20813

DEFAULT SURCHARGE – Appellant one day late with his payment – Appellant blameworthy for the default  – failed to give priority to his VAT affairs – did not make enquiries with his bank about timescales and cut off time for electronic payments – chose not to reclaim VAT as input tax – benefitted from concession not to enforce surcharges of less than £400 – no reasonable excuse – payment not dispatched in time – ten per cent surcharge proportionate to the Appellant’s transgression – Appeal dismissed. 

LONDON TRIBUNAL CENTRE

	DUNCAN J W PENNY   	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      CAROLINE DE ALBUQUERQUE (Member)	  

Sitting in public in London on 27 August 2008

The Appellant appeared in person

Simon Chambers of the Solicitor’s office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant appealed against the imposition of a default surcharge in the sum of £1,616.30 dated 18 January 2008 for the quarter ending 30 November 2007.
2.	On 27 August 2008 we heard from the parties and received a bundle of documents in evidence.  At the end of the hearing we announced our decision, dismissing the Appeal. The Appellant requested a written decision with reasons.
The Dispute
3.	The principal issue in dispute was the proportionality of the default surcharge as against the extent of the Appellant’s transgression. The Appellant contended that the quantum of the penalty was swingeing for being one day late with his VAT payment. The Respondents, on the other hand, argued that the Appellant did not have a reasonable excuse for his late submission. Further the Appellant did not dispatch the payment in time for it to be received by the Respondents by the due date. On the question of proportionality the Respondents referred to the Tribunal decision of Greengate Furniture Limited v HM Customs and Excise (VAT decision No.18280) which decided that the default surcharge regime was not devoid of reasonable foundation.
The Facts 
4.	The Appellant was a barrister and registered for VAT.
5.	On 3 January 2008 the Appellant submitted his VAT return for the quarter ending 30 November 2007 and authorised a VAT payment in the sum of £16,163.07 through his bank account by electronic transfer. The due dates for the return and payment were 31 December 2007 and 7 January 2008 respectively. The Respondents received the return on 4 January 2008, and payment on 8 January 2008.
6.	In a letter dated 5 March 2008 the Appellant’s bank indicated that the disputed payment was processed at 13:46 on 3 January 2008. The bank’s timescale for a BACS payment was three to five working days. Further the payment would have been received by the Respondents’ bank on 8 January 2008.
7.	The Appellant admitted that he made no specific enquiries of his bank with respect to its timescales and cut off time for BACS payments prior to making the 3 January payment.  Further the Appellant accepted that he was busy with his work after the Christmas break and only remembered to complete his VAT return on 3 January 2008. 
8.	The Appellant was in the default surcharge regime. He had  defaulted on three previous occasions by failing to make his VAT payments  on time for the quarters ending 31 August 2006 (two days late), 28 February 2007 (three days late) and 31 August 2007 (one day late). The Appellant did not receive surcharge penalties for the defaults. On the first default a surcharge liability notice was issued which was extended on the second and third defaults because the respective penalty for each default would have been below £400.  The effect of the three previous defaults was to fix the surcharge imposed for quarter ending 30 November 2007 at ten per cent of the VAT due. 
9.	The Appellant accepted that he received the surcharge liability notice for the quarter ending 31 August 2006 but could not recall receiving the surcharge liability extension notices for the quarters ending 28 February and 31 August 2007. The Appellant pointed out that whenever he received a communication from the Respondents he would contact them at their contact centre. The Respondents held no record of contact with the Appellant following the issue of the extension notices, which the Appellant relied upon for his assertion that he was unaware of the extension notices. The Respondents, however, disputed the Appellant’s assertion. The extension notices had been posted to the correct address and not returned by the Post Office. Further the Appellant agreed that he had received the VAT returns for the relevant quarters which had been posted to the same address as the extension notices. Finally the Appellant acknowledged that he did not read carefully the surcharge liability notice and held no real understanding of the stepped level of the penalty.
10.	The Appellant did not reclaim VAT which may be eligible as input tax in his returns. He considered such reclaims were more hassle than they were worth. The Appellant has since changed his mind and was now setting off input tax against output tax in his VAT returns.
Reasons
11.	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 payment is extended by concession to seven calendar days for electronic payments. The Appellant failed to pay the VAT owing by the due date, 7 January 2008, for the accounting period ending 30 November 2007. As the Appellant was subject to the surcharge liability regime he was liable to pay a surcharge at the rate of 10 per cent of the VAT due, namely £1,616.30. 
12.	 The Appellant can avoid the default surcharge if he can satisfy the Tribunal on a balance of probabilities that he had a reasonable excuse for not furnishing the VAT return and payment on time or that he dispatched the payment at such time and in such a manner that it was reasonable to expect that it would have been received by the Respondents by the due date.
13.	The Appellant conceded that he had no reasonable excuse for not furnishing the payment on time. Further the Appellant did not put forward a defence based on the non receipt of the surcharge liability extension notices that he was unaware of being in the default surcharge regime. For the avoidance of doubt we find that the Appellant was aware that he was in the regime. The Appellant accepted that he received the surcharge liability notice dated 13 October 2006, which was the critical document for putting the Appellant on notice. Further we are satisfied that he received the extension notices despite his assertion to the contrary. The notices were posted to the correct address and not returned to the Respondents by the Post Office. Finally the Appellant carefully chose his words that he was not aware of receiving the extension notices rather than a definite statement that he did not receive them.
14.	The two disputed issues concerned dispatching the payment in time, and the proportionality of the surcharge. We find the following facts in respect of the two issues:
(1)	The Appellant was blameworthy for not making his return and payment on time, in that he did not give proper attention to settling his VAT liability by the due date. He accepted that he overlooked the VAT return because of work pressures. It would appear that his inattention in failing to give priority to his VAT affairs was a feature of the three previous defaults.
(2)	The Appellant did not make specific enquiries of his bank about the cut off time and timescales for electronic payments by BACS. In our view a prudent business person would have made these enquiries before relying on the BACS system to dispatch his payment in time for it to be received by the Respondents by the due date. The Appellant knowingly took a risk that his payment on the 3 January 2008 would not be received by the 7 January 2008.
(3)	The Appellant chose not to reclaim VAT as input tax in his VAT returns because it was more hassle than what it was worth. 
(4)	The Appellant availed himself of the extra seven day concession given by the Respondents for making payment by electronic transfer.
(5)	The Appellant benefitted from the Respondents’ concession not to collect surcharges less than £400 in respect of his defaults for the quarters ending 28 February and 31 August 2007.
15.	We find that the Appellant did not dispatch the payment for the quarter ending 30 November 2007 at such time and in such a manner that it was reasonable to expect that it would have been received by the Respondents by the due date. The Appellant did not make enquiries of his bank about the cut off time and timescales for electronic payments and knowingly took a risk that his payment on the 3 January 2008 would not be received by the 7 January 2008.
16.	The Appellant’s case for the disproportionate nature of the surcharge was based on the quantum of the penalty for his transgression of one day late and that the Respondents had indirectly benefited from his failure to reclaim VAT as input tax in previous VAT returns.  
17.	The Tribunal decision in Greengate Furniture Limited considered in some detail the proportionality of the default surcharge regime. The Tribunal concluded that 
“The fact remains however that it (default surcharge) 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 genuine efforts 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. Indeed a trader may properly and reasonably rely on another to prepare his return and yet be liable for the dilatoriness of that other person; a defaulting trader is often criticised before the Tribunal for failing to obtain the necessary help when under pressure (paragraph 97).
In our opinion any lack of proportionality caused by those aspects of the regime would be met if there was a proper power to mitigate exercisable by the Tribunal. Any such power would be on a case by case basis although in order to promote consistency it would be necessary for the Tribunal and the Commissioners to develop guidelines (paragraph 98).

