of Registration is issued. As Mr Owens points out Regulation 25 appears to indicate that the amendment could be dealt with by letter.
15.	I have been referred to the cases above and I am surprised that in spite of the fact that several chairmen have expressed concern as to the meaning of the stagger letter it has not been amended. In fact the letter referred to in Express Vending Ltd VAT Decision 13262 which was heard in 1995 is almost identical to the letter of 2 November 2007. I agree with Angus Nicol in the case of Accounting Alliance Ltd VAT Decision 17741 heard in 2001 when he states:
“We do not see why it should be the duty of a taxpayer to make inquiries as to the meaning of a letter which the Commissioners have written, just in case there should be some hidden ambiguity in it. The Commissioners should be taken to mean what they say; it is, in our judgment, up to them to say what they mean.” 
16.	 Mrs Tilling referred me to All England Film Caterers Ltd VAT Decision 20183. In that case there was a delay or two months from the old date to the stagger date and the letter from the Commissioners required the Appellant to complete the return for the old period prior to the stagger.
17.	I therefore allow the appeal with costs for the Appellant. The costs to be agreed between the parties and if they can not be agreed to be brought back to the Tribunal.

D S PORTER
CHAIRMAN

Release Date: 27 June 2008

MAN/ 08/0265