20732

DEFAULT SURCHARGE – Late payment – Reasonable excuse – Failure to activate CHAPS payment by due date – Appeal dismissed

LONDON TRIBUNAL CENTRE

	ENCASE LTD	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	SIR STEPHEN OLIVER QC (Chairman)

Sitting in public in London on 11 June 2008

The Appellant was unrepresented 

Simon Chambers for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Encase Ltd appeals against a 2% default surcharge amounting to £7,092 for the 03/07 period.  

2.	Encase, a corrugated board engineering company, has been in the payment on account regime throughout the period to which this appeal relates, and for some time before.  The balancing payment of £353,990 for the 03/07 period, due by 30 April 2007, was received by HMRC on 1 May.

3.	No one attended the hearing to present Encase’s case.  The financial director of Encase, a Mr Button, wrote to the Tribunal on 27 May 2008 as follows:

“I am not familiar with the Appeals process, although I understand it is not necessary to attend in person.  As I am not familiar with the process I would ask that you are tolerant of any procedural shortcomings.  

I read that letter saying that Encase would not be represented.  I therefore decided to go ahead and hear the appeal.  Encase has the opportunity to apply for the matter to be reviewed in pursuance of rule 26(3) of the Tribunals Rules; but if Encase wishes to make such an application it must apply within 14 days and attend the hearing of the application.  

4.	So far as I can ascertain from the papers provided to the Tribunal what follows is a chronological account of the events leading to the default.  

The facts

5.	On 26 February 2007 a temporary finance director, a Mr Adamson, was engaged by Encase.  Encase’s quarterly return for the 03/07 period was the first of Encase’s that he had overseen.

6.	During the 03/07 period there were two members of staff responsible for ensuring that VAT payments were made on time:

(i)	Mr Bull who went off sick on 27 April and did not return until 11 May.
(ii)	Mr Bull’s manager, a Mr Reis, who also was away sick from 27 April.

7.	Encase’s quarterly return for the 03/07 period was signed by a Mr R M Morris and dated 27 April.  The return was stamped as received by HMRC on 30 April 2007.  

8.	In the morning of 30 April a temporary member of Encase’s staff was instructed to process payment of the VAT.  According to Encase’s explanation in a letter of 29 August 2007 to HMRC:

“She commenced the process after lunch and entered all the account details in correctly but unfortunately her attention was not drawn to the fact that HMRC did not hold a NatWest account.  She should have highlighted the box “OTHER UK BANK” in the output process.  

As a consequence NatWest could not process the payment request and does not have a mechanism to draw our attention to this fact.  We can only verify that a payment has been processed by revisiting the account electronically to check if the transaction status has been updated to “accepted by NatWest”.  

This failure to process was eventually identified and the payment made the following day.  I attempted to contact HMRC to register our problem but there was no one there to take my message.  The company had sufficient funds in place and it was down to an unfortunate error in the input process which was not highlighted during the process.”

(There is no dispute that Encase had sufficient funds in place.)

9.	On 30 April 2007 the NatWestBankLine payment advice records an “urgent domestic” payment direction for the tax.  It notes, against the entry “status” the words “Needs Approval”.  A handwritten note on the payment advice includes the words “defaults to NatWest third party (won’t work as VAT dept. was not a customer of NatWest … FF entered details correctly but “customer” was not a NatWest A/C.  Other UK bank should have been selected”.  The handwritten note contains the following:

“FF was late in putting them beyond banking hours …”.

10.	The next day (1 May 2007), according to a note:

“Tried to call with regard to problem with regard to TT payment – industrial action, unable to take call.”

11.	A letter from HMRC of 11 July 2007 asked for written confirmation from Encase’s bank that the payment instructions had been received in good time to be fully processed on 30 April and, that being the case, why the payment was processed late.  No letter from the bank giving such confirmation or explanation has been included with the written evidence.  

Conclusions

12.	The absence through illness of Mr Bull and Mr Reis (in both cases from 27 April) was an unforeseeable event and might in other circumstances have amounted to a reasonable excuse.  Despite their absence, however, the VAT returns were duly prepared by 27 April and signed that day by Mr Morris.

13.	Someone, who may have been Mr Adamson, the temporary finance director, instructed the “temporary member of staff” in the morning of 30 April to process the payment to HMRC.

14.	I accept that the responsibility for ensuring that VAT payments were made in time was Mr Bull’s and he was away sick.  However Mr Adamson was still around and payment instructions were duly given to the temporary member of staff.

15.	As I see it the issue comes down to the arrangements made with the bank.  Something went wrong.  There is no evidence from the bank that in any way explains why payment was delayed until 1 May.  The only attempted explanation comes from the NatWestBankLine payment advice and the manuscript notes referred to above.  I cannot understand with any degree of certainty what those are meant to convey.  

16.	The outcome might have been different had Encase produced a witness who had been involved in the payment arrangements.  Mr Adamson himself might have been able to throw light on things, as might the temporary member of staff who was actually given the responsibility of effecting payment on 30 April.  Did something go wrong that was beyond what Encase might reasonably have expected?  Was the fault the bank’s responsibility?  Why was the temporary finance director not consulted by the temporary employee who had been instructed to process the payment when something went wrong?  

17.	 There are too many unanswered questions.  I cannot be satisfied from the limited evidence that I have considered that Encase had a reasonable excuse.  In other words Encase have not proved to my satisfaction that they had a reasonable excuse for the late payment.  

Was the penalty disproportionate?

18.	Encase contend, in their written grounds of appeal, that the “penalty is vastly disproportionate – 730% rate of interest vastly in excess of the HMRC official rate of interest.”  That may be correct as a matter of arithmetic.  I can only observe, however, that the default surcharge has been calculated according to the statutory basis prescribed in Value Added Tax Act 1994 section 59.  The statutory scheme is a tough one.  I cannot, however, displace the Act of Parliament and substitute it with something less extreme.  Moreover, the Act gives the Tribunal no authority to mitigate the amount of the default surcharge.  It should be noted that in a decision of this Tribunal (Greengates) the tribunal considered the law and concluded that the scheme, albeit harsh, had the force of law and must not be disregarded by the tribunal.  

19.	For that reason I cannot allow the appeal on grounds that the default surcharge is “vastly disproportionate”.  

Decision

20.	The appeal is dismissed.  The Appellant is reminded of its rights under rule 26 explained in paragraph 3 above.

SIR STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 3 July 2008

LON 2008/0430