20787

VAT – Default surcharge – Reasonable excuse – Illness of person to whom VAT compliance have been delegated

LONDON TRIBUNAL CENTRE

	IVIS GROUP LTD	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	CHARLES HELLIER (Chairman)
						SUNIL DAS

Sitting in public in London on 2 July 2008

Sheraz Manghal, financial controller of the Appellant, for the Appellant

Jonathan Holl, advocate, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

 1.	The Appellant appeals against a default surcharge of £3,444,59 in respect of the period ending on 31 January 2008 (the ‘01/08’ period).  Its principal grounds of appeal is that it had a reasonable excuse for its default in that period because the delay in the submission of its return and payment of its VAT was caused by the illness of its bookkeeper.

The relevant law

2.	Section 59 VATA 1994 provides that a person is to be regarded as in default in respect of a period if the Commissioners have not received his VAT return by the due date or if they have received the return but not received the VAT.  If a person is in default in respect of a period the Commissioners may serve a “surcharge liability notice” on the taxpayer (using that term as appropriate shorthand for ‘taxable person’) specifying a “surcharge period” beginning with the date of the notice and ending on the first anniversary of the period of default.  If the taxpayer defaults again in respect of a VAT period ending within that surcharge period two consequences may follow: (i) the Commissioners may extend the surcharge period by an extension notice so that it ends 12 months after the latest default surcharge, and (ii) the Commissioners may assess a default surcharge which will be of 2%, 5%, 10% or 15% of the outstanding VAT depending on whether the taxpayer’s default is the first, second, third or fourth or subsequent default in the surcharge period.

3.	Section 54(7) provides that if the taxpayer satisfies the tribunal that:

“(a)	the return or, as the case may be, the VAT shown on the return 	was dispatched at such time and in such a manner that it was 	reasonable to expect that it would be received by the 	Commissioners [on time], or

(b)	there is a reasonable excuse for the return or VAT not having 	been so dispatched.”,

the taxpayer shall not be liable to the relevant surcharge.

4.	Section 71 VATA provides so far as is relevant to this appeal that:

“where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.”.

This section restricts significantly the scope of the reasonable excuse defence but it does not prevent the reason for any failure on behalf of a person relied upon from constituting a reasonable excuse.  Thus, if the person who normally completed the VAT return and posted it off with the cheque was suddenly taken seriously ill, or called away on the serious illness of a child, their consequent failure to send off the VAT and the return could in appropriate circumstances constitute a reasonable excuse; but whether or not it does will depend upon the circumstances.

The Evidence and the Findings of Fact

5.	Mr Manghal told us of the background to the defaults.  He joined the Appellant’s staff as financial controller on 3 March 2008 and his evidence as to what happened before that date was second hand evidence of what he had been told by those involved.  We did not doubt Mr Manghal’s truthfulness but we were unable to evaluate the completeness, fairness or accuracy of the statements made to him by others because we did not hear and see them.  We had before us a bundle of copy correspondence including a copy of a letter from the Physiotherapy Manager at the Shelbourne Hospital (to which we shall return later).  We find the following facts.

6.	The Appellant has been trading for some 10 years.  It is owned by its chief executive officer.  The company has grown substantially.  In particular in the last two years its workforce has grown from 15 employees to 85 employees and an equivalent number of subcontractors.  Mr Manghal was recruited to assist with the extra financial control which such expansion required.  He started work in March 2008.

7.	Until Mr Manghal’s arrival the company’s books, accounting records and VAT returns were managed by Dawn Humphries. Dawn was employed by the Appellant’s accountants Hain Watts. Hain Watts arranged for her to attend the Appellant’s offices on two half days each week. The Appellant paid Hain Watts for her services.

8.	Under the arrangement with Hain Watts, Dawn Humphries had been coming to the Appellant’s premises every week since about 2004.  She had become a trusted member of the Appellant’s team.  She kept the accounting (and VAT) records in a filing cabinet in the Appellant’s offices.  She was the only person who had a key to that cabinet, and she locked it when she left.