We turn now to consider whether the absence of any power to mitigate is "strictly necessary" (Louloudakis) and whether the exclusion of mitigation goes "further than is necessary in order to attain [the] objective" (Garage Molenheide) (paragraph 99).
We find the justifications for the absence of a power to mitigate to be less than convincing. Viewed as at the time of the surcharges under appeal, it does not seem to us that the absence of a power to mitigate is strictly necessary, see Louloudakis, and it seems to us that without such power the regime arguably goes "further than is necessary", see Garage Molenheide (paragraph 110).
However the necessity for an automatic scheme without mitigation is not merely a matter of the judgment of the Tribunal or Court. The authorities make it clear that the legislature has a wide margin of appreciation when framing implementation policies in the area of taxation (paragraph 111).

Sixteen years had passed since the 1985 Act when the surcharges under appeal were imposed and eight years had passed since the 1993 Act had introduced mitigation for penalties other than default surcharges. Much has changed in the interim period. In particular compliance has improved greatly and the culture of non-compliance has lessened. We would have expected more to be known about the actual functioning of the default surcharge system. If the Commissioners could produce figures for the number of cases when defaults have been cancelled, it is surprising that they could not give figures for the amounts involved and the breakdown (paragraph 112).

Notwithstanding our opinion as to whether the present system is "strictly necessary", we are however unable to conclude that the system is "devoid of reasonable foundation" (see Gasus Dosier) or "not merely harsh but plainly unfair" (see Roth). There may be cases where a surcharge does meet the test in Roth but this is not one of them (paragraph 113)”.
18.	The Appellant pointed out that the Greengate decision was not binding upon the Tribunal. However, we considered the decision to be persuasive, particularly as the decision specifically addressed proportionality under Community Law and under the European Convention on Human Rights of default surcharges and for this purpose the Attorney-General appointed Mr Keith to act as Advocate to the Tribunal. Further the Appellant’s case was also helped by the Tribunal’s ultimate conclusion that although the Tribunal was unable to conclude that the default surcharge regime as a whole offended against the principle of proportionality there may be cases where a surcharge was plainly unfair (see paragraph 113).
19.	We decided that the surcharge of £1,616.30 (ten per cent of the VAT due) for the Appellant’s default with quarter ending 30 November 2007 did not fall within the category of plainly unfair. Although the Appellant was one day late with his payment, he had already taken the extra seven day concession for electronic payments given by the Respondents. The Appellant was blameworthy for his default. He failed to give proper attention and priority to his VAT affairs, which was not a one-off lapse having regard to his three previous defaults.  The Appellant had directly benefitted in respect of his two previous defaults from the Respondents’ concession not to enforce surcharges of less than £400. The Respondents’ concessions relating to the additional seven days and surcharges of £400 mitigated the pre-determined consequences which flowed from the default surcharge scheme. Finally we placed no weight on the Appellant’s failure to reclaim VAT as input tax in his previous returns. He chose not to claim it because it was too much trouble which was symptomatic of his approach to his responsibilities with respect to VAT. This was not a case of the Respondents wrongly withholding input tax. We, therefore, hold that the surcharge of ten per cent of the VAT due was proportionate to the Appellant’s default for the quarter ending 30 November 2007.
Decision
20.	We decide that
(1)	The Appellant did not dispatch the payment for the quarter ending 30 November 2007 at such time and in such a manner that it was reasonable to expect that it would have been received by the Respondents by the due date.
(2)	The surcharge of £1,616.30 (ten per cent of the VAT due) for the Appellant’s default with quarter ending 30 November 2007 did not fall within the category of plainly unfair and was proportionate.
21.	We, therefore, dismiss the Appeal and make no order for costs.

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 23 September 2008

LON/