9.	Although Dawn Humphries prepared and submitted the VAT returns, in June 2007 the only authorised signatory for the bank account from which the payments were made was the chief executive officer.

10.	The VAT return for the 04/07 period (the period ending on 20 April 2007) was due to be received by the Commissioners on 31 May 2007, and was received two days earlier on 29 May 2007.  The VAT due however was not received until 8 June 2007.  It was paid electronically by BACS.  The due date for the VAT payment was therefore 7 June 2007; it was therefore one date late.

11.	The payment was late because the chief executive officer was in Malaysia and his return was delayed.  Mr Manghal suggested that the delay was caused by flight problems, but not having heard more detailed first hand evidence we are not able to make any finding as to the cause for the delay.

12.	Dawn Humphries had occasionally complained of neck or back pain but had not been absent from work for this reason.

13.	Dawn Humphries was due to come to the Appellant’s premises on Monday 22 February and Friday 26 February 2008.  On one of these days she would normally have dealt with the VAT return for the period ending on 31 January 2008.  She did not turn up.

14.	On Monday 22 February the commercial director of the Appellant tried to phone Dawn Humphries on her mobile but was unsuccessful.  He also contacted Hain Watts.  On Friday 26 February he spoke to Hain Watts again.  He was told that Dawn Humphries had injured her neck.

15.	On 3 March Mr Manghal joined the staff.  One of his first questions related to the VAT.  No one had any information.  On 14 March he spoke to Hain Watts.  He was told that the VAT return was due and was late.  Hain Watts contacted Dawn Humphries who was driven by her sister to the Appellant’s offices.  She was wearing a surgical collar around her neck.  She provided Mr Manghal with the keys to the cabinet and the relevant information.  Mr Manghal made immediate arrangements for the submission of the VAT return and the payment of the VAT.  Payment was made by CHAPS so that it arrived in the Commissioners’ bank account on the same day.

16.	We find that Dawn Humphries did have a serious neck injury. The letter from the physiotherapy manager at The Shelbourne Hospital indicated that she had two prolapsed disks and that she was unable to drive.  There was no evidence that she was so incapacitated in the week ending 26 February 2008 tat she was unable to use a telephone.

The Appellant’s arguments

04/07

17.	Mr Manghal accepts that the Appellant was late in its VAT payment for the period but says that given the Appellant’s previously unblemished record and the fact that the payment was only one day late, it should have been dealt with leniently and the default overlooked.

01/08

18.	Mr Manghal accepts that a surcharge liability notice was served in respect of the 04/07 default and that the 01/08 default fell within the surcharge period created by that notice.  He accepts that the return and the payment of VAT were late but says that the Appellant had a reasonable excuse in the shape of Dawn Humphries’ incapacity.

19.	He says that there was nothing the Appellant could do to remedy the situation at the time.  It was not possible to access the filing cabinet because Dawn Humphries had the only key, and there was no one with the requisite knowledge in her absence.  The Appellant was a small (but growing) company; Mr Manghal had been recruited to improve its system.  It was acting reasonably in the circumstances.

The Respondents’ argument

04/07

20.	Mr Holl says that there was no reasonable excuse for the delayed payment.  The chief executive officer may have had flying difficulties but if he was the only signatory he should have taken steps to ensure that the payment was made on-line.  He did not exercise the care and attention to be expected of a reasonable businessman.

01/08

21.	Mr Holl says that the Appellant was responsible for its VAT compliance whether or not it had delegated that duty to Hain Watts.  He says that:

(i)	allowing the only key to the accounts filing cabinet to be kept by an employee of Hain Watts was not the action of a reasonable businessman;

(ii)	it was not reasonable to rely wholly on Hain Watts: someone in the upper management of the Appellant should have kept oversight of VAT compliance;

(iii)	the Appellant’s actions on 22 and 26 February were not as strident as those which would have been undertaken by a reasonable businessman;

(iv)	a reasonable businessman would not have been in the position of the Appellant on 3 March – being unable to tell Mr Manghal when the VAT return was due or to give him the keys to the cabinet;

(v)	the surcharge inhibits notice received by the Appellant in respect of the 04/07 default should have alerted the Appellant to the need to take extra care in relation to its VAT compliance.

22.	Mr Holl relies on section 71 VATA.  He says that the Appellant cannot rely for a reasonable excuse on its delegation to Hain Watts or their delegation to Dawn Humphries.

Discussion

23.	We start by noting the nature of our jurisdiction.  We are given jurisdiction to hear an appeal against a default surcharge.  We may allow the appeal if there was no default, if there was no relevant surcharge period created by a surcharge liability notice (because for example such notice was not served), if the surcharge has been wrongly calculated, or if there was a reasonable excuse for the surcharge.  But we do not have power to reduce the amount of a surcharge or to consider whether or not the Commissioners acted reasonably in imposing the surcharge.  As a result, in the circumstances of this appeal, the only questions for us are whether or not there was a reasonable excuse for either of the defaults.  If there was a reasonable excuse for the 04/07 default it effectively is expunged and no default surcharge arises in respect of the 01/08 period.  Likewise if there is a reasonable excuse for the 01/08 period no default surcharge can arise in respect of it.

04/07

24.	We do not find that there was a reasonable excuse for the default in respect of this period.  On the facts as we have found them the only reason for the late payment was the chief executive officer’s late return.  There is nothing in our findings which supports a reasonable excuse in relation to that late return or otherwise.  The previous record of the Appellant is irrelevant.

01/08

25.	The delay in the submission of the VAT return and the VAT payment was clearly caused by Dawn Humphries’ neck problems.

26.	Mr Holl suggests that it is not reasonable wholly to delegate VAT compliance to a firm of accountants or to rely wholly on that firm’s employee.  We do not think it is necessarily unreasonable to do so but the mere fact of such delegation does not found a reasonable excuse.

27.	There was little evidence before us of the terms of the contact between the Appellant and Hain Watts.  That contract may or may not have placed responsibility for VAT compliance (other than in relation to the final authorisation of payment) on the shoulders of Hain Watts.  Nor was their evidence as to the extent that Hain Watts had delegated that responsibility (or any part of it) to Dawn Humphries.  We were also unable to evaluate the suitability of Hain Watts or Dawn Humphries for such delegated tasks.

28.	However, to the extent that responsibility was delegated to Dawn Humphries, we believe that it would have been possible for her to alert Hain Watts or the Appellant of her incapacity and of the need to complete the VAT, and that such action would have been reasonable to expect in the circumstances.  To the extent that responsibility was delegated to Hain Watts we believe it would have been possible for them to have contacted Dawn Humphries (particularly after the Appellant contacted them on 22 February) and to have made other arrangements for the completion of the VAT return and that it would be reasonable to expect them to have done so.  And, to the extend that the arrangements left responsibility with the Appellant, we believe that the Appellant could have, and that it was reasonable to expect that it should have, contacted Hain Watts to ensure that the VAT return was timeously completed.

29.	Thus, whatever the precise terms of the delegation, it seems to us that there were steps which could reasonably have been taken by a relevant person which would have ensured that the VAT return was completed in time.

30.	We therefore do not find the Appellants have a reasonable excuse for its default in their payment.

31.	As a result, although we accept that the Appellant’s previous history may have been good, that it has taken steps to improve its accounting controls by the appointment of Mr Manghal, and that when the problem was discovered steps were taken speedily to correct the problem, we must dismiss this appeal.

32.	Our decision was unanimous, no application was made for costs and we made no award of costs.

CHARLES HELLIER
CHAIRMAN

RELEASED: 29 August 2008

LON 2008/1023